The huge obligation of servicing the huge debt owed by Africa’s largest economy is the main reason its foreign reserves is fast dwindling as it has failed to grow despite a much favourable oil price for the country.
Oil, which accounts for about 10 per cent of Nigeria’s total export, is responsible for about 90 per cent of the nation’s foreign exchange earnings.
Crude oil price as at Thursday, June 24, hovered around $73 per barrel. It is set to go higher as market tightens. Oil price has resumed a rising trend since May 19, albeit undulating until this moment. Comment A former Chief Economist of Zenith Bank, Marcel Okeke , told New Telegraph that the leakage in the nation’s external reserves was due to its obligation to service its huge debt.
This country is hugely indebted. Our external debt is so much and it has to be serviced. A huge chunk of the reserves is going into debt servicing, which the country is under a serious obligation to do,” he said. Figures released by Debt Management Office (DMO) recently puts Nigeria’s total public debt portfolio as of March 31, 2021 at N33.11trillion, rising from N12.12trillion in June 2015.
Okeke also noted that one of the immediate impacts of the dwindling reserves on the nation was the dearth of foreign portfolio investment in the nation’s capital. “Since this crisis of dwindling reserves began last year, Portfolio investors, who invested in the economy through the stock market, have not been able to cash out because our system does not have the required quantum of dollars for them to bailout. “This is outstanding up to the tune of $2billion. So, when you inject some forex into the stock market for them to be able to liquidate part of their investment, it drains the external reserves too,” he said.
Okeke reiterated that to default in paying interest on external loans holds a grave implication for the country, adding that whatever is coming into the country from the sale of oil must first go into debt servicing. “If you place both our local and external debt side by side, you will realise that it is huge.
If we start to default in servicing the external debt the signal to the whole world will be that the country is finished economically, so we are under big pressure to continue to service the foreign debt which in turn is depleting external reserves,” he added.
Another reason the reserves is depleting, according to experts, is because the CBN is defending the naira with forex exchange. While some experts are calling for total liberalisation of exchange rate, Okeke said the move would be suicidal at the moment. His words: “If we allow the naira to find its level, we will be talking about an exchange rate of between N500 to N700 per dollar and things will go worse.”
On his part, Managing Director, BIC Consulting Limited, Dr. Boniface Chizea, maintained that a major obligation of government was to service its debts and that it is done in dollars not naira. “The external debt, especially the multilateral debts, must be serviced as we don’t want to be seen as not been as not been committed to our repayment plan.” Boniface argued that a situation where dollar is scarce contributed immensely to rising inflation, noting that the marginal decline recorded in the last two months would not make any significant difference as the trend is expected to resume.
“Things are not just right at the moment. You will notice that there is no item that has not witnessed price increase in the last few months. I have not seen things like that before. Because we need to source for dollar to make payments and also manage the exchange rate, reserves is depleting.” Like Okeke, Boniface decried the non-productivity of the economy, noting that Nigeria spends more dollars importing goods than it earns from export. When you run an economy that is not productive how you do access foreign exchange?” he queried. He, however, expressed fear that the situation with the nation’s external reserves might grow worse as the 2023 general elections approach.
“Very soon election will come and the politicians will move dollars around and that will worsen the situation of things. Besides, some Nigerians are now storing value in dollars and they are taking value, which is speculative,” he said. Chief Executive Officer of Economic Associates, Dr. Ayo Teriba, berated the Federal Government for being lackadaisical in its approach of tackling the ever fluctuating foreign reserves. Asked if he was worried about the current dwindling trend, he retorted that any serious minded person would be worried as the trend is becoming a norm. He queried why govt would always rely on a volatile commodity like oil as its major source of revenue. Teriba, who explained that the impact of rising oil price on reserves was not immediate, said it takes at least two months before the reserves portfolio feels the impact of rising revenue from oil at any time.
Recommendations He, however, called on the FG to fall back on other national assets (financial and non-financial) to take pressure off the reserves which moves in the direction of oil. “Corporate assets of govt are potential substitutes for the reserves. The LNG is a huge asset, which the govt can fall back on. The huge real estate assets scattered all over the nation is another alternative, which govt could use to borrow. If the equity of the LNG is listed on the exchange like Aramco in Saudi Arabia, it could be used to raise funds from external sources, “he said. Recommendations from other experts on the way out include effective diversification of the economy. “This economy is not properly diversified. If the economy is effectively diversified other assets other than oil will bring in forex into the country and we won’t have the problems that we are having today.
For instance, you can get dollar inflow from cocoa, cotton, groundnut, palmoil, rice etc, but this is not happening at the moment,” Okeke disclosed. Warning Okeke noted that the declining reserves was an indication that all is not well with the economy. “At a time we used to have up to $64 billion in our reserves but it has come down to around $33 billion at the moment.
It’s a clear indication that the economy is sick. The way the world is looking at us at the moment is that we have much more complicated problems that other countries. “Let me also tell you that external reserves are measured in terms of how many months import bill can you fund. Our economy is largely import dependent.
What we have at the moment cannot go too far to satisfy our appetite for import,” he noted. Dr. Chizea added that the country was in a dire strait because it is unable to generate enough revenue to meet its obligations, noting “our creditors are watching because it could get to a certain stage when you don’t have money to service your debts again and that would mean more problems. “Remember that the amount you have in your reserves serves as a confidence booster for you to get credit because you be seen as someone with the ability to pay.”
He, however, said the rising oil price was a saving grace for the economy as it has sustained it till now. Meanwhile, he warned that nobody should expect magic from the CBN to manage the situation because the situation is pretty bad. “The governor has been doing his best and but for him, the situation could have become much worse,” he added.