Not even the recent surge in global oil prices could halt Nigeria’s dwindling foreign reserves from extending its decline. Foreign reserves in Africa’s largest economy dipped by $129.210 million in seven days, according to the latest data from the Central Bank of Nigeria (CBN).
The foreign reserves stood at $39.871 billion on March 4, 2022 before dropping to $39.768 billion on March 9, 2022. This decline continues even with Brent crude oil, the international benchmark for Nigeria’s type of crude oil, trading at a 14-year high of $130.68 a barrel.
By March 10, 2022, the reserves had taken another hit to $39.755 billion and presently hovering around $39.742 billion.
Experts have attributed Nigeria’s weak foreign reserves to the nation’s economic structure. As an import-dependent economy, Nigeria depends on foreign revenue from crude oil to service its 200 million population economy.
Why Nigeria’s Foreign Reserves Remains Weak
Despite being the largest crude oil-exporting nation in Africa, Nigeria does not have a functioning crude oil refinery. Therefore, it has to import finished petroleum products and subsidize them to enable the largely unemployed Nigerians to afford them. Please note that the Federal Government had appropriated 17.5% or N3 trillion ($7.2 billion) of the 2022 budget for subsidy.
This amount, as expected, has now risen given the over 100% surge in crude oil prices from $62 a barrel it was pegged in the budget. It means Nigeria has been using her expected gain from crude oil to subsidize finished petroleum products for the masses.
The huge forex being spent on subsidies has made it impossible to efficiently service sectors that depend on imported raw materials to operate. These businesses had to resort to the black market for their forex needs — they sustain that unregulated section of the forex market.
Also, the fact that Nigerians spend an estimated N499.200 billion or $1.2 billion on medical tourism per year is a big issue. This does not include the amount spent on overseas education, etc. All these payments are made via the money generated from crude oil sales.
Two weeks ago, in an effort to lure exporters to sell their export proceeds at the Investors and Exporters Forex Window at N416/$, the CBN launched a N65/$ rebate scheme. This was because the black market goes for between N570/$ to N580/$. It also points to the fact that the apex bank may be struggling with low forex generation, especially with the nation’s crude oil production below its OPEC quota for months.