Painfully, Nigeria’s external reserves have fallen 38% from their all-time high of $65.85 billion (ATH). The impressive figure was reached on August 8, 2008, about 13 years ago.

At the peak, crude prices had breached the magic $100 a barrel mark, and the country seized the opportunity to build up its strategic reserves, as Finance Minister Dr. Ngozi Okonjo-Iweala explained. , years later.

For the first time since last October, reserves broke above the $40 billion support last week in a downtrend, even in the face of a bull run in the oil market. The performance of reserves over the past few years is, indeed, a filthy cry from the pre-2009 bullish era. They have also become volatile – rise when there is revenue from external inflows such as euros -bonds and fall before growth consolidates.

Yet there is something more complicated about this than simply comparing external reserve data from the two eras. From 2007 to 2008, which is considered Nigeria’s golden age of reserve accumulation, the country’s average monthly import bill was $3.53 billion.

Unfortunately, the desire for imported products seems more pervasive today than it was back then. In the first three quarters of last year, average monthly imports were estimated at $5.88 billion, 66% higher than about 14 years ago when import coverage was adequate and the foreign exchange market (forex) was relatively stable.

Economists agree that six-month import cover reserves are healthy for any economy. When reserves fall below the six-month benchmark, there are serious reasons for concern, said Dr Biodun Adedipe, chief consultant at B. Adedipe and Associates Limited.

Currently, the reserves cover nearly seven months of imports if the value of imports does not increase. But Nigeria’s imports are unlikely to remain constant, as this would contradict historical trends.

For example, the value of imports over nine months of last year was 10% higher than that of all of 2020. Even adjusted for the exchange rate differential, the change over the whole year would still be higher at least 10%.

From 2016 to 2020, the average year-on-year (YoY) growth in import spending was 25%, in naira terms. The last time the country saw negative growth in the value of imports was in 2015 when it fell by N676.4 billion.

If the data trend continues this year and import bills increase slightly, it suggests that current reserves are below six-month import cover. David Adonri, an economist, said a more drastic import restriction policy would be needed to keep reserves fairly stable in the future. But this is a pre-election year where sweeping reforms and sweeping policies are often seen as inadvisable. Already, experts have suggested that economic support will be traded for political convenience.

The body language and actions of President Muhammadu Buhari tend to confirm the argument. The far-reaching reforms he promised seven years ago have not materialized. As his political party walks a tightrope ahead of the general elections, which will be held in 12 months, he seems remote from embarking on major reforms. Recently, he signed the 2022 budget without much hesitation despite the large discrepancy between the figures he transmitted to the National Assembly and what the two chambers voted. Less than a month ago, the country was rocked by its effective reversal of the planned scrapping of the controversial Premium Motor Alcohol (PMS) subsidy, which is a major clause in the Petroleum Industry Act. (PIA) which he signed into law late last year.

Naturally, the president seems to have embraced the waiting game. And he communicated clearly with the botched PIA, more than in any other way, that it is too late in the life of the administration to see major reforms in the fiscal space.

Similarly, the long-awaited foreign exchange reform is viewed with skepticism. The change should lead to a market-oriented exchange rate regime and a gradual easing of market rigidity. Godwin Owoh, a professor of applied economics, had said such a drastic policy push was unlikely to happen this year because economic managers would be too busy in the policy space to pay serious attention to the economy.

A floating exchange rate regime, which the World Bank and the International Monetary Fund (IMF) have vigorously advocated, should replace the current static imbalance with a dynamic equilibrium to fix a market clearing rate, reduce arbitrage (which is a back and forth incentive and other anti-market tendencies) and make the market more attractive for importing capital.

An alternative to this, experts have warned, is continued liquidity crunch and market pressure, leaving the Central Bank of Nigeria (CBN) with limited monetary space to operationalize more efficient foreign exchange allocation. In the absence of reforms, the regulator will continue its routine intervention in the Nigerian Autonomous Foreign Exchange (NAFFEX), a window that was created to conduct market-led currency trading. These have enormous and multilevel consequences for the country’s external reserve position.

First, the CBN will continue to defend the artificial price of the naira against limited external reserves. This would further deplete it and expose the local currency to more pressure. The country would also lose the opportunity to attract foreign capital. Investment experts complain about the growing rigidity of capital mobility. Many foreign investors who reportedly exited the country’s capital market in recent years did so due to limited access to foreign exchange. Some of them invested only to realize that the monetary crisis was as serious as a conventional control of capital exports.

Now investors have a new challenge. Transactions valued at N100 million and above are now subject to capital gains tax (CGT), except the proceeds are reinvested within a limited time frame. Capital market participants described the new tax as a deterrent to investors, including foreigners. The new policy comes at a time when other economies are normalizing their monetary frameworks following the passage of COVID-19. The IMF, World Bank and other institutions have warned that this could trigger a massive outflow of capital from emerging markets, including Nigeria.

While currency supply is inadvertently choked, demand continues on an upward trend for many reasons. Local production, according to an economist and former Managing Director of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, still faces severe challenges ranging from shortage of foreign exchange, energy/operational costs raised to multiple taxation.

Local inputs remaining a major challenge, local manufacturers depend on imports for no less than 70% of inputs. Consequently, Nigeria is dependent on foreign economies for finished products as well as inputs, an ever-increasing demand. Along with the economic claims, experts have warned that shifting partisan activity will create its own pressure this year.

So while external reserves may not grow as expected in a growing economy, the CBN has a heavy responsibility to meet the growing demands of the stagnant pool. Already, the managing director of Financial Derivatives Company Limited, Bismarck Rewane, has predicted that the monetary authority will need $8-10 billion to defend the naira in the coming months. This suggests that current lean reserves could fall further.

But should the CBN retain the value of the naira, which the Bretton Woods institutions have called overvalued? Two years ago, the naira was officially devalued, at least, twice. Last year, the apex was forced to abandon the official CBN default rate for NAFEX pseudo-market pricing. Since the 1980s, the value of the naira has been in a race to the bottom, with international institutions always demanding an adjustment at the slightest market crisis.

Today, many economists also consider the current official exchange rate to be below the market rate. Yet they resisted the possibility of further devaluation, with “possibility” being used in reference to both political and economic temperature. A weaker naira is often seen as a falling knife as it inflicts more pain on the masses via forex-induced inflation. Meanwhile, overpriced essentials continue to emerge as a major talking point as election year approaches.

A former deputy director of the regulator, Stan Ukeje, had criticized NAFEX’s effectiveness in driving reform as envisaged in foreign exchange liberalisation, saying it was “incomplete” and lacked depth .

Ukeje said, “The largest foreign exchange earner in Nigeria, the Nigerian National Petroleum Corporation (NNPC), the Federal Inland Revenue Service (FIRS) and the Federal Minister of Finance do not participate in NAFEX. The market is therefore incomplete. It is deprived of the participation of all exporters and importers.

With demand for currencies showing no sign of abating amid falling supply, Ukeje said the national currency will continue to decline against other currencies.

“The Naira Agenda proposed by the CBN but rejected by the government was a lost chance to balance the market. Imagine that the state governments of Edo, Kaduna, Akwa Ibom, Rivers and Benue receive part of their FAAC revenue in dollars. NAFEX will reflect different temperaments/feelings. In the medium and long term, the exchange rate cannot be stable if the market is not transparent and responsible. When transparent, the CBN will only intervene to moderate prices by buying or selling naira in the market,” he said.