Nigeria’s foreign reserve recorded a rare upward trend in the past week, gaining $39.9 million to stand at $38.52 billion as of Thursday, 9th June 2022. This comes as a respite for the Nigerian reserve and the country’s exchange rate, considering the steady depletion recorded year-to-date.
The country’s foreign reserve has lost over $2 billion, an equivalent of N844.38 billion, between January and June 2022. By implication, this indicates that the local currency has been under enormous pressure as the Central Bank uses the external reserve to intervene in the official exchange market at times.
Nigeria’s apex bank intervenes occasionally in the official FX market to maintain stability in the value of the naira by injecting foreign exchange into the market to curb demand-pull inflationary pressure.
What is a foreign reserve?
Foreign reserves, which are also known as external or international reserves, are assets that are held on reserve by the central bank of a country and used to back liabilities and influence monetary policy. They include foreign banknotes, deposits, bonds, treasury bills and other foreign government securities.
These assets serve many purposes but are most significantly held to ensure that a government or its agency has backup funds if the national currency devalues rapidly.
Why this is important
The Nigerian foreign reserve serves as an arsenal for the Nigerian economy which the CBN employs as a buffer to tame or reduce shocks in the exchange rate market. Nigeria practices a managed floating exchange rate regime, thus allowing the central bank to intervene regularly in the foreign exchange markets to change the direction of the currency’s float and/or reduce the amount of currency volatility.
It is important to have as much FX as possible in the coffers of the apex bank to meet the country’s forex demands.
Recall that Nigeria is a net importer of goods and services, hence there is a need for forex to meet up with import bills. For better context, a downturn in the country’s external reserve will lead to more pressure on the local currency, resulting in more inflation, and thereby affecting businesses in terms of their operating costs and other expenses.
A look at the market
The naira underperformed during the week under review at the official Investors and Exporters window, depreciating by 0.36% to close at N421.25/$1 compared to the previous week’s N419.75/$1 rate.
The amount of forex traded during the week also declined from $1.34 billion to $503.78 million, representing a 62.4% week-on-week decline. At the black market, the naira closed at N608/$1 on Friday, 10th June 2022, representing a 0.33% downturn from the N606/$1 figure recorded in the previous week.
At the Nigerian stock market, the all-share index, which is the benchmark index for measuring the performance of the market, rose by 0.55% to close the week at 53,201.38 points from 52,908.24 points recorded as of the previous Friday. A total turnover of 1.83 billion shares valued at N19.49 billion was traded in 21,723 deals during the week by investors on the floor of the exchange. This is in contrast to a total of 28.74 billion shares valued at N209.06 billion that were traded in 23,688 deals in the previous week.
Stocks like Global Spectrum Energy Services, Conoil, Fidson Healthcare, University Press, and Pharma-Deko Plc were the best-performing stocks for the week.