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The Central Bank of Nigeria (CBN) has raised concerns about the future growth of Nigeria’ s external reserves, highlighting several potential risks.
The CBN has stated that the removal of the fuel subsidy, along with increasing import costs and rising external debt servicing obligations, could negatively impact the growth of external reserves between 2024 and 2025.
These insights were shared in the CBN’ s ” Monetary, Credit, Foreign Trade, and Exchange Policy Guidelines for Fiscal Years 2024/2025. ” The apex bank outlined that while there are positive economic prospects for Nigeria, certain factors could limit the accumulation of external reserves, which are crucial for stabilizing the economy.
Risks To External Reserves Growth
According to the CBN, the removal of the fuel subsidy is a key factor that could put pressure on the country’ s external reserves. With Nigeria heavily dependent on imported refined petroleum, the increased fuel prices resulting from subsidy removal could raise the cost of imports.
This will, in turn, increase the demand for foreign currency, which might deplete the country’ s reserves. Rising external debt obligations, coupled with lower earnings from crude oil, could further strain the reserve levels.
Additionally, the CBN pointed out that ongoing monetary policy tightening by central banks in advanced economies increases the risk of capital outflows from Nigeria. Such outflows could exacerbate the challenges of maintaining sufficient external reserves.
Optimistic Economic Outlook
Concerns Over Inflation And Security
However, the CBN warned that inflation is likely to remain high through 2024/2025 due to global supply chain disruptions and the impact of exchange rate fluctuations. The ongoing security challenges and infrastructural deficiencies in the country could worsen inflationary pressures, particularly as energy prices remain elevated due to the Russia- Ukraine conflict.
In terms of fiscal performance, the CBN expects the fiscal sector to continue recovering, provided that key policies such as the Finance Act 2023 are effectively implemented. However, persistent insecurity, low crude oil production, and rising public debt may pose significant challenges in the near term.
Divergent Views From Analysts
Experts have expressed differing opinions on the impact of fuel subsidy removal on Nigeria’ s external reserves. Clifford Egbomeade, a public affairs analyst, noted that the removal of the subsidy would likely increase the cost of fuel imports, thereby raising demand for foreign exchange.
This could lead to a depletion of external reserves and put pressure on the broader economy, particularly through inflation and disruptions in sectors like transportation. However, Ayodeji Ebo, Managing Director of Optimus by Afrinvest, disagreed.
Ebo argued that the removal of the subsidy could actually increase the accumulation of external reserves, as the Nigerian National Petroleum Corporation (NNPC) would no longer deduct funds for subsidy payments. This would result in more foreign exchange being remitted to the CBN, thereby supporting reserve growth.
Conclusively, while the CBN remains cautiously optimistic about Nigeria’ s economic growth over the next two years, there are clear risks on the horizon. The removal of the fuel subsidy, rising import bills, and increasing external debt payments may challenge the growth of external reserves.
However, with careful policy management, including reforms in key sectors and effective fiscal strategies, Nigeria could navigate these challenges and achieve a more stable economic outlook.
