At $32.9 billion as at August 29, 2011, South-African based Economist at Renaissance Capital (RenCap), Yvonne Mhango, has said that the prospect of a strong recovery for Nigeria’s foreign reserves this year looks bleak.

In fact, Mhango argued that at its current level, Nigeria’s foreign reserves seem to have reached its highest level this year, adding that contrary to previous expectations of a steady increase of the reserves on the back of the sharp increase in the oil price in the first quarter of the year and a sustained high price thereafter, it has essentially moved sideways year-to-date.

Nigeria's foreign reserves had climbed to over $60 billion in March 2008 before the onset of the global financial crisis. Nigeria’s apex bank has been using the foreign-currency reserves to keep the Naira within a 3 percent band + or - N150 naira to a dollar at its Wholesale Dutch Auction System (WDAS). The Naira fell to N152.40 to a dollar at the last WDAS session.

The Economist also argued that the Naira has a 40 percent probability of being devalued to N155 to a dollar in 2012 on expectations that oil prices may fall and as the government increases investments in roads and rail, raising imports. Currency Devaluation implies the official reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged.

She explained: "We think there is currently a 40 per cent probability that the Naira will be devalued in 2012 to NGN155/$1. Over the next couple of months, the finance ministry and the Central Bank of Nigeria (CBN) will review the oil price, foreign exchange reserves and the recent history of imports, amongst other factors, as they deliberate the exchange rate for the 2012 budget". The weakening global economic outlook implies there is downside risk to the oil price, so we are of the view that foreign reserves are likely to remain flat until year end of 2011 and the scope for a strong recovery in reserves in 2012 is now smaller.

“Data on outflows of forex in first quarter 2011, which includes import payments, suggest that import demand moderated in early 2011, compared with 2010. A strong improvement in forex inflows, largely due to oil sector receipts, allowed for a significant improvement in net forex inflows in 1Q11. The conundrum is that this increase in net forex inflows is not reflected in the official forex reserves, which have essentially moved sideways between year end 2010 and August 2011. This implies that there are additional, unknown pressures on forex reserves, which explains why the naira has only traded in the top half of the N150/$1 (+/-3%) trading band year-to-date.”

According to, Mhango, this new administration’s infrastructure programme implied that demand for imported capital equipment and machinery is likely to rise over the short-to-medium term. “The country’s high import dependence explains why the exchange rate is often the bellwether for Nigeria’s economic health, and why there is a swift pass-through of exchange rate movements to inflation. ‘’About a third of Nigeria’s forex outflows are due to invisibles, which refers to services. These include international payments for services as well as movement of money for which there is no contra transaction, such as transfer payments.

“Nigeria’s large oil and gas industry largely explains the country’s substantial payments to service providers. We are of the view that the local content bill will compel operators to source services from local providers and this will help ease the services’ payment burden on forex outflows. ‘’However, the impact of this is likely to only be felt over the medium-to-long term, as presently the skill set for Nigeria’s service provider industry is inadequate, in our opinion,” she added.

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