CBN: Nigeria’s external reserves at risk due to petrol subsidy removal

The Central Bank of Nigeria (CBN) says the country’s foreign exchange reserves are at risk due to the petrol subsidy removal and lower crude oil earnings.

As of September 12, Nigeria’s external reserves stood at $36.08 billion, according to data from the CBN.

In its ‘Monetary, Credit, Foreign Trade, and Exchange Policy Guidelines for the Fiscal Years 2024-2025,’ published on Tuesday, CBN also said increased external debt servicing obligations could pose downside risks for the growth of external reserves during the period.

“Lower crude oil earnings, fuel subsidy removal, rising import bills and increased external debt servicing obligations could pose downside risks for the accretion to external reserve,” CBN said.

“In addition, the sustained monetary policy tightening by central banks across advanced economies increases the risk of capital outflow.”

Nevertheless, the financial regulator said the outlook for Nigeria’s external sector in 2024 and 2025 is optimistic, on the expectation of favourable terms of trade, occasioned by a sustained rally in crude oil prices and an improvement in domestic crude oil production.

CBN also said the positive outlook is supported by the sustenance of crude oil prices, propelled by the decision to cut production, and gains from capital flows and remittances. 

President Bola Tinubu announced the end of petrol subsidy on May 29, 2023, however, there have been reports that the federal government has restored it.

On August 19, TheCable reported that Tinubu approved a request by the Nigerian National Petroleum Company (NNPC) Limited to utilise the 2023 final dividends due to the federation to pay for the petrol subsidy.

On the same day, NNPC denied the return of subsidy, but it later confirmed subsidising petrol, as the company said the federal government owes it N7.8 trillion for petrol subsidy.

Two weeks later, NNPC admitted to owing suppliers of petrol, adding that it is facing financial strain due to the petrol supply costs.

Also, Agora Policy, an Abuja-based think tank, on September 1, said petrol subsidy will reach an all-time high in 2024 after gulping N4.2 trillion from January to July.

‘RISING DEBT, LOW CRUDE OIL PRODUCTION THREATENS NIGERIA’S FISCAL PERFORMANCE’

CBN said the fiscal performance is threatened by the rising debt, low crude oil production and lingering insecurity.

Also, the apex bank said while output growth is expected to maintain a positive trajectory, some risks are likely to undermine the growth outlook.

“Nigeria’s output growth is expected to maintain a positive trajectory in 2024/2025,” CBN said.

“The growth prospects are dependent on continued policy support in the agriculture and oil sectors, reforms in the foreign exchange market, and the effective implementation of the Finance Act 2023 and the 2022-2025 Medium-Term National Development Plan (MTNDP).

“The risk to the outlook is still tilted to the downside, characterized by significant headwinds such as rising energy prices emanating from lingering effects of the Russia-Ukraine war, and the persisting security and infrastructural challenges, which could undermine the growth outlook in the short to-medium-term.

“Domestic prices are expected to remain elevated through 2024/2025, on the back of spillovers from global supply constraints, and exchange rate pass-through. More so, the persisting security and infrastructural challenges could exacerbate inflationary pressures.

“The performance of the fiscal sector is expected to remain on a positive recovery trajectory in 2024/2025. This outlook is contingent on the effective implementation of the Finance Act 2023 and restructuring of key revenue generating MDAs to boost non-oil revenue. 

“However, low domestic crude oil production, growing public debt, lingering insecurity, global economic slowdown, and the Russia-Ukraine war, could pose significant downside risks to fiscal operations in the short- to medium-term.”

According to the CBN, Nigeria’s financial sector is also expected to remain resilient in 2024 and 2025.

CBN said the outlook mirrors the efforts of the apex bank in continuously monitoring emerging vulnerabilities and risks in the system, including periodic stress-tests, examination exercises, and the provision of risk mitigants.