Reviewing The Health of Nigeria's External Shock Absorbers


Wednesday, February 22, 2017 7:58 PM / Temitope Babalola, Research

As at the beginning of democracy on May 1999, the administration of president obasanjo met an external reserve of 3.7 billion Dollars.  As at May 2007, When, the administration of   president Obasanjo was handing over the reins of governance to Alhaji Umaru Yaradua.

The Obasanjo administration had grown the external reserve to the tune of 13.4 billion Dollars. They administration had also established the excesses crude account, in order to improve fiscal prudential’s. The excess crude account as at that time had 12 billion Dollars in it kitty.

The external reserve had grown by 261% compared to its previous levels in May 1999. The growth in external reserves was partly due to an increase in the price of crude oil. Oil price had risen from 13.92 Dollars per barrel in May 1999 to 67.17 Dollars per barrel, providing the necessary “spring board effect” for both external reserve and excess crude account to rise.  President Obasanjo’s administration in attempt to get a debt relief package from the International monetary Fund, the administration had to adhere to some policies.

Fig 1: Table representation of external reserve from 1999- till present day

The Breton wood sisters insisted on a specific policy cocktail in return for a hair shave in Nigerian foreign debt. The policy cocktail hammered on strengthening shock absorbers and fiscal Prudential’s, reduction in consumption, increased government transparency, and more budget and current account balancing measures. Such policies were also responsible for strengthening both the external reserve and excess crude account. External reserve peak during the president Yaradua administration was 40 billion Dollars and the excess crude account also rose to 22 billion Dollars; which was on September 2008. This reflected a growth of 199% and 83% in external reserve and excess crude account, compared to their previous levels in May 2007. 

Tension in the Middle East triggered an increase in the price of crude oil from 65$ to 145$ in June 2007.  This was responsible for the astronomical increase in both external reserve and excess crude account, within a short span of 16 months. On February 2010 the vice president, Goodluck Jonathan as that time became the acting president. While getting into office the external reserve was mute at 40.68 billion Dollars and the Excess crude account depleted to 6.5 billion Dollars. 

The excess crude account had depleted by 70%, when compared to September 2008. This was partly due to the chain reaction from the global equity crash, which left oil price depressed for some time;  Oil prices dipped heavily from 145$ to 38$ as a result of the global equity crash. This restrained external reserve from growing compare to the previous level in September 2008.

In return, excess crude account for some time acted as a bridge to finance the shortfall in oil receipts. External reserve peak during President Jonathan administration was 48.44 billion Dollars and excess crude account stood at 11.5 billion Dollars on 20th May 2013.

This implied an increase of 19% and 77% in both external reserve and excess crude account respectively compared to the levels in September 2010. The rise in both external reserve and excess crude account rode on the back of improve conditions in both oil prices and domestic oil production (Fig2) and (Fig 3):

Fig 2; A graphical illustration of Crude oil produced and exported


Prior to the elections as at January 2015, conditions which supported the oversupply of crude oil abroad began to emerge (oil shale) and domestic oil production had dwindled (Fig 2).

The combination of these factors led to a slump in oil receipts (fi4). In reaction to the fall in oil receipts, external reserve and excess crude account depleted to 34 billion dollars and 2.45 billion dollars respectively. This reflected a dip of 42.7% and 78.9% in the external reserve and excess crude account. Also prior to the elections in 2016, the sovereign wealth fund had been established with a kick-off fund of 1 billion Dollars.

The sovereign wealth fund was created with the intention to improve government saving pool, while the management was mandated to invest the fund and increase its initial weight. On May 29 2015 when the President Jonathan was handing over to President Buhari, the external reserve and excess crude account stood at 29.6 billion Dollars and 2.07 billion Dollars.

The negative price effect on oil price further eroded the growth in external reserve and excess crude account by 13% and 15.5% compared to the pre election period (fig1). 

Figure 3:  A graphical illustration of major reference crude

As at 30 May 2016, the external reserve and the excess crude account stood at 26.46 billion Dollars and 2.26 billion Dollars. This reflects a 10.6% fall in external reserve and a 9.14% increase in excess crude account compared to its previous levels a year ago.

The persistent slide in both the price of oil and the production of crude was responsible for the free fall in oil receipts and external reserve (Fig4). While a combination of dividends from   Nigeria liquefied natural gas and substantial fiscal house keeping was responsible for the increase in excess crude account.

Sovereign wealth fund as at May 30 2016, stood at 1.5 billion Dollars, which reflected a 50% increase compared to previous levels in 2015.

Fig 4:  A graphical illustration of oil receipts from 2010 t0 2016

Currently the external reserve and excess crude account stands at 29 billion Dollars and 2.47 billion Dollars.  External reserve and excess crude account had grown by 8.96% and 0.21%. The increase in external reserve and excess crude is a product of a improved price oil and increase domestic production.

Although the output cutting mechanisms have pushed price back on a recovery path, but the possibility of increased oil shale rigs can neutralize earlier oil price recovery. While sovereign wealth fund still remain static at 1.5 billion, leaving it mute compare to the previous levels 2015.

More importantly the present health of Nigerian external absorbers compared to 2008, relatively leaves monetary policy with a leaner space to manoeuvre; With regards to detoxification of possible contagion in the financial markets and restraining cyclical reversals.

At the same time, given that the quarterly level of foreign outflows has grown compared to the previous levels of 2008 and coupled with a leaner firewall too. It no surprise that the exchange rate shock compare to 2008 is more pronounced and also accompanied with prolonged aftershocks.

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