Plot the exchange rate of Naira against time. Plot the foreign reserves of Nigeria against time. This is what you get. Is that statistically significant to deduce that the recent strengthening of the Naira was not done naturally, but has a connection to the depletion of the foreign reserves?

Of course, you can argue that the reserve is there to strengthen the Naira, and if using it has worked well to strengthen Naira, that should be celebrated. So, it comes down to how our leaders communicate. Yes, they can celebrate this by articulating a position, instead of fighting data. A suggestion…

“Fellow Citizens, I have used some reserves to strengthen the Naira, and I expect this policy to be sustained over the next 12 months. This will help us stabilize the FX market and bring stability for our manufacturing companies which need imported raw materials to produce. With a strengthened and stable Naira, the government will have the window to focus on catalytic projects we have for the nation. We expect this policy to cost $10 billion.

“Sure, we understand your concerns on what happens after we pause the policy. Let me tell you that by then, we will attain equilibrium in our local manufacturing through initiatives 1, 2, and 3 which are expected to boost local manufacturing output by 15%. Also, even though we will burn $10b for this current policy, a stable and strengthened Naira will unlock $50 billion in FDI within 12 months.

“Our banks are expected to hit the market for more funds. A stable Naira will help them outperform, and that will help the nation. No investor would like to invest if Naira is not curtailed within an investable range. Through Project 2, 3, and 5, the Naira will attain an organic equilibrium in 12 months and we’re looking at N750/$. Project 2 will provide solar bulk storage facilities in 774 LGAs in Nigeria, to reduce food waste, and that will boost overall supply of food, and cut down on the demand of USD for food imports.  The disintermediation will reduce pressure on Naira by N120/$. 

“Project 3 will task all LGAs to make 100 hectares available for mini cities across Nigeria where people in diasporas could be given lands to build for free. That will bring more than $300 billion over three years. “Project 5….” as this can go on.

Summary: do not waste time arguing over data, rather, communicate on a higher purpose and secure Naira’s future.

Comment on Feed

Comment: Ndubuisi Ekekwe like I wrote in one of your earlier post, please come back by 1st week in May with this graph. All figures for other months were captured as at month end why pick this in the middle? The CBN Governor has said that the reduction in the reserve is due to routine payment of FG’s obligations so let us at least give him that benefit of doubt.

My Response: Unless they have modified the 2024 national budget, my understanding is that debt servicing and debt payment are not modeled to come from the foreign reserves: “Nigeria’s 2024 budget includes 30% of spending on debt servicing, which is N8.25 trillion. The budget is projected to be N27.5 trillion, with 18.3 trillion in revenue, and a budget deficit of N9.18 trillion. The budget will be funded by borrowing, asset sales, and loans from multilateral creditors, such as the World Bank and the African Development Bank.”

What is happening here is this: Nigeria does not want to do Ways and Means (asking CBN to give the government money in Naira), but wants to “borrow” from the foreign reserves. So, unlike the last government which went for more CBN printing, it seems now we are focusing on using the reserves to pay for debts. That is legal, but making it look like there is no correlation between borrowing money from AfDB (to support the Naira) and using foreign reserves to service the associated interest, on Naira performance, is not real.

Finally, “ routine payments of FG’s obligations” are usually budgeted. If that was the case, such could have been noted what was paid.

Comment 1A: Ndubuisi Ekekwe I usually refrain from commenting on controversial ‘opaque’ matters, but in this case, a little light has been thrown. Actually, the country CAN and DOES service debt from external reserves, but that debt is FOREIGN DEBT! It is budgeted for, yes, but the budget is in Naira and You have to pay in USD. As a matter of fact, there are obligations due CBN to some Nigerian Banks in USD that should have been taken from reserves this year, but they have kicked the can down the road by issuing them high coupon bonds in lieu. My point is DEBT CAN BE PAID FROM RESERVES! Secondly, I see your chart and what you’re driving at by plotting the time series of reserves and exchange rate. It would be a classic mistake (rookie mistake amongst Economists) to mistake CORELLATION FOR CAUSATION. The pattern you see might just be out of a spurious corellation (not saying it is.) But when you tell folks to conclude via a statistical significance of same corellation to corroborate your assertion, one wonders to what tests of statistical significance you refer, it’s not nit-picking, it actually matters when you’re making definitive statements. I believe we have to take the CBN Governor’s explanation for now, howbeit with a pinch of salt!

My Response: I am not disputing the CBN position and I am not saying that foreign reserves cannot be spent. That money is there to be spent on something. My position is arguing that spending it has no relationship to the strengthening of Naira. You build the reserves to spend it. And they’re spending it.

“Actually, the country CAN and DOES service debt from external reserves, but that debt is FOREIGN DEBT!” As I noted, I was referring specifically to the 2024 budget which was billed to actually boost and increase the foreign reserves. The government has made the case that it is actively working to “boost” the reserves. So, seeing it drawing from it was my confusion.

Finally, your position on the Bloomberg’s economists’ chart would have been more powerful if you have one that disputes their correlation. For the fact you cannot dispute it, we can assume that it stands. Economics is a social science (not natural philosophy). So, your position could hold, but this one could also hold since this is not physics. That is why it is a democracy, and we can debate. Yet, I did not create the plot. Thanks as always, we learn whenever you make time to comment here. Thanks

Plot the exchange rate of Naira against time. Plot the foreign reserves of Nigeria against time. This is what you get. Is that statistically significant to deduce that the recent strengthening of the Naira was not done naturally, but has a connection to the depletion of the… pic.twitter.com/WDVdIgwIrQ

— Ndubuisi Ekekwe (@ndekekwe) April 17, 2024

During the Second Quarter Dinner of the Petroleum Club in Lagos themed “Funding Our Way out of the Crisis: Looking up to the Oil and Gas Sector”, Minister of State for Petroleum Resources, Heineken Lokpobiri, delivered a keynote speech addressing critical issues facing the oil and gas sector.

Among other things, he revealed a staggering loss of $34 billion over the last two and a half years due to declining oil production from assets being divested by ExxonMobil to Seplat Energy.

Lokpobiri disclosed that output from these assets plummeted from 600,000 barrels per day (bpd) to a mere 120,000bpd, resulting in a significant shortfall of 480,000bpd. At a conservative estimate of $80 per barrel, this translated to a monumental loss of $34 billion, highlighting the magnitude of the challenge facing Nigeria’s oil industry.

“My own opinion is that, look, we are in short of 480,000 barrels a day from that ExxonMobil-Seplat transaction,” he said.

“For the past two and a half years, oil has been moving around $80 a barrel. Four hundred and eighty thousand barrels a day, multiply it by two and a half years, and it will give you about $34 billion.

“When I was at this table, I was doing rough mathematics and I guess you have your phones. So, you can do the calculation. If one asset was doing about 600,000 barrels, because of certain problems, which we’re trying to resolve, production declined to 120,000 barrels, which means we’ve lost about 480,000 barrels a day.

“Multiply it by $80 a barrel. Every day, you’ll get about $34 million. Multiply it by two and a half years, you’re talking about over $30 billion. If $30 billion is injected into our economy today, I guess you guys will have to sell more of your dollars because dollar will naturally drop. This exchange rate is sometimes a question of demand and supply.”

Against this backdrop, which has been described as the major contributor to the naira’s woeful performance in the FX market, Lokpobiri expressed confidence in the country’s ability to ramp up oil production to five million barrels per day within the next 12 to 18 months. He attributed the decline in production to a lack of investment in the sector over the past decade and underscored the urgency of addressing this issue.

“If from only that Seplat-ExxonMobil transaction, we have lost about $35 billion, imagine if that money was in Nigeria. Imagine if NNPC has about 70 per cent of that money. If they have that money to expand their investment, I believe that Nigeria will be in a better place,” he added.

The Minister said the quickest way to the redemption of the Nigerian economic problems is through the oil and gas sector. No oil and gas-producing country fails to prioritize investment in the sector.

He further outlined the potential for restoring production levels by resolving the divestment process and making minimal investments in the affected assets. He stressed that resolving the bottlenecks hindering the divestment process was paramount to unlocking Nigeria’s oil production potential.

According to him, one of the first problems that confronted him was the ExxonMobil-Seplat transaction, and said for the past two years, they’ve been struggling to resolve the problem.

“When I came, what I did was to bring Seplat and NNPC to the table to say, ‘Look, we must lock up ourselves in this room. We must find a solution to this problem.’

“What is the problem? They can attest to the fact that we are able to get some agreements. And I believe that in no distant time, we’ll be able to resolve that problem,” he said.

Lokpobiri’s calculations revealed the staggering economic impact of the production decline, with implications for the country’s revenue and overall economic stability. He reiterated the government’s commitment to prioritizing investment in the oil and gas sector to drive economic growth and deliver on its promises to the Nigerian people.

“That is my mandate. That is the mandate given to me by Mr. President. And I can assure you that this present administration is committed to ensuring that that happens.”

In addition to addressing the divestment challenges, Lokpobiri highlighted the government’s efforts to attract investment and remove bottlenecks in the industry. He emphasized the importance of collaboration with industry stakeholders and expressed optimism about resolving the issues hindering investment in the sector.

“We are willing to remove all bottlenecks in the industry because every country that has oil prioritizes investment in the oil and gas sector,” he said.

Furthermore, the Minister outlined plans for hosting the African Energy Bank (AEB), highlighting the potential economic benefits for Nigeria. He noted the government’s determination to leverage all available resources to attract investment and maximize the country’s oil and gas potential.

“But the summary of what I want to say today is that, as a government, our own policy is to ensure that we do everything that is globally possible that other countries don’t have and that other countries are doing to attract investment, so that we can attract the desired investment,” he said.

An increase in oil output has been touted as a sure way to lift Nigeria from its present economic predicament – which has unleashed an unprecedented 40.1 percent food inflation as the naira falters.

Lokpobiri’s remarks are seen as an admission of how critical the situation has become and the importance of addressing the challenges – mainly, oil theft and infrastructure vandalism. Also, experts note that by resolving divestment issues, attracting investment, and fostering collaboration with industry stakeholders, Nigeria can unlock its oil production potential and pave the way for sustainable economic growth.