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Sanusi Says Outlook Mixed for Nigeria Foreign Reserves

Nigeria’s foreign-currency reserves will probably keep expanding while facing risks from lower-than-projected oil output and falling prices, central bank Governor Lamido Sanusi said.

Quantitative easing by central banks in the U.S., the U.K. and Japan “all point to a likelihood of strong capital flows to emerging and frontier markets” that may benefit Nigeria, Sanusi said today in an e-mailed response to questions. Still, “the combination of lower global oil prices and weak output performance in Nigeria may lead to a slowdown.”

Oil production in Africa’s biggest producer fell to 1.81 million barrels a day in March, the lowest level since September 2009, according to data compiled by Bloomberg. Output averaged 2.2 million barrels a day in the first quarter, according to figures released by state-owned Nigerian National Petroleum Corp. on April 17. That compares with a production forecast of 2.53 million barrels a day used in this year’s budget.

Nigeria relies on crude exports for about 80 percent of government revenue and more than 90 percent of foreign income, according to the central bank.

Foreign-currency reserves rose 33 percent to $48.9 billion on May 3 from a year earlier, according to data published by the central bank. The naira has dropped 1.1 percent against the dollar since the beginning of the year and was trading at 157.85 as of 1:36 p.m. in Lagos, the commercial capital.

Unrealistic Assumptions

“We always said that the budget based on projections of about 2.5 million barrels per day was founded on overly optimistic and unrealistic assumptions,” Sanusi said.

The drop in output, which cost the country $1.23 billion in the period, was a result of “incessant crude oil theft and vandalism along the major pipelines” in the oil-rich Niger River delta, said NNPC.

The theft of oil and slowing of investments by energy companies due to lack of clarity on fiscal terms “cannot be ignored,” Sanusi said.

The increase in reserves will be driven more by portfolio inflows rather than savings, as the government will probably use excess oil income “to make up for fiscal revenue shortfalls,” Sanusi said. While “most of the inflows are stable,” Nigeria’s main risks are oil price and output shocks and “excessive depletion of savings and high imports fueled by government spending,” Sanusi said.

“This will put pressure on currency and then start a reversal of capital flows,” he said.

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