According to Nigeria’s Finance Minister Wale Edun, the government’s decision to forgo intervening to protect the Naira has resulted in an organic increase in the nation’s foreign reserves. According to Olayemi Cardoso, the governor of the Central Bank of Nigeria (CBN), the total reserves have grown to $40.2 billion. The administration wants to give frequent updates on net reserves and is committed to preserving openness in the way these assets are managed. The prior strategy of protecting the naira by spending about $1 billion every month has been abandoned, Edun stressed.
As an alternative, the government is letting the market dictate the exchange rate more. The goal of this change is to increase investor confidence and foster economic stability. Without regular central bank interventions, the long-term objective is to ensure exchange rate stability, even though the CBN may periodically interfere in the market. Edun also emphasised the benefits of Foreign Portfolio Investment (FPI) and the government’s oil sector reform, which has eliminated Fuel Subsidies and established a free market for Petroleum products.
To protect the naira FG has frequently interfered in the FX market.
Due to this shift, domestic refiners are now able to operate in the naira market, and expenditures associated with subsidies, which formerly accounted for 5% of the nation’s GDP, have decreased. Even while this puts pressure on the foreign exchange market, the Nigerian National Petroleum Corporation (NNPC) is currently paying off its debts, including foreign exchange subsidies, gradually. Nigeria’s history as an oil-dependent nation has influenced its fuel Subsidies and naira policy. To protect the naira, the government has frequently interfered in the foreign exchange (FX) market, particularly during periods of Volatility in oil prices.
Prior to the recent change in policy, The Central Bank of Nigeria (CBN) frequently used significant sums of foreign reserves to keep the value of the naira stable. For example, Nigeria had close to $34 billion in foreign reserves in 2015, but by 2016, the CBN’s actions during a period of falling oil prices caused reserves to fall sharply to $24 billion. During this time, the naira’s currency rate also saw significant swings. Officially, the naira was valued at about 197 naira to the US Dollar in 2015.
Nigeria spent roughly $7 billion a year on the subsidies at its height.
After significant interventions, the naira depreciated to ₦305 per dollar by 2016, and the Black Market rate increased much further. A key component of Nigeria’s economic policies for many years is the gasoline subsidy, which aims to make petroleum products cheap for Nigerians. Nigeria spent roughly $7 billion a year on the subsidies at its height. This subsidy was generally considered unsustainable by 2022, when it was predicted to have cost ₦4.4 trillion, or 2.2% of Nigeria’s GDP. But because of its effect on household expenses, its repeal has proven politically difficult.
Under the revised policies intended to lessen CBN intervention, Nigeria’s foreign reserves as of 2023 were estimated to be approximately $33 billion, as opposed to their present level of $40.2 billion. According to experts, this increase in reserves is an indication that Economic Stability is growing. Regarding these reforms, economists have differing views. The choice to let the naira float and naturally accumulate reserves, according to local experts like Bismarck Rewane, CEO of Financial Derivatives, will boost investor confidence and lessen unnatural pressures on the economy.
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However, international economists like Razia Khan of Standard Chartered have warned that although this strategy might stabilise the currency over time, the short-term effects could result in slower Economic Growth and higher inflation, particularly as businesses adjust to the naira’s true market rate, which might be higher than previous CBN-controlled rates. In an effort to achieve long-term stability, the long-standing reliance on subsidies and artificial exchange rate Regulation is gradually being replaced by more market-driven strategies. As evidenced by the sudden spike in fuel costs following the elimination of subsidies, several economists warn that these policies may raise Nigerians’ short-term cost of living.