According to the Central Bank of Nigeria (CBN), Nigeria experienced a $1.02bn decline in foreign exchange reserves over an 18-day period. This significant drop occurred as part of the CBN’s ongoing efforts to support the naira. As of April 3, 2024, the Foreign Exchange reserves (FX) had fallen from $34.45bn on March 18 to $33.50bn, as reported by the latest CBN data. Prior to the recent decrease, the reserve experienced consistent growth, with a notable increase of $1.28bn over a 43-day period from 5th of February to 18th of March, 2024.
The increase in foreign reserves was credited to a rise in remittance payments from Nigerians living abroad and growing interest from foreign investors in local assets, particularly government debt securities. Enhanced regulations in the foreign exchange market and a boost in oil production also played a role in the reserve growth. Despite this positive trend, there has been a noticeable decrease in reserves since March 18, with a peak at $34.45bn followed by a gradual decline to $34.39bn on March 19, then $33.57 billion dollars on 2nd of April, before dropping down to $33.50 billion on 3rd of April.
CBN has been working tirelessly to prop up the naira.
This decrease in just 18 days, which saw the reserve make a drastic drop of $1.02 billion, highlights the ongoing struggle to maintain the stability of the local currency. The Central Bank of Nigeria has been working tirelessly to prop up the naira amidst challenges posed by multiple economic forces through interventions in the forex market. Selling dollars as part of these interventions is a common practice to keep the market liquid, but it may have played a role in the decline of FX reserves. Within these days, the Central Bank of Nigeria issued two major announcements that caught public attention.
At first, all valid foreign exchange backlogs were officially cleared. Then, foreign exchange was made available for purchase by Bureau De Change operators in Nigeria at a rate of ₦1,251/$1. The diminishing FX reserves are worrisome because they indicate the nation’s balance of payments status and its capability to fulfill worldwide commitments. A decrease in reserves could shake investor trust and result in a drop in credit rating, ultimately causing the country’s borrowing expenses to rise.
Reduction in reserves could hinder CBN’s capacity.
Nigeria is struggling with various economic obstacles, such as theft and losses in the oil and gas industry, which have long been a crucial source of foreign exchange for the nation. The reduction in reserves could hinder the Central Bank of Nigeria’s capacity to participate in the currency market, possibly resulting in additional devaluation of the naira. A forecast from the International Monetary Fund (IMF) predicts a sharp decline in Nigeria’s foreign reserves, estimating it to drop to $24bn by 2024.
IMF anticipates tough times ahead for Nigeria’s financial outlook between 2024 and 2025 due to factors such as no new Eurobond offerings, large repayments of current loans and Eurobonds amounting to $3.5bn, and ongoing outflows from investment portfolios. In the upcoming second quarter of this year, specifically in June, the federal government has announced plans to release domestic bonds in foreign currency. This decision has sparked optimism among some economists, who believe it will have a positive impact on the stability of the naira and the nation’s reserve.
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Moreover, the Central Bank of Nigeria has reaffirmed its commitment to supporting the naira by selling foreign exchange to bureau de change (BDC) operators at a rate of ₦1,101/$1, as announced on Monday. The current rate is lower than the official closing rate of ₦1251/$1 on Friday. It is important for policymakers to carefully consider both short-term currency stabilization measures and long-term economic strategies in order to secure Nigeria’s financial standing on the global scene.
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