Why rising external reserves fail to stabilise Naira

…CBN cautious of depleting reserves –Robertson

…Efforts to clear outstanding forex obligations will make positive impact – Yusuf

Nigeria’s external reserves have grown to $38.67 billion year-to-date, yet the naira has depreciated by 39.8 percent in the official foreign exchange market since the start of 2024.

Data from the Central Bank of Nigeria (CBN) show that the foreign currency reserves of the West African nation, which boasts the largest economy in the region, increased by 17.11 percent or $5.65 billion, rising from $33.02 billion at the beginning of the year to $38.67 billion as of October 10, 2024.

Despite the rise in reserves, the naira has experienced significant losses. According to data from the FMDQ Securities Exchange Limited, the dollar was quoted at N1, 641.27 on Friday, a depreciation from N988.46 on January 3, 2024, within the Nigerian Autonomous Foreign Exchange Market (NAFEM). This represents a loss of N652.81 in the naira’s value.

The situation in the parallel or black market reflects a similar trend. The naira traded at N1, 700 on Friday, marking a 12.35 percent decline from N1, 490 on January 30, 2024, losing N210 in value over that period.

Read also:External reserves hit 22-month high amid naira struggles

The growth in external reserves, which could equip the CBN to defend the naira, has not been able to stabilise the currency.

Charlie Robertson, head of macro-strategy at FIM Partners, noted via email to BusinessDay that the CBN seems to be prioritising reserve accumulation over currency stability. He suggested that the apex bank might be building a war chest before intervening or preparing for upcoming forex obligations.

“The CBN is choosing to prioritise FX reserves build-up over FX stability, perhaps, because they want a war chest before they step into the FX market or, perhaps, because they are aware of upcoming FX payments,” Robertson said.

Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, pointed out that the CBN is being cautious about depleting reserves, particularly by using them to defend the naira.

“The CBN is careful about depleting the reserves, particularly in expending it to defend the currency,” Olubunmi said.

Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise (CPPE), acknowledged some level of stability in the forex market but highlighted structural issues causing market distortions. One significant issue, according to Yusuf, lies on the fiscal side, where government officials with access to excessive naira are buying dollars at any rate. Yusuf emphasised that fiscal operations must be addressed to mitigate this problem.

In its September 2024 meeting, the Monetary Policy Committee (MPC) noted the persistent growth in money supply and emphasised the need to curtail excess liquidity in the financial system to reduce pressure on forex demand. The committee also expressed concern over the rising fiscal deficit but welcomed the government’s pledge to avoid monetary financing through the Ways and Means facility.

Additionally, the MPC observed a direct correlation between Federation Account Allocation Committee (FAAC) releases and liquidity in the banking system, which in turn affects the exchange rate. To manage this, the MPC committed to closer monitoring of future FAAC disbursements and their impact on prices.

Olayemi Cardoso, CBN governor, remarked in February 2023 that increased demand for forex was a key driver of the naira’s depreciation. Cardoso cited speculative activities, inadequate forex inflows due to delayed oil earnings remittances, rising capital outflows, and excess liquidity from government spending as factors exacerbating the situation.

On August 19, 2024, the Nigerian government issued $500 million bond—the first tranche of a planned $2 billion domestic US dollar bond—aimed at stabilising the economy.

Additionally, Nigeria received $2.25 billion in December 2023 as part of a $3.3 billion forex support facility from Afreximbank, which contributed to a modest increase in reserves. According to CBN data, external reserves inched up by 0.06 percent in one day, rising from $32.892 billion on December 28, 2023, to $32.912 billion on December 29, 2023.

Read also: External reserves jump by $490m one week after domestic dollar bond issuance

Muda Yusuf predicts that the economic challenges in 2024 will not be as severe as those encountered in 2023. He expects positive outcomes from the CBN’s efforts to clear outstanding forex obligations, the removal of barriers to forex inflows, and the impact of local refining on import substitution.

Yusuf also emphasised that tackling oil theft and boosting crude oil production would improve the nation’s foreign reserves and enhance exchange rate stability.

With these measures in place, Nigeria aims to address the core issues affecting its currency and reserves, though the path to sustainable stability remains challenging, analysts said.