External reserves fall $320m in 11 days on debt servicing

Nigeria’s external reserves, which experienced steady growth over the past year, have now recorded a sharp decline, primarily due to foreign debt servicing pressures.

According to data from the Central Bank of Nigeria (CBN), the country’s foreign currency reserves decreased by $320 million, representing a 0.8 percent drop in just under two weeks. As of January 13, 2025, the reserves stood at $40.56 billion, compared to $40.88 billion on January 2, 2025.

Analysts have attributed this decline to two main factors: international debt servicing obligations and foreign exchange interventions by the CBN.

Nigeria’s foreign debt servicing expenditures totaled $3.6 billion over the nine months from January 31 to September 30, 2024. This marks a 39.8 percent increase, $1.02 billion more than the $2.6 billion spent in the corresponding period of 2023, as revealed by the CBN’s international payments data.

The decline in reserves highlights the ongoing financial strain posed by Nigeria’s external obligations and the delicate balance the CBN must maintain between meeting debt repayments and stabilising the foreign exchange market.

One plausible explanation for the recent dip as noted by Tobi Ehinmosan, analyst at FBNQuest, could be debt repayments. Nigeria, like many nations, services dollar-denominated loans from institutions such as the World Bank, IMF, and bilateral agreements with countries like China. These repayments, encompassing both principal and interest, are managed by the CBN on behalf of the federal government. The timing of such payments—whether at the beginning, middle, or end of the year—can create temporary declines in reserve levels.

However, debt repayment is not the sole factor. Another potential contributor to reserve movements is the CBN’s intervention in the foreign exchange (FX) market. Typically, such interventions aim to stabilize the naira by supplying dollars to meet demand. Yet, given the recent depreciation of the naira, it appears unlikely that significant interventions have taken place. Instead, the weak supply and high demand for foreign exchange may indicate that intervention has been minimal, leaving debt repayment as the more probable cause of the current decline.

Read also: Why rising external reserves fail to stabilise Naira

That said, it is essential to contextualise these fluctuations. A decline over a few days does not necessarily signify a sustained trend. Ehinmosan aptly advises caution, suggesting that a clearer picture would emerge after observing reserve movements over a more extended period. Short-term changes could just as easily reverse, highlighting the day-to-day volatility inherent in such metrics.

Nigeria’s external reserves are a cornerstone of its economic stability, serving critical functions such as debt servicing and currency support. Muda Yusuf, director and CEO of the Centre for the Promotion of Private Enterprise (CPPE), highlighted these dual responsibilities while responding to a question on the reason for the decline in reserves.

“What the CBN has been doing to ensure that there is stability in the exchange rate, and we have been seeing evidence of that anyway. So for me, those are the two possibilities that will have led to that drop in reserves and any case, that is what the reserves are meant for”, Yusuf said.

One plausible explanation for the decline is the repayment of external debts. Nigeria’s debt obligations, denominated in foreign currencies, are settled using the reserves. it is undeniable that debt servicing is a routine and significant draw on the reserves. This shows the importance of maintaining a robust reserve buffer to meet these obligations without undue strain on the economy.

The second possibility is the CBN intervention in the foreign exchange market. As Yusuf notes, the CBN has been actively working to stabilise the exchange rate, a critical objective given the persistent pressure on the naira. Such interventions typically involve selling foreign currency to meet demand, ensuring liquidity, and reducing volatility. While these actions are necessary to maintain economic confidence, they also deplete reserves, creating a delicate balancing act for policymakers.

The naira on Wednesday closed flat at the official FX market as demand moderated. At the Nigerian Foreign Exchange Market (NFEM), the dollar was quoted at N1,550 compared to N1,549 quoted on Tuesday, according to data from the CBN.

Authorised currency dealers quoted the dollar at the highest rate of N1,554 on Wednesday, stronger than N1,560 quoted on Tuesday. The FX market recorded the lowest rate of N1,546 per dollar on Wednesday compared to N1,545 on Tuesday.

Nigeria’s total debt service payments have been increasing in recent years, consuming a large portion of the Federal Government’s budget. In the first half of 2024, Nigeria’s debt servicing payments reached N6.04 trillion, a 68 percent increase from N3.58 trillion recorded in the corresponding period in 2023.