• Tony Chukwunyem

The naira’s recent depreciation amid a decline in Nigeria’s external reserves has again highlighted the need for the country to enhance the sources of its dollar buffers, writes Tony Chukwunyem

Although the naira had been largely stable against the dollar since December 2024, when the Central Bank of Nigeria (CBN) stepped up its ongoing efforts to boost transparency in the foreign exchange market, the local currency significantly started strengthening against the greenback in the last week of January, when it appreciated from about N1,533/$1 to N1,493 per dollar in the Nigerian Foreign Exchange Market (NFEM).

Within that period, the local currency also recorded gains in the parallel market as it appreciated to about N1,627 against the dollar compared with above N1,650/$1 previously.

While forex dealers at the time said low demand for the dollar was responsible for the naira’s appreciation, analysts attributed it to additional measures introduced by the CBN to boost transparency and liquidity in the forex market.

Such measures included the apex bank bank’s introduction of a Foreign Exchange (FX) Code and the Electronic Foreign Exchange Matching System (EFEMS) as well as its approval for Bureaux De Change (BDCs) to access the NFEM to purchase FX from Authorised Dealer Banks (ADBs).

Cardoso’s confidence

Indeed, in his speech at the launch of the Nigerian Economic Summit Group’s (NESG) 2025 Macroeconomic Outlook Report, in January, Governor of the CBN, Mr. Olayemi Cardoso, declared that the apex bank’s reforms were already impacting positively on the economy.

He said: “Our efforts have resulted in a significant milestone in 2024 with over $6 billion in foreign capital inflow into Nigeria external reserves exceeding $40 billion signaling growing investor confidence.

Again we emphasise reserves going up not just in numbers but in quality. “As we progress through 2025, we aim to ensure that the reforms and market-oriented policies will support a more competitive business environment.

These developments carry significant implications for businesses operating in Nigeria requiring them to adapt to an evolving economic landscape. “GDP growth is projected to rise to 4.17 per cent in 2025 from 3.36 per cent in 2024.

This growth is anchored on stable crude oil prices, increased refining capacity driven by the Dangote refinery, and the revitalization of the Port Harcourt and Warri refineries.

A stable exchange rate will also play a crucial role in maintaining this positive trajectory.” Highlighting the impact of the CBN’s foreign exchange policies, he noted that the apex bank’s initiatives such as the Foreign Exchange (FX) Code and the Electronic Foreign Exchange Matching System (EFEMS) have boosted market efficiency and transparency.

“The introduction of the foreign exchange matching system and the foreign currency disclosure repatriation and investment scheme will enhance market efficiency and transparency, reduce the disparity between the Bureaux de Change (BDCs) and official exchange rates, and foster stability in the market. So far, we can see the result of a lot of those efforts on our market,” Cardoso stated.

FDC’s scepticism

However, in a report they released at the time, analysts at Financial Derivatives Company (FDC) Limited had stated that they did not expect the naira’s appreciation against the dollar to continue, given that, in their view, there was no change yet in the “fundamental drivers” of the local currency.

They attributed the naira’s gains to “technical factors rather than an improvement in the underlying economic fundamentals.”

As the analysts put it, “in the last few days, we have seen a notable appreciation of the naira, recording gains of 1.82 per cent in the parallel market and 1.73 per cent in the Nigerian Autonomous Foreign Exchange Market (NAFEM).

This improvement has been primarily driven by increased dollar liquidity, speculative trading, and short-term market interventions.

“However, this appreciation is unlikely to last long because the fundamental drivers of the currency (i.e., export earnings, agricultural production capacity and FDI) have not changed dramatically in the last few days.

Therefore, one can conclude that the recent gains in the naira are more based on technical factors rather than an improvement in the underlying economic fundamentals.”

Depreciation

It would seem that the scepticism expressed by the FDC analysts has proved true as the naira appears to have resumed its downward trend against the dollar in the last few weeks.

For instance, on March 10, the naira fell to N1,530.1451 per dollar on the official market compared with

The future trajectory of Nigeria’s external reserves will largely depend on policy adjustments and prevailing market conditions

N1,517.24/$1 on March 7. According to forex dealers, the local currency’s slump was occasioned by renewed dollar shortage at the official Foreign Exchange (FX) market.

Commenting on the development, President of the Association of Bureau De Change Operators of Nigeria (ABCON), Aminu Gwadebe, attributed it to the huge demand for forex that was triggered by the windfall from some contractual payments and releases by some Federal Government agencies.

However, last week, Nairametrics reported the Chief Investment Officer of Cordros Capital, Arnold Dublin-Green, as saying that the naira’s fall was caused by the exit of Foreign Portfolio Investors (FPIs) from Nigeria’s financial markets.

He opined that Nigeria’s dependence on foreign portfolio inflows has made the naira vulnerable to external shocks.

The reported quoted DublinGreen as saying: “Our heavy reliance on foreign portfolio influence is coming to play because we’ve opened up our market to a volatile global environment. Yes, we are in a weaker dollar situation which is always the risk to the trade … but it is what it is.

The naira is getting priced with oil, the naira is getting priced with everything around the world.” He explained that foreign investors were initially attracted by high yields in Nigeria’s fixed-income market, particularly when Open Market Operations (OMO) bills and Treasury bills offered returns as high as 30 per cent and 29 per cent, respectively, but with yields declining and the naira appreciating against the dollar, investors began to exit the market to secure their profits.

“This FPI has made the money… Money came in when OMO was at 30 per cent yield for one year, one-year T-bills at 29 per cent. The naira was at 1700/1600. We wanted to court these investors, and they came in.

Now they realize that T-bills that were at 29 per cent yield are now under 20 per cent. Your OMO that was 30 per cent yield is now under 20 per cent. Your currency that was at N1700 is now strengthened to 1500 very quickly.

You’ve made your money, and I don’t need to be here anymore,” the Cordros Capital official was further quoted as saying.

Boosting external reserves sources

Interestingly, in a recent report, analysts at CSL Research harped on the need for the sources of the factors that drive external reserves accumulation in Nigeria to be bolstered.

They warned that the sources of factors, such as multilateral inflows, external debt issuances, and foreign portfolio investments, which are the current drivers of external reserves accumulation, “could dwindle as maturities come due.”

The analysts stated: “According to reserves movement data from the Central Bank of Nigeria (CBN), the country’s external reserves declined to $38.74 billion as of February 20, 2025, marking a 5.3 per cent decrease ($2.1 bn) from the year high of $40.92 billion recorded on January 6, 2025.

This decline may be attributed to the CBN’s efforts to settle a portion of its 361-day Open Market Operations (OMO) and 364-day Treasury bill obligations owed to foreign portfolio investors (FPIs), with maturities between January 6 and March 27, 2025.

“Additionally, the depletion in reserves could be linked to the CBN’s interventions to stabilise the naira, particularly through clearing foreign exchange (FX) backlogs for profit repatriation via the official market.

“While Nigeria’s external reserves are supported by various sources such as foreign remittances, foreign currency loans, and yields from foreign assets, the primary inflow comes from crude oil sales.

Global oil prices have remained relatively stable in recent years, influenced by geopolitical events such as the Russia-Ukraine war and the Israel-Gaza conflict.

“However, Nigeria has struggled to fully capitalise on these stable prices due to declining oil production, primarily driven by crude oil theft and deteriorating infrastructure.

In response to ongoing FX challenges, the PBAT administration has introduced several policies to foster a more transparent foreign exchange market.

Despite these efforts, FX pressures have persisted, leading to a significant depreciation of the naira in 2023 and 2024.

However, since the beginning of 2025, the naira has shown signs of appreciation and relative stability, closing at N1,501/$ on 21 February 2025.”

They further stated: “The future trajectory of Nigeria’s external reserves will largely depend on policy adjustments and prevailing market conditions.

Oil revenues could gradually recover if the Federal Government and the CBN successfully implement reforms to boost oil production and improve operational efficiencies.

“However, the organic contribution of oil exports to reserve accumulation remains weak, as much of the reserves’ growth has been driven by multilateral inflows, external debt issuances, and foreign portfolio investments—sources that could dwindle as maturities come due.

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