Market News

BY  Iheanyi Nwachukwu 

Nigeria’s external reserves decreased by about $1.19billion in just three weeks and four days.

According to data from the Central Bank of Nigeria (CBN), the gross external reserves had reached a high of $40.920billion as at January 6, 2025 after closing year 2024 at $40.877billion. It started moderating steeply from $40.560billion as at January 13, 2025 to $39.723billion as at January 31.

The downward movement in the nation’s foreign currency reserves was revealed as the Central Bank of Nigeria (CBN) is yet to publish the position of the external reserves four days into the new month of February.

Bismarck Rewane-led Financial Derivatives Company (FDC) in their 2025-2026 outlook expect Nigeria’s gross external reserves to drop by 11.47 percent in 2025 to $36.21billion and 2026 at $37.65billion from a high of $40.9billion in 2024.

The FDC analysts also expect that Dollar/Naira exchange rate will average at N1,586 in 2025 and N,1575 in 2026 as against average exchange rate of N1,615 in 2024.

The naira appreciated recently to an eighth-month high of 1474.78/$ at the official foreign exchange (FX) market as dollar demand eases on a raft of fiscal and monetary policies of the government.

At the black market, naira strengthened to $/N1,595 from preceding day’s $/N1,599.33, fuelled by a reduction in the demand for the dollar and various policies from the Central Bank of Nigeria.

The Central Bank of Nigeria (CBN) has just extended the temporary access granted to Bureau De Change (BDC) operators to purchase foreign exchange from the Nigerian Foreign Exchange Market (NFEM) to meet retail market demand for invisible transactions until May 30, 2025.

Nigeria successfully returned to the international debt market after a hiatus of over two years issuing $2.20 billion in Eurobonds. The issuance was split into two tranches: $700 million maturing in 2031 and $1.50 billion maturing in 2034.

The bonds were met with strong investor demand, generating an order book exceeding $9 billion, as the yields on the Nigerian instruments appeared more attractive compared to those of recent issuances from SSA.

While reserves decline had been attributed to two main factors – international debt servicing obligations and foreign exchange (FX) interventions by the CBN, an informed source said that while supply is meeting demand, there are other areas where the reserves go.

“Reserves are used for many reasons and not just by CBN. When we repay external loans, or pay coupons on Eurobonds, or spend in USD based on budget, where do you think the money comes from?

“I don’t monitor reserves but I know that there has been nothing done by CBN that remotely resembles defending the naira. The naira is appreciating so there is no need to defend it and the volume of CBN involvement in the markets is sub 10 percent,” the source said.

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

“Some observers argued that Nigeria might have been better off waiting until 2025, when moderating U.S. inflation could lead to lower interest rates from the Fed. Looking ahead, Nigeria faces some notable debt obligations.

“Aside from 2026, the country has Eurobond maturities averaging $1.33 billion annually over the next decade. Including coupon payments, total annual debt servicing costs could average $2.24 billion,” according to CardinalStone analysts in their 2025 economic outlook titled “Pressure to the Plateau”.

They noted that these Eurobond maturities suggest “debt repayment and servicing costs are likely to remain high in the near to medium term, but we reiterate that the country’s external debt linked ratios (such as external debt service as percentage of exports, external debt to exports, and debt service to exports) are still favourably within IMF’s prescribed thresholds”.

Nigeria’s foreign debt servicing expenditures totalled $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.

Also speaking, Abiola Rasaq, financial analyst and former head, Investor Relations & Portfolio Investments at United Bank for Africa Plc said “The external reserve has shed about 2.6 percent or USD$1.1billion year-to-date, partly due to the seasonal January demand for foreign currency and market euphoria about probable strength of the greenback, as President Trump assumes office as the 46th American President, with plethora of restrictive trade policies aimed at correcting United States’ visible trade deficit and weakening manufacturing influence”.

According to him, “Paradoxically, the Naira has strengthened 3.1 percent at the official window to N1,489/USD$, with similar appreciation at the parallel market, where the local currency now trades around N1,580/USD. The strength of the Naira bucks the global market weakness of most of the G7 currencies against the greenback, especially the Canadian dollar and British pounds which have depreciated 5 percent and 3 percent year-to-date”.

He said: “It’s instructive to note that beyond the positive impact of the administrative measures of the CBN on the Naira, the sustained tight monetary policy has also been helpful, as the relatively high interest rate differential provides attraction for Naira-denoninated investments and discourages capital flight. Notably, whilst the Bank of Canada and the Bank of England continue in the pursuit of an accommodative policy, with successive reductions in their respective policy rates below the Fed rate, the MPC in Nigeria has consistently demonstrated the appetite to trade off near term economic growth for price stability, as both fiscal and monetary policy authorities in the country work towards stemming the high inflationary pressures”.

“Obviosuly, new immigration policies in UK, Canada, US and Europe are also reducing near term pressure on the Naira, as FX demand for school fees and upkeep slightly moderates. Notwithstanding the downside risk to oil price, which may weaken FX inflow to Nigeria, the fundamentals of the economy are supportive of a stronger Naira this year, especially as Dangote Reginery ramps up local petroleum supply, thereby reducing genuine and fictitious outflow of FX,” Rasaq further noted.