Nigeria’s foreign exchange reserves have experienced a significant decline of $1.6 billion, dropping to $32.97 billion since the Central Bank of Nigeria (CBN) initiated efforts to unify the country’s foreign exchange rates.
The move, which aimed at ensuring the free float of the national currency against the dollar and other global currencies, has led to a series of changes in the foreign exchange market.
On June 14, the CBN instructed Deposit Money Banks to remove the rate cap on the naira at the official Investors and Exporters’ Window, consolidating all segments into this single window. The “Willing Buyer, Willing Seller” model was also reintroduced at the I&E Window, guided by the extant circular dated April 21, 2017.
Data from the CBN reveals that as of December 1, 2023, the country’s gross foreign exchange reserves fell to $32.97 billion from $34.62 billion on June 15. The decline has been linked to limited capacity to earn foreign exchange from both non-oil and oil exports, coupled with increasing demand for foreign exchange, resulting in a more than 40% depreciation of the naira since June.
During the Monetary Policy Committee Meeting in July, the CBN noted weak accretion to external reserves, persistent foreign exchange demand pressures, and a fundamental problem in the foreign exchange market—insufficient foreign exchange supply due to low productivity, inadequate export earnings, and limited foreign capital inflows.
The Economist Intelligence Unit’s Africa Outlook report highlighted Nigeria’s insufficient foreign exchange reserves to support its exchange rate unification policy, foreseeing continued pressure on the naira, instability in the exchange rate regime, and periodic devaluations.
JP Morgan estimated Nigeria’s net FX reserves at $3.7 billion, emphasizing ongoing pressures in the FX market despite the CBN’s efforts. The removal of the petrol subsidy and the adoption of a floating exchange rate, among other government policies, are expected to have positive effects on the economy in the medium term, according to CBN Governor Olayemi Cardoso.
