Nigeria’s foreign exchange reserves have fallen by $1.6bn to $32.97bn since the Central Bank of Nigeria tried to unify the country’s foreign exchange rates.
On June 14, the apex bank asked Deposit Money Banks to
remove the rate cap on the naira at the official Investors and Exporters’
Window of the foreign exchange market to ensure the free float of the national
currency against the dollar and other global currencies.
In a circular, the bank said, “The Central Bank of Nigeria
wishes to inform all authorised dealers and the general public of the following
immediate changes to operations in the Nigerian Foreign Exchange Market:
Abolishment of segmentation.
“All segments are now collapsed into the Investors and
Exporters window. Applications for medicals, school fees, BTA/PTA, and SMEs
would continue to be processed through deposit money banks. Re-introduction of
the ‘Willing Buyer, Willing Seller’ model at the I&E Window. Operations in
this window shall be guided by the extant circular on the establishment of the
window, dated 21 April 2017, and referenced FMD/DlR/ClR/GEN/08/007. All
eligible transactions are permitted to access foreign exchange at this window.”
Since then, the naira and foreign currency reserves have
recorded a decline. As of June 15, the country’s gross FX reserves stood at
$34.62bn. However, the foreign exchange reserves fell to $32.97bn as of
December 1, 2023, according to data from the CBN.
The decline in the FX reserves has been blamed for the fall
in the naira rate and has been attributed to the limited capacity of the
country to earn foreign exchange from both non-oil and oil exports and
increasing FX demand which has seen the naira weaken by more than 40 per cent
since June.
In July, the bank noted that accretion to external reserves
remained weak while foreign exchange demand pressures persisted. During the
bank’s Monetary Policy Committee Meeting, one of the members, Obadan Mike,
highlighted that amidst unabating demand, the fundamental problem of the
foreign exchange market remains inadequate foreign exchange supply reflecting
low productivity of the economy, inadequate export earnings, and limited
foreign capital inflows.
Mike worried that the country’s external reserves is in an
uncomfortable position and is a key concern for the domestic economy.
In its recent Africa Outlook report, the Economist
Intelligence Unit, disclosed that Nigeria doesn’t have enough in its FX
reserves to back up its exchange rate unification policy.
It said, “In Nigeria, an unsupportive monetary policy
implies that the naira will remain under pressure, while the central bank lacks
the firepower to adequately supply the market or clear a backlog of foreign
exchange orders, which will keep foreign investors unnerved. High inflation and
a continued spread with the parallel market will leave the exchange rate regime
unstable and result in periodic devaluations.”
Recently, JP Morgan estimated Nigeria’s net FX reserves at
$3.7bn following owing to larger-than-expected currency swaps and borrowing
against existing reserves. It noted that this low net FX reserves mean
continued FX market pressures, although the CBN may source FX at commercial and
semi-commercial rates.
However, the CBN Governor, Mr Olayemi Cardoso, expects that
with time the removal of petrol subsidy and the adoption of a floating exchange
rate, among other government policies, will have positive effects on the
economy in the medium-term.