Nigeria’s External Reserves Surge to $37.31bn Despite Naira’s Plunge
Nigeria’s external reserves have surged to a 22-month high of $37.31 billion as of September 18, 2024. This significant rise in foreign currency reserves, a crucial indicator of the country’s ability to meet international financial obligations, comes amid persistent struggles with the naira’s depreciation. According to data from the Central Bank of Nigeria (CBN), the reserves have reached their highest level since November 2022, marking a recovery for Africa’s largest economy.
Despite the growth in reserves, the naira continues to struggle, having been named one of the ten worst-performing currencies globally by Bloomberg on September 20. The reserves are typically used by the CBN to stabilize the local currency, but the naira has depreciated by 49.56% in the official market over the review period.
Factors Behind the Surge in Reserves
Several key factors have contributed to the increase in Nigeria’s external reserves. Among the major drivers is the federal government’s domestic dollar bond issuance, which has attracted foreign investment. The $500 million first series of a $2 billion domestic dollar bond raised over $900 million, providing a boost to the reserves. Other significant inflows include remittances from Nigerians abroad, multilateral loans from organizations like the World Bank and the African Export-Import Bank (AfreximBank), and foreign portfolio investments.
Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, highlighted the role of domestic dollar bonds and the uptick in diaspora remittances as primary contributors to the reserve increase.
Rising External Reserves, Declining Naira
While the external reserves have grown, they have not succeeded in halting the decline of the naira. Between September 19, 2023, and September 18, 2024, the naira fell from N776.60 to N1,539.65 in the Nigerian Autonomous Foreign Exchange Market (NAFEM), according to FMDQ Securities Exchange Limited. In the parallel market, the naira dropped by 41.87% from N965 to N1,660 within the same period.
Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, attributed the naira’s continued depreciation to a “crisis of confidence” in the foreign exchange market, leading to heightened speculative activities.
Nigeria’s Growing Foreign Exchange Demand
Olayemi Cardoso, the CBN Governor, stated in February 2024 that the demand for foreign exchange had surged, particularly for education and healthcare. Over the past decade, $40 billion has been allocated for education-related expenses abroad, while Personal Travel Allowances (PTAs) accounted for $58.7 billion over the same period. These factors have further strained the naira despite the growing reserves.
Impact of Foreign Investments and Loans
In addition to the dollar bond issuance, Nigeria also benefited from other inflows, including a $3.3 billion oil facility from AfreximBank and $2.25 billion from the World Bank Group. These inflows have provided much-needed liquidity to the economy but have yet to translate into real gains for the local currency.
FBNQuest noted that similar trends were observed in other African economies, with Egypt’s reserves rising to $46.6 billion and South Africa’s external liquidity increasing to $60.1 billion.
Reactions to External Reserves Surge
- @ChiomaFinance: “Great news about Nigeria’s external reserves, but why is the naira still falling? #NairaDepreciation”
- @AdeBanksNaija: “The reserves hit $37bn, yet the naira is struggling. CBN needs a better strategy. #ForexCrisis”
- @KemiInvests: “We need to address the confidence crisis in the FX market. Speculation is killing the naira. #NairaWatch”
- @DeleEconomist: “So our reserves are growing but no effect on the naira? Something isn’t adding up. #CBNPolicies”
- @NaijaBizAlert: “With external reserves this high, why is the naira one of the worst-performing currencies? #NairaDepreciation”
- @TundeTrade: “Foreign investments pouring in, but the naira still drops. We need stability in the forex market. #NairaStruggles”
- @ZainabForex: “CBN has to act fast! These reserves should be defending the naira, not just sitting there. #ForexCrisis”
- @SeyiWorldEconomy: “It’s sad that even with $37bn in reserves, our naira has depreciated by nearly 50%. #NairaWoes”
- @LolaFinanceGuru: “Reserves hitting a 22-month high should have boosted the naira. Where’s the disconnect? #NairaChallenges”
- @BolaInvestor: “The naira’s fall despite rising reserves is frustrating. We need real solutions! #NigeriaEconomy”
- @EmekaNairaMonitor: “The bond sales are helping our reserves, but it’s not saving the naira. What’s going on? #NairaDepreciation”
- @YinkaTradeExpert: “Naira depreciates by almost 50% while reserves soar. CBN needs a new approach. #ForexCrisis”
- @FemiForexWatch: “The growing reserves should mean something for the naira, but it seems we’re missing the point. #NairaStruggles”
Despite the surge in Nigeria’s external reserves, the naira continues to depreciate, highlighting the need for comprehensive policy solutions to address the confidence crisis in the foreign exchange market.
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