Bamidele Famoofo
The latest data from the Central Bank of Nigeria (CBN) indicates a notable improvement in the country’s foreign exchange reserves, highlighting a positive trajectory in their periodic movement.
By the end of November 2024, Nigeria’s reserves had appreciated by an impressive 21.90 percent year-on-year, climbing from $33 billion in November 2023 to $40.23 billion. This increase of $7.23 billion represents the highest reserve levels recorded since February 2022, bolstered by substantial foreign capital inflows driven by robust carry trade opportunities arising from the CBN’s tight monetary policy stance.
Throughout 2024, Nigeria’s foreign exchange reserves experienced a significant uptick of 22.24 percent between January and November. At the start of the year, the reserves stood at a relatively strong $33.02 billion, supported by a combination of moderate oil prices and deliberate efforts by the CBN to stabilise the foreign exchange market. The growth in reserves was further sustained by favourable conditions in the oil market, particularly for Bonny Light crude, which maintained an upward trajectory, frequently exceeding $80 per barrel. Additionally, the country benefitted from increased foreign portfolio investments, reflecting renewed investor interest in Nigeria’s financial markets.
Despite these gains, the foreign exchange market faced persistent pressures, as the naira struggled under the weight of high demand for dollars from diverse segments of the economy. This demand placed significant strain on reserves, particularly as the year progressed. Global oil price volatility emerged as a key challenge, impacting Nigeria’s export revenues. While oil production showed periods of recovery, structural challenges such as crude oil theft and operational inefficiencies hindered the steady flow of revenues. On the domestic front, the removal of petrol subsidies, a critical fiscal reform, introduced initial inflationary pressures, which temporarily discouraged foreign capital inflows. Furthermore, the persistent depreciation of the naira against major currencies exacerbated demand for foreign exchange, compelling the CBN to intervene in the market to meet critical import needs, particularly for essential commodities such as fuel and food. These interventions, while necessary, placed additional pressure on reserves. By November 2024, the reserves provided coverage for 11.8 months of merchandise imports based on the balance of payments for the 12 months to June 2024. When imported services were included, the coverage extended to 8.3 months, which marked an improvement over the average of 9 months for merchandise import cover in 2023. These figures reflect a relatively favourable position, underscoring the resilience of Nigeria’s external reserves amidst persistent challenges.
According to analysts at Cowry Assets Management, the decline in foreign direct investment and portfolio inflows remained a concern, attributed largely to economic uncertainties and structural inefficiencies.
“To mitigate these issues, the government launched initiatives such as issuing dollar-denominated bonds and implementing policies aimed at attracting foreign investment. While these measures achieved limited success, they underscored the importance of addressing broader structural issues and enhancing the business environment to sustain inflows. As the year drew to a close, cautious optimism emerged.
“Recovering oil prices, combined with the gradual impact of fiscal reforms, began to lift investor sentiment. However, sustaining this momentum requires sustained policy efforts to diversify exports, improve oil production efficiency, and rebuild confidence among investors,” they said.
Looking ahead, expectations are for a continued rise in Nigeria’s foreign exchange reserves, primarily supported by higher foreign portfolio inflows driven by the CBN’s hawkish monetary policy stance and the favourable real interest rate differential relative to advanced economies. These dynamics offer a path to stabilising the reserves further, but achieving long-term resilience will depend on a holistic approach to economic reforms and diversification.
