Nigeria’s foreign exchange (FX) reserves have shown signs of recovery in recent months, rising to a three-month high of $33.53 billion as of June 19, 2024. This represents a 2.19% increase from $32.447 billion in May 2024.
The news comes after a period of decline in 2023, which saw reserves fall from $36 billion at the end of 2022 to $32.3 billion by year-end.
Reasons Behind the Decline in 2023
The decline in Nigeria’s FX reserves in 2023 can be attributed to a combination of factors. Reduced forex inflows, likely due to a decrease in foreign investment and oil exports, coupled with an increase in forex outflows, put pressure on the reserves.
This decline also impacted Nigeria’s share of global FX reserves, dropping from 0.30% at the end of 2022 to 0.26% by the end of 2023.
Composition of Nigeria’s Forex Reserves
Transparency surrounding the composition of Nigeria’s FX reserves remains a point of contention. However, available data suggests that a portion of the reserves is held in Chinese Yuan (Renminbi) and gold. As of Q3 2022, the Chinese Yuan reportedly constituted $3.2 billion of the reserves, while Nigeria also held 21.37 metric tonnes of gold valued at approximately $1.6 billion in 2023.
Recent Uptick and Naira Stability
The recent increase in FX reserves coincides with a period of relative stability for the Nigerian Naira. The official exchange rate has hovered around ₦1480-₦1490 in recent weeks, averaging ₦1,481/$1 for June 2024. The Naira, however, depreciated slightly on June 22nd, closing at ₦1,485.36, a 0.15% decline compared to the previous day.
Despite the recent stability, there are still underlying concerns. The Naira depreciated slightly on June 22nd, closing at N1,485.36, a 0.15% decline compared to the previous day.
Additionally, the black market exchange rate for the Naira continues to differ from the official rate, suggesting ongoing pressure on the currency. The black market, remains relatively steady at N1,490 per dollar, slightly weaker than the official rate.
Improved Liquidity and Challenges Remain
Data from the Central Bank of Nigeria (CBN) indicates improved forex turnover, with the average daily turnover for June exceeding $199 million compared to $168 million in May. This suggests increased activity in the official foreign exchange market.
Total forex turnover in June is now $2.1 billion of trading in 11 days of trading.
This stability is a welcome development after a period of fluctuation that saw reserves dip to a low of $32.11 billion in April 2024, raising concerns about Nigeria’s financial health.
The recent rise in FX reserves offers some optimism for the Nigerian economy. This growth is primarily driven by inflows of dollars from international financial institutions. Despite the positive developments, challenges remain. The overall level of Nigeria’s FX reserves is still considered low compared to the country’s import needs.
If You Ask Me
While the uptick in FX reserves offers some relief, questions remain about its sustainability. Increased oil exports and improved global economic conditions could contribute to continued growth. However, persistent trade imbalances and dependence on volatile oil prices pose challenges.
The CBN’s policies aimed at attracting foreign investment and boosting domestic production will be crucial in determining the long-term trajectory of Nigeria’s FX reserves. Additionally, a more transparent approach to disclosing the composition of reserves could improve public confidence and enhance financial stability.
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Nigeria’s recent increase in FX reserves provides a temporary sigh of relief. However, addressing the underlying causes of reserve decline and diversifying the economy are critical for long-term financial health. The CBN’s commitment to sound monetary policies and fostering a more investment-friendly environment will be key to achieving sustainable FX reserve growth and ensuring the Naira’s stability.
