Foreign reserves return to growth

After nearly three months of consecutive declines, Nigeria’s foreign reserves might have started a slow recovery.

The naira also appreciated by 4.4 per cent to N743.07 per dollar at the unified market-driven portal. The local currency remains volatile and under intense pressure from unmet forex demands.

The reserves had come under intense pressure in recent periods as the country struggled with a multiple exchange rate system. There was a gap of some 300 basis points between the official and parallel market rates.

The reserves, which closed in 2022 at about $37.08 billion, peaked at $37.211 billion on January 16, 2023. It remained on the decline, running consecutive falls for several weeks in many instances. The reserves lost about $2.9 billion in first half of 2023.

In line with the economic direction of President Bola Tinubu’s administration, the Central Bank of Nigeria (CBN) had on June 14, 2023, abolished the multiple exchange rates system and its close-managed official rate.

The apex bank adopted a market-determined system, which largely leaves the nation’s currency to forces of demand and supply.

Experts were unanimous that the foreign reserves would remain under pressure in the meantime due to a backlog of demand, low supply and the usual policy time lag required for transitional effects.

Several analysts were however optimistic recent policy mix by the new government would substantially alter the forex position, providing a stable point for a steady build-up of forex reserves and a stable naira.

According to analysts, a mix of increased oil receipts, foreign investments, remittances and reduction in forex management could boost reserves and naira stability in the medium to long term.

Global rating agency, Standard and Poor’s (S&P), at the weekend, upgraded Nigeria’s credit outlook to stable from negative. The agency premised the upgrade on recent policies by the Tinubu administration..

The latest report on foreign portfolio investments (FDIs) shows that Nigeria returned to a net positive position in the second quarter of 2023, driven largely by foreign inflows in the last two months.

Managing Director, Arthur Steven Asset Management, Mr Olatunde Amolegbe, said the modest recovery in forex reserves might not be unconnected with a reduction in demand due to the removal of fuel subsidy and new forex policies.

“The expectation is that the pace of accretion might accelerate due to increased in foreign inflows and improved oil export if the issue of theft and security could be tackled,” Amolegbe, a former president of Chartered Institute of SStockbrokers (CIS), said.

He, however, noted that the apex bank may eventually settle for a managed float regime in order to cure the policy time lag and avoid undue damage to the economy before attaining forex stability.


This implies that the apex bank may intervene from time to time to ensure the naira remains within a range.

President Tinubu had also hinted that while the government remains committed to a market economy, it would take due cognisance of undue volatility and take appropriate measures to support stability.

Analysts at Cordros Capital Group said they expected currency pressures to remain intact in the near term, given seasonal-induced demand.

They noted that forex supply is still frail despite recent policy measures.

“On forex supply, we expect foreign investors to remain on the sidelines in the near term, as they continue to look for signals on market interest rates and solutions to the existing forex backlog and supply issues,” Cordros Capital Group stated.

President of the Association of Capital Market Academics, Prof Uche Uwaleke, said the forex accretion might be due to recent policy measures, although the outlook remains grim.

His words: “The accretion may be the result of favourable oil price and improvements in crude oil output. It could also have been helped by the recent increase in foreign portfolio investments in the wake of the unification of exchange rates.

“But it is very marginal and insufficient to make any significant impact on the exchange rate in view of the unmet demand as well as increasing demand pressure.

“External reserves serve many purposes including being used to defend the value of a country’s currency.

“Unfortunately for Nigeria, crude oil sales still account for over 90 per cent of forex earnings.

“In this regard, the outlook for forex will remain grim until we can establish multiple streams of forex including through diversifying the country’s export base.”

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