Nigeria’s external reserves have surged to a 22-month high, reaching $37.31 billion as of September 18, 2024, according to data released by the Central Bank of Nigeria (CBN). This marks the highest level since November 4, 2022, when the reserves stood at $37.36 billion. The increase signals a significant recovery in Nigeria’s foreign currency position and highlights renewed foreign inflows into the economy. Despite this improvement, the Nigerian naira remains one of the worst-performing currencies globally, indicating the challenges the country still faces in stabilizing its currency and overall economic landscape.

The country’s external reserves are a key indicator of its ability to meet international financial obligations, service foreign debt, and support the value of its currency in the foreign exchange (FX) market. The reserves act as a buffer against economic shocks, providing the CBN with the capacity to intervene in the FX market to manage exchange rate volatility and address balance of payments deficits.

Overview of Nigeria’s External Reserves Growth

As of September 18, 2024, the CBN data revealed that Nigeria’s external reserves have increased by 12.99% or $4.29 billion since the beginning of the year, when reserves stood at $33.02 billion on January 2. The year-on-year comparison also shows a growth of 12%, with reserves adding $4.03 billion from the $33.28 billion recorded on September 18, 2023. This uptick reflects the positive impact of several contributing factors, including the government’s issuance of domestic dollar bonds, increased remittance inflows, multilateral loans, and foreign portfolio investments.

Factors Driving the Increase in External Reserves

1. Domestic Dollar Bonds

One of the major contributors to the growth in Nigeria’s external reserves has been the federal government’s domestic dollar bond issuance. The government raised over $900 million from investors through the issuance of $500 million, which was part of a $2 billion domestic U.S. dollar bond series aimed at stabilizing the economy. This bond issuance attracted significant foreign investment, showcasing confidence in Nigeria’s economic outlook despite existing challenges.

2. Remittances from Nigerians Abroad

Remittance inflows have consistently been a significant source of foreign exchange for Nigeria. According to the CBN, Nigeria received $553 million in remittances between July 2023 and July 2024. Remittances play a crucial role in bolstering the reserves, as they provide much-needed foreign exchange to support the local economy and reduce reliance on external borrowing. The Nigerian diaspora remains a key player in this regard, as their continued support through remittances has helped maintain the country’s reserves during periods of economic uncertainty.

3. Multilateral Loans

Multilateral loans from international organizations, including the African Export-Import Bank (Afreximbank) and the World Bank, have also contributed to the increase in external reserves. Notably, Nigeria secured a $3.3 billion oil facility from Afreximbank, which has bolstered the country’s foreign exchange inflows. Additionally, a $2.25 billion loan from the World Bank Group provided much-needed financial support to address Nigeria’s economic challenges, including efforts to diversify the economy and reduce dependence on oil revenues.

4. Foreign Portfolio Investments

Foreign portfolio investments (FPIs) have seen a resurgence, with foreign investors showing renewed interest in Nigeria’s financial markets. According to the CBN, new investments into the economy increased significantly to $1.24 billion in February 2024, compared to $0.33 billion in January 2024. FPIs, particularly in money market instruments and bonds, have contributed to the rise in external reserves. In particular, portfolio investment inflows rose to $0.80 billion in February 2024 from $0.12 billion in January 2024, reflecting improved returns on investments and increased confidence in the country’s economic policies.

5. Consistent FX Policies

The CBN’s consistent policies aimed at managing the FX market and attracting foreign inflows have played a vital role in the growth of external reserves. Data from the CBN shows that Nigeria recorded $8.86 billion in FX inflows in February 2024, a 57% increase from $5.66 billion in the corresponding period in 2023. These policies, which include managing exchange rate volatility and ensuring the availability of foreign currency for critical sectors, have encouraged foreign investors to inject capital into the economy.

Challenges Facing the Naira and Economic Stability

Despite the improvement in external reserves, Nigeria continues to grapple with a weakening naira. On September 20, 2024, Bloomberg ranked the naira as one of the 10 worst-performing currencies globally, reflecting the currency’s persistent challenges in the FX market. The naira’s depreciation is driven by several factors, including high demand for foreign exchange, reduced oil revenues, and inflationary pressures.

While the increase in external reserves provides a temporary buffer, it has not yet translated into substantial relief for the local currency. The CBN’s ability to defend the naira has been constrained by the need to balance foreign exchange interventions with maintaining sufficient reserves to meet external debt obligations. Furthermore, the widening gap between the official exchange rate and the parallel market rate continues to fuel uncertainty in the FX market.

Future Outlook: Sustaining Reserve Growth and Currency Stability

To sustain the current growth in external reserves and achieve long-term economic stability, Nigeria will need to implement a multi-pronged approach that addresses both domestic and external challenges.

1. Diversification of the Economy

Nigeria’s heavy reliance on oil revenues has left the economy vulnerable to external shocks, particularly fluctuations in global oil prices. Diversifying the economy by investing in non-oil sectors such as agriculture, technology, and manufacturing will be crucial for reducing reliance on oil and increasing foreign exchange earnings. The government’s ongoing efforts to promote non-oil exports and enhance the business environment for foreign direct investment (FDI) are steps in the right direction. However, more needs to be done to ensure that these initiatives translate into sustainable economic growth.

2. Strengthening Monetary Policy

The CBN’s monetary policy framework will play a pivotal role in stabilizing the naira and managing inflation. While the central bank has taken steps to manage exchange rate volatility, more comprehensive reforms are needed to address the underlying factors driving currency depreciation. This includes ensuring that FX policies are aligned with broader economic goals, such as promoting investment, reducing inflation, and fostering growth in key sectors.

3. Boosting Remittances and Foreign Investments

Encouraging remittances from the Nigerian diaspora and attracting foreign direct investments will be key to maintaining a healthy level of external reserves. To achieve this, the government must continue to implement policies that enhance the ease of doing business, improve transparency, and provide incentives for foreign investors. Additionally, the financial sector can play a crucial role in facilitating remittances by offering innovative digital solutions that make it easier for Nigerians abroad to send money back home.

4. Addressing Structural Reforms

Structural reforms in areas such as infrastructure, power supply, and governance will be critical for creating an enabling environment for economic growth. Investing in critical infrastructure, such as roads, ports, and energy, will enhance productivity and attract foreign investment. Moreover, improving governance and reducing corruption will build investor confidence and ensure that public resources are used efficiently to support economic development.

Conclusion

Nigeria’s external reserves hitting a 22-month high of $37.31 billion is a positive development that signals renewed foreign inflows and increased confidence in the country’s economic outlook. However, the challenges facing the naira and the broader economy remain significant. To sustain reserve growth and achieve long-term economic stability, Nigeria must continue to implement comprehensive reforms that address both domestic and external factors. These include diversifying the economy, strengthening monetary policy, boosting remittances and foreign investments, and addressing structural issues. Only through a holistic approach can Nigeria achieve sustainable growth, currency stability, and a robust external reserves position.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

25th September 2024