The Central Bank of Nigeria (CBN) has shed light on the significant decline in the nation’s foreign exchange reserves, clarifying that the primary objective was not solely to defend the naira but rather to partially repay debts owed to creditors.
During the ongoing International Monetary Fund/World Bank Spring Meetings in Washington D.C, CBN Governor Olayemi Cardoso provided an explanation for this strategy.
Contrary to common belief, the CBN aims to minimize its intervention in the market and encourages the determination of prices through the interactions of willing buyers and sellers. This approach underscores the importance of market forces in price discovery, reducing reliance on extensive bank intervention.
Concerns were raised by Nigerians over the notable downturn in the country’s foreign exchange reserves, which decreased by approximately $2.16 billion in just 29 days, despite robust efforts to stabilize the naira. Data obtained from the CBN website revealed that as of April 15, 2024, the FX reserves stood at $32.29 billion, a considerable decline from the $34.45 billion recorded on March 18, 2024. However, the reserves experienced a 43-day surge, accumulating $1.28 billion between February 5 and March 18, 2024.
The CBN had previously attributed the increase in reserves to factors such as increased remittance payments from Nigerians abroad, growing interest from foreign investors in local assets, foreign exchange market reforms, and an uptick in oil production. However, Cardoso stressed during the Governor Talks event in Washington that the recent slight shift in reserves was unrelated to defending the naira. He reassured that an upward trajectory is expected soon as an additional $600 million will be added to the reserves accounts.
Cardoso emphasized the CBN’s intention to foster a market-driven system, intervening only in exceptional circumstances. He stated, “What is important to us is that there is sufficient liquidity in the market,” highlighting the focus on a vibrant currency market and the provision of funds for essential needs.
The governor also elucidated the specific reasons behind the significant decline in reserves, explaining that it is a common occurrence in any country where debt payments and obligations need to be fulfilled to maintain credibility. He expressed confidence in an imminent improvement and highlighted the significant increase in forex liquidity, with daily transactions surpassing $1 billion within six months of assuming office, compared to monthly trading figures of $200 million to $300 million during previous administrations.
Cardoso acknowledged the challenging circumstances under which he assumed office and affirmed the government’s commitment to address rising inflation through significant measures. Furthermore, he noted the discontinuation of the practice of using Ways and Means, thanks to collaboration between the central bank and the Ministry of Finance.
By providing insights into the link between depleting external reserves and debt repayments, the CBN aims to promote transparency and market-driven mechanisms while ensuring the stability of Nigeria’s economy.
