Significant Drop in Reserves
Nigeria’s foreign currency reserves have fallen by $2 billion since the beginning of the year, according to data from the Central Bank of Nigeria (CBN). As of January 2, 2025, the country’s reserves stood at $40.88 billion, but by February 17, 2025, they had declined to $38.88 billion.
Debt Issuance and Reserve Depletion
In 2024, Nigeria raised $3.8 billion through various debt instruments. This included a $900 million domestic bond, a $2.2 billion Eurobond, and $750 million from a World Bank loan package. Despite these inflows, the country’s foreign reserves have continued to shrink, mainly due to external debt repayments and other financial obligations.
Strengthening Currency Amid Economic Adjustments
While foreign reserves have decreased, the Naira has shown signs of strengthening in recent months. The National Bureau of Statistics (NBS) recently introduced a new methodology for calculating inflation, revealing a headline inflation rate of 24.48% in January 2025. Analysts at Coronation Research noted that this shift could improve investor confidence, particularly in fixed-income investments, as real interest rates turn positive.
Impact on Monetary Policy Decisions
The Monetary Policy Committee (MPC) is set to meet on February 19–20, 2025, to discuss interest rates. Analysts anticipate that the committee will maintain the benchmark rate at 27.50% to allow time for assessing the impact of the rebased inflation data and the relative stability of the exchange rate. However, they also warn that inflationary pressures may rise slightly due to increased demand for essential commodities ahead of the fasting season.
Challenges in Reserve Build-Up
Experts have observed that Nigeria’s oil exports have made a weak contribution to foreign reserves, as much of the build-up has come from multilateral loans, foreign debt issuances, and portfolio investments. Looking ahead, Nigeria faces significant debt obligations, including annual Eurobond maturities averaging $1.33 billion over the next decade. With additional coupon payments, total annual debt servicing costs could reach $2.24 billion.
Long-Term Outlook on FX Reserves
In November 2024, Fitch Ratings affirmed Nigeria’s long-term Foreign-Currency Issuer Default Rating (IDR) at ‘B-’ with a Positive Outlook. The rating agency acknowledged the country’s progress in policy reforms but cited challenges such as weak governance, high hydrocarbon dependence, low non-oil revenue, and ongoing security concerns.
Fitch estimated that one-quarter of Nigeria’s gross reserves consists of FX swaps with local banks, raising concerns about the actual availability of foreign exchange. However, the agency forecasted that FX reserves could rise to an average of 5.3 months of import cover in 2025–2026, signaling some improvement in external financial stability.
Potential Impact on the Exchange Rate
Analysts at Coronation Research highlighted the importance of tracking the CBN’s Net Foreign Assets, as they indicate how much USD liquidity the central bank has at its disposal. In 2024, the CBN supplied limited amounts of foreign exchange to the NAFEM market, reflecting a conservative approach to dollar distribution.
Looking ahead, an optimistic scenario suggests that CBN could increase FX supply in 2025, leading to Naira appreciation and potential reductions in imported inflation. However, this depends on how the central bank balances foreign exchange management with economic stability.
