Olayemi Cardoso, governor of the Central Bank of Nigeria (CBN), announced a significant rise in the country’s foreign reserves, which he said grew by 12.74 percent, reaching $39.12 billion as of October 11, 2024.
This increase marks a substantial improvement from earlier in the year when reserves had dropped to $32.29 billion in mid-April, the lowest level in over six years.
Speaking during his appearance before the House of Representatives Committee on Banking Regulation, Cardoso attributed the growth in reserves to stronger foreign capital inflows, oil-related revenues, and improved trade balances.
Cardoso disclosed that Nigeria’s foreign reserves had risen from $34.70 billion at the end of June to $39.12 billion by mid-October, reflecting a 12.74 percent increase over three months. He pointed out that remittances currently represent 9.4 percent of the total external reserves, a figure that underscores the role of diaspora inflows in supporting the nation’s foreign exchange position.
“The reserves rose by 12.74% to $39.12 billion as of October 11, 2024, from $34.70 billion at the end of June 2024,” Cardoso stated, emphasizing the upward trend in reserves.
The CBN governor detailed the factors contributing to the rise, citing foreign capital inflows, receipts from crude oil-related taxes, and third-party sources as major drivers.
“In Q2 2024, we maintained a current account surplus and saw remarkable improvements in our trade balance,” he noted.
According to Cardoso, the current reserve level can finance over 12 months of imports of goods and services, or up to 15 months for goods alone, which is substantially higher than the internationally recommended minimum of three months.
“This is substantially higher than the prescribed international benchmark of three months, reflecting a robust buffer against external shocks,” he added.
Foreign Exchange Market Reforms and Policy Measures
Cardoso elaborated on the central bank’s recent foreign exchange market reforms aimed at stabilizing the naira and improving liquidity. He mentioned the unification strategy that consolidated various exchange rate windows into a single model, adopting a “willing buyer, willing seller” approach to enhance foreign exchange liquidity and financial market stability.
“Regarding the foreign exchange market, the bank implemented various reforms including a unification strategy, which streamlined various exchange rate windows into a single model, adopting the ‘willing buyer, willing seller’ approach to enhance FX liquidity and financial market stability,” he explained.
The governor also noted the resumption of foreign exchange sales at the Nigeria Autonomous Foreign Exchange Market (NAFEM) and Bureau de Change (BDC) segments, supported by an increase in supply from foreign portfolio investors (FPIs).
He stated, “This move was aimed at fostering transparency, reducing market distortions, and enhancing the efficiency of foreign exchange allocations. This consolidation involved the implementation of new operational guidelines which included removing the international money transfer operators (IMTOs) quote cap.”
Cardoso claimed these reforms were beginning to yield positive outcomes in the foreign exchange market, including increased transparency and reduced arbitrage opportunities. He reported a narrowing of the exchange rate disparities between the NAFEM and BDC segments, leading to the convergence of rates.
“In the foreign exchange market, we have achieved increased transparency and improved overall supply. By allowing the foreign exchange rate to be determined by market demand and supply, the CBN has reduced arbitrage and speculative activities and eliminated the front-loading of FX demand,” he said.
Further, he highlighted that the policy measures taken had restored confidence in the market, leading to increased capital inflows and helping clear existing foreign exchange backlogs.
“The settlement of all legitimate backlogs of outstanding FX obligations by the bank has significantly improved Nigeria’s credibility and ratings across the global financial market, helping to boost investor confidence, and enhanced liquidity in the foreign exchange market,” Cardoso remarked.
Analyst Doubts $39.12 Billion Foreign Reserves
However, a market analyst has raised concerns about the actual liquidity available in the reserves. Financial analyst Kelvin Emmanuel voiced skepticism about the reported $39.12 billion, suggesting that if the reserves were genuinely unencumbered, the naira would not be struggling at its current level.
He questioned the true state of Nigeria’s external reserves, stating, “If you had $39bn ‘un-encumbered’ in the external reserves, the naira would not be at 1,700.”
Emmanuel pointed out the persistent liquidity challenges in the foreign exchange market, noting that the demand for foreign currency currently exceeds the CBN’s supply capabilities.
“This market needs $750m per week, and currently the Central Bank lacks the liquidity to solve that demand,” he said, arguing that the reported increase in reserves might not reflect the actual liquid assets available.
He emphasized that the CBN needs to provide more transparency regarding the net external reserves, factoring in liabilities such as outstanding $2.4 billion in forward contracts, swap agreements conducted to maintain previous currency pegs, and loans borrowed against commercial banks’ foreign currency balances.
Emmanuel argued, “Show us the Net External Reserves, less outstanding $2.4bn in forwards, swaps with external asset managers for loans collected in the past to maintain the peg, borrowings done from the FCY balance sheet of commercial banks. Gross means nothing!”
He further called on the CBN to release its 2023 financial statement in compliance with Sections 50(1-3) of the CBN Act. He contended that publishing the annual financial statement would provide a clearer picture of the central bank’s financial health and help build market confidence.
“This sensational tidbits is the reason why the Central Bank should release its annual financial statement for 2023,” Emmanuel added.
Inflation Remains a Pressing Issue Amid Monetary Tightening
Cardoso acknowledged that inflation remains a significant concern for the economy, despite the recent gains in foreign reserves. The latest data from the National Bureau of Statistics (NBS) revealed that the consumer price index (CPI), which measures inflation, increased to 32.7 percent in September. This uptick marked the first rise in three months, following slight declines in July and August. The CBN governor attributed the recent inflationary pressures to ongoing structural challenges but expressed optimism that the measures taken by the central bank were gradually moderating inflation.
He stated, “Inflation has shown ‘gradual moderation,’ indicating that the monetary policy measures are becoming effective.”
Cardoso predicted steady relief from inflationary pressures in the last quarter of 2024, driven by the central bank’s monetary tightening efforts and recent government initiatives.
“We anticipate steady moderation of inflationary pressures in the last quarter of 2024, supported by our monetary policy measures and the federal government’s recent initiatives such as tax incentives on businesses in the economy,” he added.
In an attempt to curb inflation, the CBN has fully reverted to an orthodox monetary policy approach, raising the monetary policy rate (MPR) by 850 basis points to 27.25 percent, increasing cash reserve ratios, and utilizing open market operations as the primary liquidity management tool. The CBN has also adopted an inflation-targeting monetary policy framework as part of its enterprise strategy for 2024-2028.
“The IT framework, widely adopted across various global economies, is renowned for its effectiveness in combating persistent inflation,” Cardoso said, expressing confidence in its potential impact.
While the CBN’s report on the foreign reserves’ improvement may suggest progress, market analysts remain skeptical, noting that the naira’s ongoing struggles indicate that challenges remain.
The central bank’s measures have undoubtedly provided some relief by narrowing exchange rate disparities and increasing foreign exchange liquidity, but underlying concerns about the actual composition of Nigeria’s reserves persist. Analysts argue that the focus should not solely be on gross reserve figures but on the liquid, accessible portion after deducting liabilities.
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