The recent improvement in the naira’s value against the dollar has sparked debate in Nigeria.
While some celebrate this positive development with the naira, others are trying to twist the facts; raising unnecessary alarm about the country’s supposed dwindling foreign reserves.
With the facts available, explanations by financial experts and even the Governor of the Central Bank of Nigeria (CBN) himself, more light has been shed on the recent actions of Mr Cardoso.
Naira Gains and Forex Pains
Nigerians have been engaged in a back-and-forth debate about the true position of the naira and the recent decline in foreign reserves. This has pitted many currency speculators against CBN Governor Olayemi Cardoso. For these speculators, good news for the naira often translates to bad news for them. Unfortunately for this group of speculators, the sustained appreciation of the naira in recent weeks has left many caught off guard. This apparent contradiction suggests that some currency speculators might be primarily interested in the decline of the Nigerian economy and the depreciation of its currency.
Metrics of Naira
The popular blog Nairametrics first ignited the debate with a widely shared story on the depletion of Nigeria’s foreign reserves. They reported a significant decline of $2.16 billion in just 29 days, occurring amidst the CBN’s efforts to stabilize the naira. Nairametrics’ figures, as of April 15, 2024, showed the reserves at $32.29 billion, down from $34.45 billion on March 18, 2024. Speculators quickly interpreted these figures, linking naira gains to a decline in forex reserves, suggesting the CBN was “burning” reserves to prop up the naira.
Cardoso Clarifies Reserve Use
Governor Cardoso’s swift response added much-needed context to the discussion. He clarified that fluctuations in reserves are a normal part of any central bank’s operations, especially when debts are due and payments need to be made. “Maintaining credibility” was a key aspect of this process, he emphasized.
Supporting Cardoso’s Stance
Senior investment analyst Isaac Marshall of TLG Capital corroborated Mr. Cardoso’s position. He explained that the CBN was simply “honoring the backlog of USD conversions” that market participants had been waiting for for years. This backlog had finally been cleared, leading to a near-synchronization between the official and parallel market exchange rates.
“Using reserves to honor legitimate transactions is the very reason a central bank holds foreign exchange reserves,” Marshall concluded. “In this light, the depletion of reserves over the past month is a positive development for both the currency and the Nigerian macroeconomy.”
A Note on Currency Reserves
The International Monetary Fund (IMF) defines foreign exchange reserves as foreign currency deposits held by central banks. These reserves, typically held in dollars, euros, or yuan, serve several purposes. They back a country’s local currency issuance, support deposits held by commercial banks, and ensure the smooth functioning of domestic and international payment systems.
Financial analysts often view large foreign reserves as a sign of a country’s economic strength, inspiring confidence in the international community. Conversely, low reserves can raise concerns about a country’s economic stability.
A Date with China
As of 2024, China boasts the world’s largest international reserves, holding a staggering 3.59 trillion USD in reserves and foreign currency liquidity (according to Statista). In Africa, Libya leads the pack with around 80 billion USD (2021 data), followed by South Africa and Algeria with approximately 50 billion USD and 46 billion USD, respectively.
However, China’s massive reserves are partly due to its export-driven economy. To curb the depreciation of its currency (the renminbi), China sometimes aggressively sells dollars in international markets. A 2015 report from the South China Morning Post noted that a one-time devaluation of the yuan by the People’s Bank of China triggered depreciation expectations, leading them to use an estimated US$1 trillion of their foreign exchange reserves to defend the currency.
Cardoso on the Right Track
The example of China demonstrates that foreign exchange reserves are not simply decorative holdings. They are used strategically during economic challenges. In this context, the recent decline in Nigeria’s reserves alongside the appreciation of the naira should not be seen as counterproductive or contradictory. Governor Cardoso’s policies appear to reflect standard practices employed by central banks around the world, particularly in countries with complex economic situations like Nigeria.
Hopefully in the days ahead the concerted efforts at improving Nigeria’s export capabilities beyond crude oil will also yield the right results. This will be definitely impact positively on the foreign reserves; meaning Nigeria will be gaining on two fronts with its currency also stabilized.
