Nigeria's Central Bank Clarifies: Decline in Foreign Reserves Due to Debt Payments, Not Naira Defense

Recent analysis by Bloomberg highlighted a concerning trend where Nigeria's foreign currency reserves were diminishing at a pace unseen in the last four years. "This situation sparked debates around whether this was an attempt by the central bank to buttress the naira, especially following commitments to let the currency's value be determined more openly by the market.

Olayemi Cardoso, the head of Nigeria's Central Bank, emphasized that the surprising ascent of the naira reflects the effectiveness of measures taken to control inflation rather than any direct intervention by the government to prop up the currency.

Reserve Drop Since March: An Overview

    Since March 18, a noticeable 5.6% drop in liquid reserves to $31.7 billion was reported by April 12, based on Bloomberg's analysis and the most recent data from the Central Bank of Nigeria (CBN). This marks the steepest decline within a comparable timeframe since April 2020, data from Bloomberg reveals.

Central Bank's Stance on Naira Defense

    During the spring gatherings of the International Monetary Fund and World Bank in Washington, Cardoso stated, "Defending the naira is not our aim," attributing the decrease in reserves to typical scenarios where countries face due debts requiring settlement, a process vital for maintaining credibility.

Since assuming his position in September 2023, following an extensive career in the private banking sector, Cardoso downplayed the significance of the reserve depletion, noting an influx of about $600 million into the account over the past two days.

"Our goal is to nurture a self-sustaining market driven by the forces of demand and supply and price determination," he shared. "Looking ahead, we anticipate minimal central bank interventions unless faced with extraordinary situations, concentrating instead on ensuring ample market liquidity."

Recovery and Valuation of the Naira

    Since the naira's 43% devaluation in January, it has largely recuperated its value, thanks in part to 600 basis points of monetary tightening between February and March, alongside various central bank initiatives aimed at enhancing domestic dollar availability and addressing a backlog of $7 billion in foreign currency orders.

Cardoso views the currency's resurgence as proof of the central bank's success in convincing investors of its commitment to stabilizing inflation.

After years of overvaluation against the dollar, reforms in foreign exchange policy initiated in June saw the naira's value plummet, at one point losing over 70% against the US dollar, before beginning its recovery in mid-March.

Reflecting on the naira's journey, Cardoso remarked, "When I began, within a mere month or two, our currency was perceived as the weakest globally. Six months down the line, it's now seen as the strongest. I believe these outcomes speak volumes."