Nigeria’s FX Reserve Mechanism May Require Review as Stakeholders Gaze at the US$18bn Net Position

The recent scare about Nigeria’s net external reserve position has triggered a maelstrom of public commentaries ranging from tepid to outlandish and brilliant. The whole spectrum of thoughts has been well-represented over the last week. The debate about Nigeria’s net reserves was triggered by the release of seven years of audited financial statements by the Central Bank of Nigeria (CBN). In releasing the stream of reports the banking sector regulator, inadvertently caused distress, as the low net foreign reserve position, prompted economic agents to speculate on the forward value of the naira.

Nigeria’s foreign reserves which dropped to a net position of US$18.04bn as of 2022 suggested a slim capacity for the government’s bankers to defend the naira against a fall in external value.  Indeed, the situation raised concerns about the country’s reserve management framework, including sustainability (the ability to meet at least six months of imports), and exchange rate governance.

More recently, some analysts have proposed a Singaporean-type clouded management regime that limited public information on the exact size of the country’s reserves to avoid the aggressive shorting of the local currency by market speculators. According to these economic observers, Singapore’s foreign reserves are seen as a national security emblem needed to preserve financial and economic stability, curb excessive expenditure, enhance currency stability, erase speculation, and increase foreign currency stockpile in the year. While this option, at first blush, appears beneficial given the high speculative pressure on the naira, other analysts have argued that a more transparent structure and management framework should be maintained, especially because Nigeria is plagued by information asymmetry or a situation where different economic agents receive information at separate times with different accuracy or reliability.

They note that concealing the national reserve figures could worsen investors’ confidence in the country and hinder foreign portfolio investment (FPI) and foreign direct investment (FDI). These analysts suggest that the focus should be on tackling the FX supply deficiency while increasing crude oil production and non-oil export (semi-finished & finished products) output. They further urge that foreign borrowings should be reduced to a minimum to ease the pressure on the reserves