Concerns as forex reserves drop $2.3bn amid naira gains
Naira has continued to strengthen in recent times on the back of foreign exchange reforms put in place by the Central Bank of Nigeria.
While this has provided some relief for the business environment, there are concerns that it may be short-lived.
At the close of trading on Tuesday, the naira appreciated by 0.15 per cent to close at N1,501.42/$ on the official window domiciled on FMDQ FX, while the parallel market rate appreciated by 0.24 per cent to settle at N1,497/$, indicating that the gap between the markets has closed significantly.
According to Bloomberg, the naira has strengthened by 2.6 per cent since the beginning of the year. Conversely, during the same period, Nigeria’s foreign reserves are down $2.34bn since hitting a $40.92bn high on January 6. As of Monday, the reserves stood at $38.58bn.
“If reserves continue to decline at an accelerated pace and we don’t have clarity on net reserves, and monetary policy easing commences, then foreign investors could become nervous,” the director of fixed income at BancTrust & Co. in London, Ayodeji Dawodu, was quoted as saying by Bloomberg.
Also, Stears, a financial data and software company focused on African markets, has expressed concerns that the discontinuation of the weekly sale of dollars to Bureau De Change operators may widen the spread between the official and parallel markets.
In its Stears Africa Capital in 2025 report, it stated, “In the parallel market, the CBN’s weekly $25,000 forex sales to Bureau De Change operators will likely sustain relative stability and meet invisible forex demand. However, discontinuing these sales could widen the spread between official and parallel rates, increase arbitrage, and fuel speculative pressures, destabilising the market.”
“In 2025, proactive CBN interventions are expected to slow naira depreciation from 41 per cent in 2024 to around 8-9 per cent annually by
2025/26. We expect the naira to close 2025 at N1,674/$ in the official market. Key risks to this outlook include oil revenue volatility, reduced forex reserves limiting interventions, and weak investor sentiment affecting dollar inflows. Exchange rate stability depends not only on CBN efforts but also on Federal Government actions. Tackling insecurity and economic uncertainty is essential for improving forex inflows. Increased revenues from crude oil, non-oil exports, foreign investments, and remittances will be critical to sustaining stability in official and parallel markets.”
Last December, the CBN granted temporary access to Bureau de Change operators to purchase foreign exchange from the Nigerian Foreign Exchange Market. In February, that access was extended till May 30, 2025. Later, the apex bank restricted the BDCs to purchase a maximum of $25,000 per week from a single authorised dealer bank.
Meanwhile, the apex bank’s intervention in the foreign exchange market has been commended by the Managing Director of Financial Derivatives Company, Bismarck Rewane, who noted that the naira was undervalued.
Speaking on Arise TV on Monday, Rewane explained that a Purchasing Power Parity analysis placed the fair value of the naira at 1,102.15/$, meaning the currency is currently 26.35 per cent undervalued. He noted that while intervening to protect an overvalued currency can distort market forces, supporting an undervalued currency helps correct misalignment.
He said, “What is the fair value of the naira? When you do the PPP analysis of the naira, it comes out at 1,102.15/$; in other words, the naira is 26.35 per cent undervalued. If you intervene to protect an overvalued currency, that is bad, but if you intervene to support an undervalued currency, you’re actually bringing the currency back from its misalignment to its alignment. So that is what the Central Bank of Nigeria is doing, and we applaud them.
“The big picture is, are these policies working, and are they for the good of the country? In our humble opinion, the policies are working. Why do we say that? Number one, the difference between the official and parallel markets had dropped to less than one per cent. It was as much as 10, 15, and 20 per cent. The market and price discovery are efficient; we are no longer saying Aboki FX and blaming all those shadowy entities. Three, the balance of trade is now $18.6bn. It is the highest level in a long time. The balance of trade is the difference between your exports and your imports. In other words, Nigerians are importing less and exporting more. Why? Because the exchange rate has moved against them, there are also policies to discourage imports and encourage exports.”
