Despite Nigeria’s foreign exchange (FX) reserves still providing a buffer of more than 8.15 months of import cover, well above the International Monetary Fund’s (IMF) recommended minimum of three months, analysts at Coronation Asset Management have raised red flags over the sustainability of this position.
In a newly released Economic and Financial Insight, the firm pointed to weakening oil fundamentals and volatile foreign portfolio investment (FPI) flows as key risks to Nigeria’s FX reserve stability in the months ahead.
According to the Central Bank of Nigeria (CBN), gross reserves declined by $2.55bn in Q1 2025, representing a 6.23 per cent drop to $38.33bn as of March 27, marking the sharpest first-quarter contraction in five years.
The decline was driven by a combination of external debt service payments, consistent FX market interventions to manage the naira, reduced oil earnings, and softening global crude prices—currently trading around $65 to $70 per barrel.
FPI inflows, which had surged in 2024, saw a significant 30.3 per cent decline between January and February 2025, influenced by falling interest rates on short-term government securities.
The analysts warn that if this trend continues and the carry trade unwinds, it could further pressure the reserves and potentially lead to renewed currency volatility.
They highlighted that uncertainty surrounding the sustainability of oil production growth, particularly due to political instability in the Niger Delta and operational challenges facing the new owners of divested oil fields, compounds the vulnerability.
Additionally, growing fears of a global trade conflict spurred by the policy direction of the new U.S. administration may undermine investor confidence and affect Nigeria’s ability to attract capital inflows.
While 2025 began on a cautious note, the end of 2024 painted a more optimistic picture. The CBN reported a surge in net FX reserves to $23.11bn, the highest in over three years.
Gross external reserves also improved to $40.19bn, up from $33.22bn in 2023. The turnaround was attributed to deliberate policy measures by the CBN, including a reduction in short-term FX liabilities, increased non-oil FX inflows, and the reintroduction of market-oriented monetary reforms.
Governor Olayemi Cardoso credited the gains to strategic actions such as cutting reliance on FX swaps and forwards, attracting non-oil FX from sectors like financial services, telecoms, and agriculture, and introducing transparency tools like the Electronic Foreign Exchange Matching System (EFEMS).
A sharp hike in the Monetary Policy Rate (MPR) in 2024 also helped attract portfolio investments during the year.
These reforms contributed to a temporary stabilisation of the exchange rate, with the naira appreciating by N5.57 to close at N1,531.25/$ in the official market shortly after the reserve report.
The analysts noted that this announcement helped ease market concerns that had been building over declining gross reserves and the CBN’s earlier silence on net reserve data.
They stated that the net reserve report also indicates that many of the FX swap and forward contracts entered into under the previous administration were either settled or unwound—likely financed by the combined inflows from improved oil production, a $1bn BOI syndicated loan, a $900m domestic dollar bond, and a Eurobond issuance in November 2024.
Nonetheless, Coronation Asset Management emphasized that sustaining reserve levels going forward would require greater FX source diversification, strengthened investor confidence, and a more synchronized approach to fiscal and monetary policy amid increasing global and domestic headwinds.
Market stakeholders continue to advocate for regular publication of net reserves data to improve transparency and reduce speculation, especially now that the reserve position has improved.
Whether this positive trend can be maintained amid emerging pressures remains to be seen.
