MARKET NEWS

BY Paul Ogbuokiri

In this report by PAUL OGBUOKIRI, economists examine the 6.23 per cent decline in Nigeria’s gross foreign reserves in Q1 2025, viz-a-viz the nine per cent appreciation of the Naira in the review period. They conclude that the Naira’s appreciation is temporary, even as the reserves decline will fuel FX speculation and create anxiety about currency stability

Nigeria’s foreign reserves dropped by $2.55bn in Q1 2025 Data obtained from the Central Bank of Nigeria (CBN) by the Sunday Telegraph indicate that Nigeria’s gross foreign reserves declined by 6.23 per cent from $40.88 billion reported on January 2 to $38.33 billion on March 27. 

The decline in the foreign reserves coincides with a drop in Foreign Portfolio Investment (FPI) during the first quarter. Similarly, data obtained from the Nigerian Exchange Limited (NGX), showed that the Foreign Portfolio Investment (FPI) declined by 30.3 per cent between January to February.

In January, NGX reported that Nigeria recorded $17.35 million in foreign direct investments through equities; however, in February, the foreign inflow dropped to $12.09 million. During the same period, foreign outflows outstripped foreign inflows each month, with $31.01 million recorded in January and $16.48 million reported the next month. 

Economists say a country’s foreign reserve size has bearing on imports, currency intervention, external debt settlement, and monetary stability; a low gross domestic product (GDP) to reserve ratio signals fiscal and monetary policy tightening, higher interest rates, and higher unemployment rates. 

This is as the research lead at Cowry Asset Management Limited, Charles Abuede, says the decline in foreign reserves indicates lack of foreign exchange (FX) inflows into the economy. 

He said: “Minimal petrodollar earnings” and the CBN’s intervention in the FX market to support the Naira through the sale of $25,000 weekly to Bureau de Change (BDC) operators are possible contributors to the decline. “The depletion of Nigeria’s foreign reserves in the first quarter of 2025 clearly indicates a lack of foreign exchange (FX) inflows into the economy,” he said. “This is largely due to minimal petrodollar earnings, as crude oil prices remain uncertain, fluctuating between $65 and $70 per barrel. “It may also reflect the Central Bank of Nigeria’s (CBN) ongoing efforts to defend the Naira, alongside the $25,000 weekly FX sales to Bureau de Change (BDC) operators to maintain liquidity in the market.” 

Also, the Chief Executive Officer (CEO), the Centre for the Promotion of Private Enterprise (CPPE), Muda Yusuf, shared the opinion of Abuede, saying that regular interventions by the CBN must have been depleting the reserves gradually. “Because if we are having that, and we are not having sufficient inflows to balance out those outflows, that could be a possibility. 

You know, the CBN has been very consistent in defending the currency, which is not a bad idea. What is important is to ensure that we are doing so within a sustainable framework, so that it doesn’t create an unnecessary crisis for us,” he said. “Secondly, is the fact that the very depletion of reserves is also possibly triggering some speculative pressure in the market. 

In other words, if people begin to look at the trend and they notice that the reserves have been declining, it’s possible that that could also be increasing the pressure of demand, you know, on the foreign exchange market.

“And if demand is increasing, that means the amount that is made available to ensure stability will also be increasing. 

So, that speculative component is also a possibility. So, mind you, I’m talking about possibilities because I don’t have all the facts. So, that is also a possible factor. “The third possible factor is the fact that NNPC seems to have stepped up or given a window for increased importation of petroleum products. 

Now, when we had only Dangote (refinery), substantially, you know, supplying the PMS, I think that there was a reduction in the pressure. Because when you look at our import bill, the importation of petroleum products historically has been about between 30 to 40 per cent. “In other words, the pressure of importation of petroleum products has been accounting for almost 30 to 40 per cent of our import bill. 

So, when you have a situation where the dependence on domestic petroleum refinery is declining because NNPC and some of these agencies in the petroleum downstream or regulators seems to be supporting the continuous importation of petroleum products, that is also a factor, because the importation of fuel is a significant factor in the pressure on our reserves.”