How CBN can sustain Nigeria’s foreign reserves rebound

By Chinwendu Obienyi

Nigeria’s external reserves have staged a remarkable rebound, rekindling hope in the country’s macroeconomic stability and the Central Bank of Nigeria (CBN)’s resolve to restore credibility to monetary policy.

With the gross official reserves climbing to $41.08 billion as of August 21, 2025, up 12.65 per cent year-on-year, the general consensus among investors and analysts is if this momentum can be sustained.

The latest data from the apex bank not only reflect a turnaround in the country’s external balance sheet but also signal renewed confidence in the naira, Nigeria’s policy direction, and its attractiveness to foreign investors. At current levels, the reserves provide roughly 12 months of merchandise import cover, or 8.7 months when services are included, well above international benchmarks for reserve adequacy.

This development, while encouraging, is not accidental. It is the outcome of a confluence of strategic policy moves, improved market sentiment, and a favorable external environment. However, sustaining this hard-won progress will require the CBN to remain steadfast in its reforms, proactive in its risk management, and pragmatic in coordinating with fiscal authorities.

One of the biggest drivers of the recent reserve surge is the return of foreign portfolio investors, lured by elevated yields in the country’s local debt market. As global investors continue to navigate a world of high interest rates and economic uncertainty, Nigeria’s relatively high real returns, combined with a more stable naira, have created attractive carry-trade opportunities.

Portfolio Manager at East Capital, Emre Akcakmak, during a programme monitored by Daily Sun, revealed that investor confidence has improved significantly since the CBN began normalising the FX regime and adopting a more transparent policy stance.

“Nigeria appears to be back in business as long awaited economic reforms take shape. Key measures include improved currency liquidity, leeway for investors to repatriate their profit and the stabilizing naira.

This is why the confidence is now being rewarded by stronger inflows and a healthier external position”, Akcakmak said.

Indeed, between July 31 and August 20, 2025, Nigeria’s reserves rose by $1.69 billion, marking the largest monthly accretion since July 2024. While year-to-date growth remains modest at 0.4 per cent, the sharp uptick in August highlights the effectiveness of recent interventions by the apex bank.

According to economic analysts at Cowry Asset Management, the CBN’s decision to maintain an active presence in the FX market, while also settling key external obligations, has sent the right signals to both domestic and international players. These moves not only provided liquidity at critical moments but also helped anchor expectations about the naira’s value.

Under Governor Olayemi Cardoso, the CBN has prioritized a market-driven FX regime anchored on transparency, discipline, and macroeconomic fundamentals. The decision to begin publishing net FX reserve figures, alongside gross figures, has further bolstered credibility and allowed for more accurate assessments of Nigeria’s buffer position.

At the Afreximbank meetings in June 2025, Cardoso announced plans to diversify Nigeria’s reserve portfolio, exploring asset classes such as gold, SDRs, yuan, and euros, rather than relying almost exclusively on the U.S. dollar. This shift reflects a broader commitment to building resilience and reducing concentration risk in reserve management.

The apex bank has also introduced two new diaspora-focused instruments, the Non-Resident Nigerian Investment Account (NRNIA) and the Ordinary Account (NRNOA), to deepen the pool of FX inflows. These products aim to tap into the vast potential of remittance capital, estimated at over $20 billion annually, much of which remains outside the formal banking system.

While non-oil inflows are playing a growing role, oil revenues still underpin Nigeria’s external sector. A gradual rise in crude output forecast to average 2.3 million barrels per day this year has supported FX receipts and eased pressure on the naira.

However, the CBN is under no illusion about the volatility of oil prices and the structural fragilities of oil dependence. Cardoso speaking to newsmen at the end of the last MPC meeting said, “We must build a reserve position that is not only strong but also sustainable in the face of global shocks. That means diversifying our FX sources and reducing avoidable demand.”

Indeed, a significant part of the reserves rebound also stems from weaker demand for imports, particularly from households and corporates facing higher FX costs. With the naira more reflective of market conditions and importers less reliant on arbitrage opportunities, Nigeria’s import appetite has declined, a development that inadvertently supports reserve accumulation.

Experts react

But while the current picture is optimistic, experts caution that without sustained policy discipline, the gains could easily unravel.

Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, giving more context to the development, said the country’s reserves actually increased sharply, from a level of $36.31 billion in August last year to over $41 billion up for about $7 billion. He noted that the level of external debt that Nigeria had increased also from $42.5 to $46 billion, adding that once the reserves increased by $7 billion, the debt also increased by $4 billion which on net-on-net, leaves Nigeria in a better place by $3 billion.

Rewane further said that although FPIs went up by $13 billion which helped to support the currency but stated that the country cannot rely on “hot money” from FPIs using the 2008/2009 development in South East Asia. “The FPIs are benefitting from a stable currency which is not a bad thing for now and one thing we must note is that when the exchange rate is stable and appreciating, it helps to moderate inflationary pressure which then makes the country attractive to FPIs and even local investors.

You will find that our total net reserves at $22 billion is half of our gross reserves and our net reserves is only half of our total external debt. What this means is that our external position is not as fragile as painted when compared to Kenya, Ghana and South Africa. However, if you take out the $13 billion from FPIs, it means that our reserves could drop from $41 billion to $26 billion which still gives 6-7 months of import cover, which is still a comfort zone of the IMF.

So yes, this can be sustainable but not for too long. Hence, we need to ensure that we bring inflation and price stability to a moderating level, reduce the amount of piling debt and address the leakages out of the system. Policies and programmes are one thing but we need to see impact”.

According to Rewane, “I do not think defending the naira should be an issue, one can only defend the naira when it is under speculative attack. We think that the naira is about 24 per cent under-valued. So what we must watch is the difference between the parallel market and the official market price and the price of oil”.

Chief Economist, SPM Professional, Dr Paul Alaje, acknowledged that the present reserves of $41 billion represent a significant improvement compared to previous levels. However, he emphasized that building market confidence requires a stronger reserves base.

“If foreign portfolio investors (FPIs) pull out, the economy should still be resilient enough to remain on the path of development. That is why building solid reserves is not just a matter of numbers, but a strategy for long-term stability so we must go beyond the current foreign reserves figure. To adequately buffer our economy and cover at least ten months of imports, Nigeria needs to grow its reserves to around $50 billion. Reaching that threshold would signal a relative comfort level and economic stability”, Alaje said.

While advocating for deeper continental integration, Alaje said, “African countries must rethink how we manage exchange rate systems. A common African currency, backed by unified reserves, would strengthen our position globally. Managing exchange floats collectively and keeping reserves in a single currency could be transformative.

We must prioritize sectors like agro-processing, ICT, especially artificial intelligence and manufacturing. These are the industries that can drive sustainable, inclusive growth”.

Conclusion

The current level of $41.05 billion in FX reserves is a milestone, but it is only a starting point. With global financial conditions still tight and external vulnerabilities persisting, Nigeria must use this window of opportunity to entrench reforms that foster long-term resilience.

Hence, if the country can navigate the testing waters of the global financial conditions, manage external flows and control inflation, the year 2025 could mark a turning point in its FX story, one where buffers are built, confidence is restored, and the economy finally finds its footing.