Nigeria: CBN Governor Explains Reasons Behind Depletion of External Reserves

In a recent discussion at the International Monetary Fund/World Bank Spring Meetings in Washington D.C., the Governor of the Central Bank of Nigeria (CBN), Olayemi Cardoso, addressed the substantial decrease in Nigeria’s foreign exchange reserves. Contrary to popular belief that the depletion was due to efforts to defend the naira, the Governor clarified that the decline was primarily due to debt repayments to international creditors.

Cardoso emphasized the Central Bank’s shift towards minimizing its market interventions, advocating for a market-driven approach where foreign exchange rates are determined by market dynamics without the Central Bank’s direct involvement.

Recent data from the CBN highlighted a significant drop in foreign exchange reserves from $34.45 billion on March 18, 2024, to $32.29 billion by April 15, 2024, a decrease that raised concerns among Nigerians regarding the stability of the naira.

However, the Governor reassured that the reduction in reserves was linked to scheduled debt repayments and was a strategic move to maintain Nigeria’s credibility on the financial front. He also projected a positive outlook, noting that an infusion of about $600 million was expected shortly, which would bolster the reserve levels.

The CBN’s stance is to encourage a free market scenario where transactions are governed by the principles of supply and demand, known as a “willing-buyer, willing-seller” model. This model aims to ensure liquidity in the market while reducing the need for direct intervention by the Central Bank.

In his address titled “Catalyzing Change: Reforming Monetary Policy in Nigeria,” Cardoso further revealed that Nigeria’s forex market had seen a substantial increase in activity, with daily trading volumes reaching as high as $1 billion, a significant rise compared to previous periods.

The Governor’s discussion also touched on domestic economic challenges, particularly inflation, affirming that the government was actively implementing measures to manage rising prices effectively. Additionally, he mentioned that the practice of using Ways and Means, a method for central banks to lend directly to the government, had been discontinued in collaboration with the Ministry of Finance, aligning with broader fiscal responsibility and transparency efforts.

This dialogue highlights the CBN’s ongoing commitment to fostering a robust economic environment through prudent financial and monetary policies, supporting overall economic stability and growth in Nigeria.