Nigeria’s foreign exchange reserves experienced a substantial decline in the first weeks of January 2025, raising concerns about the country’s economic stability and ability to manage external pressures. Between January 6th and January 21st, the reserves plummeted by $832.62 million, marking the steepest drop since April 2024 and pushing the total reserves down to $40.09 billion. This decline followed a period of relative stability and growth in the reserves, highlighting a shift in the country’s financial landscape. The consistent downward trend throughout the two-week period suggests a potential further decrease below the $40 billion mark by the end of January if the pressures persist. This depletion of reserves has sparked anxieties similar to those experienced during the significant drop in April 2024, when the reserves fell by over $2 billion.
The dwindling foreign exchange reserves paint a concerning picture of Nigeria’s external liquidity position. The decline is attributed to a confluence of factors, including escalating import costs, servicing external debt obligations, and the persistent challenge of capital flight. These pressures collectively strain the nation’s reserves, potentially limiting the Central Bank of Nigeria’s (CBN) capacity to intervene effectively in the foreign exchange market. Such intervention is crucial for maintaining stability and preventing further depreciation of the naira, the national currency. The current downward trajectory of the reserves raises concerns about the CBN’s ability to defend the naira and manage the country’s external financial obligations effectively.
The January decline echoes the significant drop experienced in April 2024, when the reserves plunged by $2.16 billion within a month. At that time, the CBN Governor attributed the decline primarily to debt servicing and other financial commitments, rather than interventions aimed at stabilizing the naira. This explanation provides a crucial context for understanding the current situation, suggesting that similar factors are likely at play. The combination of external debt repayments and increasing import bills creates a significant drain on the foreign reserves, highlighting the challenges Nigeria faces in balancing its international financial obligations with its domestic economic needs.
The consistent decline in reserves throughout January 2025 underscores the severity of the situation. The reserves fell below $40.6 billion for the first time in the month on January 13th, reaching $40.56 billion. This downward trend continued, with the reserves further decreasing to $40.42 billion by January 15th before settling at $40.09 billion on January 21st. This persistent daily decline highlights the urgency of addressing the underlying causes of the reserve depletion. Failure to do so could further jeopardize the country’s economic stability and its ability to meet its international financial obligations.
The depleting reserves could significantly impact the CBN’s ability to intervene in the foreign exchange market, potentially exacerbating pressures on the naira. Before stabilizing in December 2024, the naira had faced considerable depreciation, indicating vulnerability to external shocks and internal economic pressures. Throughout January 2025, the naira traded between N1,548/$ and N1,552/$ in the official market. Although the naira experienced a marginal appreciation of 0.01 percent at the Investors and Exporters (I&E) window, trading at N1,552.58/$ on Wednesday, up from N1,552.78/$ the previous day, this minor gain does little to offset the broader concerns surrounding the depletion of foreign reserves.
The dwindling foreign exchange reserves pose a significant challenge to Nigeria’s economic stability. The consistent decline throughout January 2025 indicates a pressing need for effective policy interventions to address the root causes of the depletion, including managing external debt, curbing capital flight, and promoting export diversification. The CBN’s capacity to intervene in the foreign exchange market and stabilize the naira is increasingly constrained by the diminishing reserves. The situation warrants close monitoring and proactive measures to mitigate the risks of further economic instability and currency depreciation.
