Naira Appreciates Despite Foreign Reserves Decline: What’s Behind the Trend?

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Nigeria’s foreign exchange reserves took a hit in February 2025, declining by $1.31 billion due to sustained external pressures. According to data from the Central Bank of Nigeria, reserves dropped from $39.72 billion on January 31, 2025, to $38.42 billion on February 28, 2025, representing a 3.3% decline within the month.

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The decline in February was slightly higher than the $1.16 billion drop recorded in January, highlighting the continued strain on the country’s external reserves. The steady depletion of reserves has raised concerns that the apex bank’s sustained interventions in the foreign exchange market have come at the cost of reducing external reserves.

Despite this, the local currency strengthened significantly against major foreign currencies in February, suggesting that the CBN’s efforts have had some positive impact in restoring confidence in the market. The naira appreciated against the US dollar, closing at N1,540/$ from N1,620/$ at the start of the month, reflecting a 7.41% gain

It also strengthened against the British pound, rising from N2,000/£ to N1,910/£, marking a 4.50% increase. Similarly, the naira appreciated against the euro, improving from N1,660/€ to N1,550/€, showing a 6.34% gain.

The official exchange rate followed a similar trend, stabilizing above N1,500/$ in the final weeks of February. Data from the Nigerian Autonomous Foreign Exchange Market showed that the naira closed at N1,496/$ at the official window, narrowing the gap between the official and parallel market rates.

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The convergence of the official and parallel market exchange rates indicates that Nigeria may be moving towards a unified forex market, reducing the speculation and arbitrage that have previously contributed to forex volatility.

Experts have attributed the decline in foreign exchange reserves to multiple factors, including Nigeria’s heavy dependence on imports, which exerts pressure on foreign exchange reserves. The country remains highly reliant on imports of industrial goods and food supplies, leading to high FX outflows.

Although oil prices have rebounded in recent months, Nigeria’s oil production challenges, crude theft, and pipeline vandalism have constrained forex inflows from the oil sector, limiting the CBN’s ability to shore up reserves.

The depletion of external reserves has also raised concerns over Nigeria’s capacity to meet external debt obligations. The country holds significant foreign debt, and a further decline in reserves could weaken its ability to make timely debt repayments, potentially increasing borrowing costs.

A lower reserve level could also affect Nigeria’s credit rating and investor confidence, making it more expensive for the government to access international capital markets.

The CBN has been working to stabilize the foreign exchange market and rebuild reserves. However, the bank’s efforts have been hindered by the country’s dependence on imports and the decline in oil production.

In a bid to address the challenges facing the foreign exchange market, the CBN has introduced various measures, including the introduction of a new foreign exchange policy and the establishment of a special foreign exchange window for small and medium-sized enterprises.

The bank has also been working to increase foreign exchange earnings from non-oil exports, such as agriculture and solid minerals.

Despite the challenges facing the foreign exchange market, experts believe that the CBN’s efforts to stabilize the market and rebuild reserves will yield positive results in the long run.

As the CBN continues to work towards achieving its goal of a stable and converged foreign exchange market, it is essential for the government to implement policies that will reduce the country’s dependence on imports and increase foreign exchange earnings from non-oil exports.

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