By Suleyman A. Ndanusa, PhD, OON
Nigeria’s external reserves have reportedly risen above $54.6 billion, their highest level in seventeen years. After the turbulence of recent years foreign exchange scarcity, accumulated obligations, widening market premiums and a naira that sometimes appeared to be negotiating with gravity, this is unquestionably welcome news.
A stronger reserve position gives the Central Bank of Nigeria greater capacity to meet external obligations, moderate excessive exchange rate volatility and reassure investors that the country is not approaching every international payment with an empty wallet and a hopeful expression.
The achievement should therefore be acknowledged. But it should also be interrogated.
The real questions are no longer simply how large the reserves have become. We must ask how they were accumulated, how much is freely usable, how durable their sources are and, ultimately, whether this improved national balance sheet is translating into a more stable naira, affordable credit, productive investment, employment and better living conditions.
That is the difference between celebrating a reservoir because it is full and asking whether clean water is reaching the household tap.
The first task is to distinguish gross reserves from net international reserves. Gross reserves represent the foreign assets held by the Central Bank before deducting associated foreign currency obligations. Net reserves attempt to show what remains after accounting for swaps, forward commitments, securities lending arrangements and other liabilities or encumbrances.
The distinction is important. A man may have ₦100 million in his bank account and still not be worth ₦100 million if ₦80 million belongs, in one form or another, to his creditors. The balance is impressive; the net position tells the more complete story.
Recent improvements in Nigeria’s reported net reserves are therefore significant. They suggest that the country’s external position is not merely expanding in gross terms but may also be becoming more liquid and less encumbered. Nevertheless, the difference between gross and net reserves must remain visible in public discussion. Markets are interested not only in what is displayed in the shop window but also in what can actually be taken from the shelf when obligations fall due.
The second question concerns the sources of reserve accumulation. Not every dollar in the reserve account possesses the same economic quality.
Foreign exchange earned from sustained oil and gas exports, expanding non oil exports, diaspora remittances and long term foreign direct investment provides a relatively durable foundation. These inflows arise from continuing economic activity and can, with supportive policies, be replenished.
Reserves accumulated through external borrowing, short term portfolio investment, foreign exchange swaps or exceptional official inflows tell a more complicated story. They may increase the headline figure, but they also create repayment obligations, interest costs or the risk of sudden reversal.
Borrowing is not inherently objectionable. Countries borrow for development, liquidity management and refinancing. Access to international capital markets may itself indicate stronger investor confidence. But borrowed dollars are visitors. However comfortable they appear in the reserve account, they eventually remember that they have another home.
Portfolio investment deserves similar caution. High domestic interest rates can attract foreign investors seeking superior returns. Their dollars improve market liquidity, support the naira and add to the external buffer. Yet portfolio capital is particularly sensitive to yields, political risk and global financial conditions. It may arrive with great enthusiasm and leave with admirable punctuality once the calculation changes.
Foreign direct investment is different. It is generally associated with factories, infrastructure, technology, employment and longer-term commitment. Portfolio capital often arrives carrying a calculator and a return ticket; foreign direct investment is more likely to arrive carrying architectural drawings.
The composition of recent external inflows therefore matters as much as their total size. If reserves are rising mainly because exports, remittances and long-term investments are improving, the foundation is comparatively strong. If the increase depends substantially on borrowing, high interest portfolio flows or temporary arrangements, the headline remains positive, but the durability of the improvement requires closer scrutiny.
We must also separate genuine export expansion from import compression.
A country’s external balance may improve because it exports more, produces more efficiently and earns more foreign exchange. But it may also improve because currency depreciation and declining real incomes have made imports unaffordable. In both situations, demand for foreign exchange falls and reserves may rise. The economic meaning, however, is entirely different.
There is a considerable difference between reducing imports because Nigerian factories are producing the goods locally and reducing imports because Nigerian consumers and businesses can no longer afford them. The first reflects structural progress. The second may represent adjustment through hardship.
If imports of machinery, industrial inputs and essential raw materials decline, the immediate balance of payments position may improve while future productive capacity weakens. A fuller reserve account should not be achieved by leaving the factory floor empty.
Valuation effects must equally be identified. Central banks hold their reserves in different currencies, securities and gold. When gold prices rise or reserve currencies appreciate against the dollar, the reported dollar value of the portfolio may increase even without corresponding new foreign exchange inflows.
Such gains are legitimate and beneficial, but they should not be mistaken for newly earned dollars. A family may discover that its house has appreciated significantly in value. That is good news, but it does not necessarily increase the amount available for tomorrow’s groceries.
These distinctions lead directly to the exchange rate question.
Conventional reasoning suggests that stronger foreign reserves should help strengthen or stabilise the domestic currency. This is broadly correct, but only up to a point. Reserves give the Central Bank the capacity to intervene against disorderly market conditions, meet legitimate demand and reassure market participants. They also discourage one way speculation against the currency.
Yet reserves do not independently determine the exchange rate. The naira responds to inflation, domestic liquidity, import dependence, export earnings, fiscal deficits, productivity, external debt service and public expectations. The Central Bank can use reserves to influence the market, but it cannot permanently instruct economic fundamentals to remain silent.
This helps explain the apparent paradox of historically high reserves coexisting with an exchange rate still above ₦1,300 to the dollar. The comparison with 2014, when Nigeria had lower reserves but a much stronger nominal naira, is tempting. It is also incomplete.
In 2014, the exchange rate was more tightly managed, domestic prices were significantly lower and the monetary, fiscal and external environments were different. A currency may appear strong because it is supported by sound fundamentals. It may also appear strong because the central bank is selling reserves, restricting demand or postponing adjustment.
The proper comparison is therefore not simply the number of naira exchanged for one dollar. We must also examine inflation, market liquidity, the gap between official and parallel rates, reserve depletion, outstanding FX obligations and whether legitimate demand is being met.
A currency is not genuinely stable merely because its official rate remains unchanged. Stability exists when businesses and households can obtain foreign exchange through a transparent market, excessive volatility is contained, speculative opportunities are limited and the exchange rate broadly reflects economic fundamentals.
Nigeria has experienced periods when the official rate appeared stable while unmet demand accumulated quietly in the background. The exchange rate was calm, but the queue was restless.
Foreign reserves are a stock of the amount currently in the tank. Sustainable exchange rate stability depends on flows. The continuing supply of export proceeds, remittances and investment relative to the demand created by imports, debt service, profit repatriation, education, healthcare and other international obligations.
If underlying demand persistently exceeds supply, intervention merely converts the reserve stock into a countdown clock. Reserves can provide breathing space, but the economy must use that space to correct the imbalance.
There is also a second transmission gap in the relationship between reserve accumulation and domestic credit.
Nigeria’s tight monetary policy has contributed to the fight against inflation, supported positive real returns and attracted foreign capital. It may also have helped restore confidence in the naira. But high policy rates transmit into high yields on government securities and expensive bank credit.
When government securities provide attractive returns with relatively low risk, banks have less incentive to lend to small businesses, manufacturers and agricultural enterprises carrying higher credit risk. Government borrowing may consequently crowd out private investment, while businesses that obtain loans face interest costs capable of frightening even the most optimistic entrepreneur.
This creates a difficult policy trade off. The same high interest rates that attract portfolio inflows and support reserve accumulation can weaken domestic capital formation, employment and productive capacity. Nigeria may succeed in attracting foreign money into financial instruments while making domestic money prohibitively expensive for those expected to produce goods and create jobs.
The trade off should not be reduced to a demand for immediate or indiscriminate monetary easing. Premature easing could revive inflation, increase pressure on the naira and reverse capital flows. The appropriate course is carefully calibrated easing as inflation becomes sustainably anchored, accompanied by fiscal discipline and measures that address the structural risks making private sector credit expensive.
Interest rates cannot fall sustainably if government borrowing remains excessive, inflationary pressures persist and banks consider productive enterprises significantly riskier than purchasing government securities. Monetary policy cannot be expected to perform a solo rescue while fiscal policy continues adding weight to the boat.
The final and most important test is welfare.
Macroeconomic buffers are not accumulated as ornaments. Their ultimate purpose is to protect the economy from external shocks and create the stability required for production, employment and rising living standards.
If reserves are increasing while food prices remain oppressive, real wages continue to decline, small businesses cannot afford credit and manufacturers struggle with power, logistics and insecurity, citizens will understandably regard the celebration of macroeconomic progress as a conversation taking place in another country.
This does not mean reserve accumulation has failed. It means the transmission process is incomplete.
Foreign reserves cannot directly repair rural roads, secure farms, generate electricity or reduce transport costs. Nor should the Central Bank be expected to convert reserve assets into a general welfare programme. But stronger reserves should create a more stable environment in which appropriate monetary, fiscal and structural policies can operate.
The next phase of reform must therefore concentrate on productive translation.
Foreign exchange supply should be orderly, transparent and sufficiently liquid to support legitimate productive activity without recreating preferential windows and opportunities for arbitrage. Manufacturers requiring machinery and essential inputs should not be forced into a prolonged contest with speculators and rent seekers.
At the same time, fiscal authorities must address the non monetary causes of inflation. Food inflation cannot be defeated solely by increasing interest rates when farmers cannot safely reach their farms, transport costs are excessive, storage facilities are inadequate and poor roads convert agricultural produce into roadside compost.
Investment in power, transport, agricultural logistics and security is therefore part of exchange rate and inflation policy, even if it does not appear in the traditional central banking manual. Greater domestic production reduces import dependence, increases export capacity and strengthens the naira from the productive side.
Reserve reporting must also become more transparent. The public should be able to distinguish gross reserves from net reserves, borrowed inflows from earned inflows, portfolio capital from direct investment, valuation gains from actual receipts and export growth from import compression.
Transparency should not be feared. Credible disclosure strengthens confidence because serious investors are more frightened by uncertainty than by inconvenient facts.
Nigeria’s rising reserves are a commendable achievement. They provide better import cover, stronger debt service capacity, improved investor confidence and greater protection against external shocks. But the headline figure should be regarded as the beginning of the analysis, not its conclusion.
Three questions must now guide the national conversation.
How much do we have after accounting for existing obligations? How did we acquire it, and can those sources be sustained? Most importantly, is the stronger external position producing a stable and liquid foreign exchange market, affordable productive credit, investment, employment and improved household welfare?
The quality of the answers will tell us whether Nigeria is building genuine economic resilience or merely enjoying a favourable financial moment.
Foreign reserves can protect the national balance sheet, but they cannot by themselves improve the family balance sheet. They can purchase time, but they cannot purchase productivity. They can calm the foreign exchange market, but they cannot indefinitely conceal inflation, weak exports, fiscal indiscipline or structural insecurity.
The most enduring defence of the naira will not be found only in the vaults of the Central Bank. It will be found on secure farms, in functioning factories, through reliable power, in competitive exports and within a government that lives reasonably within its means.
Reserves provide the shield. Productive translation must ensure that the shield protects not only the nation’s accounts, but also the lives and livelihoods of its citizens.
Suleyman A. Ndanusa, PhD, OON, is an economist, lawyer, strategic studies scholar, and public policy thinker and practitioner with extensive experience in financial markets, regulation, governance, national Security and development.
