The Central Bank of Nigeria’s directive to remove the rate cap on the naira at the official Investors and Exporters’ Window has triggered a significant decline in the country’s foreign exchange reserves.

From June 14 to December 1, 2023, the reserves have plunged by $1.6 billion from $34.62 billion to $32.97 billion.

The decision aimed at fostering a free float of the national currency against global currencies has faced challenges, leading to a weakened naira by more than 40%.

The limited capacity to earn foreign exchange from both non-oil and oil exports, coupled with increasing FX demand, has contributed to the decline, raising concerns about the nation’s economic stability.

Economists, including Obadan Mike, a member of the Monetary Policy Committee, highlight the persistent pressure on foreign exchange demand amidst weak accretion to external reserves.

The fundamental issues include low productivity, inadequate export earnings, and limited foreign capital inflows.

The Economist Intelligence Unit’s Africa Outlook report questions Nigeria’s ability to support its exchange rate unification policy due to insufficient FX reserves.

It predicts ongoing instability, periodic devaluations, and foreign investors’ unease, indicating the need for robust measures.

While JP Morgan estimates Nigeria’s net FX reserves at $3.7 billion, the Central Bank Governor, Mr. Olayemi Cardoso, remains optimistic.

He anticipates positive economic impacts in the medium-term, driven by policies such as the removal of the petrol subsidy and the adoption of a floating exchange rate.

However, challenges persist, necessitating a careful balancing act to secure the nation’s financial stability.