Cardoso: Declining FX reserves not linked to defending naira… debts are being repaid

Olayemi Cardoso, governor of the Central Bank of Nigeria (CBN), says the recovery of the naira has little or nothing to do with the country’s foreign reserves decline.

Cardoso spoke during an interactive session with Abebe Aemro Selassie, the International Monetary Fund’s (IMF) director of the African department, on Wednesday.

The event, a part of programmes at the ongoing IMF and World Bank annual meetings in Washington, focused on Nigeria’s foreign exchange (FX) market reforms.

For weeks, the gap between the local currency and the dollar has continued to shrink as the naira sustains its rally against the greenback in the FX market.

The latest appreciation was recorded on April 17, with the naira trading N1, 050 per dollar at the parallel section of the market.

The rally was extended at the official side with a 6.56 percent gain to N1,072.74/$ on the same day — from N1,148.14 traded on April 16.

But while the naira continues to appreciate, Nigeria’s foreign reserves are dwindling, dropping to $32.29 billion on April 15 — the lowest level in over six years.

As a result, the currency’s recovery — described by some market watchers as “sudden and artificial” — has sparked debates regarding the fundamentals backing its appreciation; with some suggesting that the regulator is defending the naira from the reserves.

To “defend” a currency is to manage the exchange rate of such currency to reach a desired level.

Participating in the FX market, creating a fund to fend off volatility, or setting a fixed exchange rate with a foreign currency, are a few ways governments defend their currencies.

Governments can also use reserves to defend against speculation.

‘IT’S COUNTERINTUITIVE, AGAINST OUR PHILOSOPHY’

Speaking on the issue in the United States, Cardoso said doing this would be counterintuitive, stressing that the apex bank does not “intend to defend the naira”.

“As much as I have read in the recent few days, some opinions with respect to what is happening with our reserves, and the central bank defending the naira, if you think back to what our overall policy and philosophy has been, you can see is counterintuitive,” he said.

“What we’re encouraging is for the markets to willing buyer, willing seller, price discovery and ultimately, I perceive a future where central banks will really not need to intervene, except in very, very unusual circumstances.

“What is important to us is that there’s sufficient liquidity in the market which I’ve spoken about here today… and that will continue.

“So, as long as we have a vibrant currency market, why do we need to go in there to intervene? We don’t need to.

“I can understand that, especially at the outset, there have been little cases where the bureau de change (the BDCs), there was a need to get that segment going.

“And small amounts of money, relatively tiny amounts of money, have gone into that to catalyse that happening because it’s important that individuals have access to funds to send their kids abroad and do things which are important — health, etc.

“So, it’s important not to keep them out of the mainstay. But in terms of intervention, frankly that’s really not our intention at all.”

‘$600 MILLION CAME INTO THE RESERVES ACCOUNT’

Cardoso said the reduction in the country’s reserves is due to the payment of debts, and not defending the naira.

“What you see with respect to the shifts in our reserves, is the shifts that you will find in any country’s reserve situation where, for example, debts are due and when certain payments need to be made, they’re made because that is also part of keeping your credibility intact,” he said.

“Other times, money comes in and you know, takes it up again, and if you watch the next couple of days, I think between yesterday and today, we had about 600 million that came to the reserves account.

“All I will say is that we are looking towards ensuring that we have a market that operates on its own: willing buyer, willing seller and price discovery. That’s where we’re going to be.”

The CBN governor reiterated that the shift “in our reserves has little or nothing to do with defending any naira”, stressing that it is not the regulator’s objective to do so.

In October 2023, the CBN had said it would boost liquidity in the FX market by intervening “from time to time”.