The recently disclosed financial statements from the Central Bank of Nigeria (CBN) have raised concerns about the reliability of the country’s foreign exchange reserves, leading to doubts about the CBN’s ability to support the value of the national currency, the naira.

The foreign exchange (FX) reserves are a crucial resource that enables the central bank to protect the naira’s value.

However, questions have been raised regarding the accuracy of the reported value of foreign currency-denominated assets held in reserve, with experts suggesting that the actual value might be lower than what is stated on the CBN’s official website.

CBN reveals substantial dollar transactions

As of August 10, the FX reserves stood at $33.88 billion, a decline from the $37.08 billion recorded at the end of the previous year. Economists have voiced concerns over these reserves, particularly after the CBN revealed substantial dollar transactions with financial giants JP Morgan and Goldman Sachs.

These documents also indicated that the CBN had exceeded limits on lending to the government.

James Okweshine, an economics professor at the University of Benin, emphasized that while these contracts are valid, the resulting obligations raise questions about their justification and the safeguards in place when entering into them.

ALSO READ: Naira’s depreciation increases strain on CBN’s $15 billion debt burden

Agora Policy, an Abuja-based think tank, pointed out that Nigeria’s external accounts show significant imbalances due to a combination of structural changes and policy missteps by the CBN, which have contributed to the current FX challenges.

The CBN acknowledged that it had utilized securities lending to secure cash from JP Morgan and Goldman Sachs, which, in turn, impacted the actual liquidity of the FX reserves. This has hindered the CBN’s ability to intervene effectively in the foreign exchange market.

Security lending is a financial tool used by central banks globally to inject liquidity into markets or enhance returns. However, it has to be used responsibly to prevent adverse effects such as inflation.

The disclosure of the true state of the fx reserves has led to a lack of trust in Nigeria’s current external reserves, even after the CBN initiated currency reform in June. The widening gap between official and black market exchange rates indicates ongoing challenges in managing the naira’s value.

Experts are highlighting the need for more effective fiscal policies, including aggressive taxation and boosting non-oil exports, to improve Nigeria’s economic situation.

The country’s external reserves are divided into portions for the CBN, the Federal Government of Nigeria (FGN), and the Federation. The CBN’s share of the reserves is used for monetary policy and currency defense, emphasizing its significance in the country’s economic stability.