NIGERIA’s gross foreign reserves increased to $41.05 billion as of August 20, the highest in about four years, demonstrating strong stability that is expected to positively influence the naira’s strengthening.

This is the highest level gross foreign reserves, also known as external reserves, have recorded since December 3, 2021, when it stood at $41.09 billion, The ICIR can report.

According to Investopedia, foreign reserves as foreign currency-denominated assets held by a nation’s central bank to stabilise its currency, manage the money supply, and provide backup funds during economic crises.

These assets include foreign currencies, bonds, treasury bills, and government securities, often held in the U.S. dollar or Euro, which are considered stable and widely accepted for international trade.

An analysis of data from the Central Bank of Nigeria (CBN) shows gross external reserves have risen from $40.88 billion at the beginning of the year to the current figure of $41.05 billion as of August 20.

It has risen from $35.09 billion as of May 30, 3023, since President Bola Tinubu came into office on May 29, 2023.

A cursory look at the CBN data further revealed that gross external reserves have been highest at $64.85 billion as of August 8, 2008, since the last two decades, precisely since April 3, 2006.

However, how the improved external reserves are affecting the country’s economy, amid concerns of increasing government borrowings, high debt-to-revenue ratio, declining foreign direct investment (FDI), among others, remains a critical worry for most Nigerians.

In this report, The ICIR looks at what the rising foreign exchange reserve means for the Nigerian economy and why the government needs to have a framework that improves fiscal policies that support a better enabling business environment.

What’s driving foreign reserves

The notable improvement in gross external reserves has been attributed to crude oil production and stability in the foreign exchange market arising from CBN’s ongoing policy reforms.

According to the CBN Monetary Policy Committee (MPC), other factors include expected reduction in import demand pressures arising from the full deregulation of the downstream oil sector, reduced petroleum products importation regime, increased inflows, and other subsisting measures deployed by the apex bank.

The committee had projected that the level of external reserves would further increase due to reduced external debt service and the resumption of the naira-for-crude agreement.

CBN had also noted there has been a reduction in debt service from 97 per cent to 68 per cent, with a commitment to further reduce the debt-to-revenue ratio and free up resources for critical investments.

The CBN Governor, Olayemi Cardoso, has repeatedly stressed the need to sustain growth in the external reserves.

At the end of the monetary policy committee meeting, on July 22, Cardoso said the country was witnessing “sustained stability in the foreign exchange market.”

He hinted there had been increased capital inflows, improved crude oil production, rising non-oil exports, and reduced imports.

How the rise will impact the economy

Nigeria, under the previous administration, paid for several government operations through ways and means, putting a huge fiscal loophole in the economy, with its impact felt on rising inflation and violation of the Fiscal Responsibility Act.

Consequently, President Tinubu’s administrative tenure made fuel subsidy removal and the foreign exchange unification a major policy direction that saw fuel prices rise to over 200 per cent, and prices of goods rose astronomically, with cost of energy prices and food inflation influencing such rise.

To further stabilise the economy amid several avoidable economic shocks, the CBN came up with some key reforms focused on banking recapitalisation, inflation targeting framework, interest rate adjustments, unification of exchange rates, Nigerian foreign exchange code, and international money transfer operations to facilitate remittance inflow into the economy.

These reforms, analysts believe, are on the right trajectory; however, they want the government to build on the foreign reserve appreciation to grow the economy, most especially by lessening production costs and downward adjustments of the exchange rate.

“Considering where we are coming from, the economy is stabilising, and we must acknowledge the reforms of the government on that. But there’s still lots of work to be done. Most of the complaints we have about the economy are about the cost of production and the cost of transportation. This is what is pushing higher prices of commodities,” a development economist, Muda Yusuf, told The ICIR.

He stressed the need for the government to priortise fiscal policies that support the supply side of the economy, which would see possible downward adjustments of import duties and lessening production costs to support manufacturing and trade.

“We need to look at our trade and import procedures. We must ask ourselves whether the import duty we impose on goods helps in trade facilitation or drags down businesses. For instance, if you are paying almost 25 per cent to import a vehicle, how many people in the middle-class would own a vehicle conveniently from such payable duty? he queried.

Speaking with The ICIR, the head of Financial Institutions Rating at Agusto & Co, Ayokunle Olubunmi, said the rising external reserves are a testament to the various initiatives adopted to reform the Nigerian foreign exchange market by the CBN.

He noted that the elevated treasury yields and the special open market operations (OMO) targeted at the foreign portfolio investments (FPIs) also supported the external reserves.

“The rising reserves will further support the exchange rate stability, given that some foreign investors assess the potential strength of the currency with the size of the external reserves. It also strengthens the ability of the CBN to meet FX demand.

“In addition, speculative FX activities will be further moderated based on the rising reserves,” Olubunmi added.

The CBN governor had earlier expressed that the country is seeing improving growth in its economy.

“The key thing is that we as regulators will continue to play our part to ensure that the system and the players and the actors continue to do what we are doing, creating resilience, creating buffer, and, of course, playing by the rules, because that is so important for those who are looking to invest that they can believe and they trust in you.”

In his personal statement from the May 2025 MPC meeting, Cardoso had said gross external reserves at $40.11 billion as of July 18, could provide about 9.5 months of import cover.