Nigeria’s Foreign Reserves and the Naira, Explained

Nigeria’s external reserves are the stock of foreign currency the Central Bank holds — mostly dollars. They are the country’s financial shock absorber, and their level has a direct bearing on the naira rate.

How reserves are built

Reserves grow from crude oil earnings, non-oil exports, diaspora remittances, foreign loans and investment inflows. A stretch of strong oil prices or heavy diaspora inflows tends to lift them.

How reserves are spent

• Defending the naira — selling dollars into the market to meet demand.
• Paying for government imports and servicing external debt.
• Meeting maturing obligations and backstopping the banking system.

Why the level moves the naira

High reserves give the CBN room to supply dollars and steady the rate; falling reserves limit that and can signal a weaker naira ahead, feeding the kind of dollar shortage that widens the gap to the parallel rate. Markets watch the monthly reserve figure closely.