How Long Can the CBN Hold the Line?
There is no fixed formula for how much a central bank should spend to defend its currency, but economic theory offers a few guiding principles. A widely accepted benchmark is the
import cover rule, which suggests that a country should maintain at least three to six months’ worth of
import cover in foreign reserves. Nigeria’s spending spree on defending the naira could push reserves dangerously close to this threshold, leaving little room for manoeuvre in the event of a global financial shock.
Another key metric is the
Guidotti-Greenspan Rule, which states that a country’s reserves should be at least equal to its
short-term external debt obligations—in Nigeria’s case, a crucial consideration given its growing debt load. If forex interventions deplete reserves below this level, the country could struggle to meet external obligations, sending a wave of panic through financial markets.
A third measure is the money supply-to-reserves ratio, where reserves should ideally constitute at least 20% of the country’s broad money supply (M2). When reserves fall below this level, the economy becomes highly vulnerable to capital flight, making currency defense increasingly difficult.
Finally, central banks typically avoid spending more than 5-10% of total reserves per month on forex interventions. If a country persistently spends 20-30% of its reserves over a short period, it raises serious concerns about sustainability. Nigeria’s current pace of intervention suggests that without a significant boost in forex inflows, the naira’s newfound stability could prove short-lived.
Nigerian Authorities Should Look in the Mirror for Rising Debt
Nigeria’s forex defense strategy has come at a steep price. In the past,
forex interventions were backed by strong oil revenues, but with fluctuating oil prices and still less than robust levels of crude production, the country no longer enjoys the same
financial cushion. Instead, external borrowing has surged, and much of it is now being used to sustain the naira rather than finance productive investments.
The IMF recommends that emerging markets maintain foreign reserves at least 100-150% of its reserve adequacy metric, a measure that accounts for external debt, trade balance, and capital flows. Nigeria’s reserves are now being stretched thin, and as debt servicing costs mount, policymakers will have to decide whether to continue defending the naira at all costs or allow market forces to play a greater role.
For now, the ₦1,500/$ exchange rate holds steady, bringing some relief to businesses and consumers who have had to deal with months of volatility. However, this stability hinges on continued interventions from the CBN, raising concerns about how long the government can
sustain its current strategy.
Analysts argue that a more sustainable approach would involve boosting non-oil exports, improving foreign investment inflows, and implementing transparent forex policies that encourage confidence in Nigeria’s financial markets. Without these measures, the CBN may soon find itself at a crossroads: either depleting reserves further or allowing the naira to adjust more freely to market realities.
While Rewane’s revelations offer a clear picture of Nigeria’s efforts to
maintain currency stability, it is not clear if he stands by his
projection that the naira will stabilise at N1550/$ in 2025. The coming months will reveal whether Nigeria’s forex policy can withstand
market pressures or if Nigeria’s currency will succumb to a new bout of volatility.
