Can Nigeria sustain FX reserve growth?

Nigeria's foreign reserves have seen a remarkable uptrend, reaching $40.08 billion on November 7, marking the highest level in nearly two years. This achievement comes amidst a series of initiatives by the Central Bank of Nigeria (CBN) to bolster the country's currency and enhance liquidity in the market. Dipo Ajayi, the Head of Fixed Income & FX at Chapel Hill Denham Securities, shed light on the significance of these developments in a recent interview with CNBC Africa. Ajayi expressed optimism about the increase in foreign reserves, highlighting it as a positive indication for the economy. However, he also emphasized the importance of concurrently ensuring liquidity in the market to prevent currency depreciation. While the rise in reserves is promising, sustaining liquidity levels remains crucial for overall economic stability. One of the key initiatives introduced by the CBN involves granting banks approval to trade with foreign currencies deposited under the amnesty initiative for the foreign exchange deposit window. This move allows banks to leverage funds previously dormant in domiciliary accounts, estimated at over $22 billion, to enhance market liquidity. Ajayi praised this decision, stating that it would facilitate increased dollar supply and reduce volatility in the FX market. The new arrangement presents a mutually beneficial opportunity for both banks and customers. Customers with funds in domiciliary accounts stand to benefit from potential returns on their idle capital, while banks can generate revenue by actively trading these funds. Ajayi underscored the broader economic impact, noting that the utilization of dormant funds would contribute to the economy's productivity. Regarding the voluntary nature of the initiative, Ajayi acknowledged the varying risk appetites among banks. While some institutions may view the trading scheme as a lucrative opportunity, others might approach it cautiously due to potential risks. The CBN's stance on voluntary participation allows banks to assess their risk tolerance and opt into the program accordingly. In conclusion, the surge in Nigeria's FX reserves signals a positive trajectory for the economy, supported by proactive measures by the CBN to enhance liquidity and encourage active participation from financial institutions. The collaborative effort between the central bank, banks, and customers is poised to unlock Nigeria's economic potential and foster sustainable growth in the FX market.