Why Nigeria’s forex reserve is swelling

Nigeria's foreign exchange reserves have reached over $54 billion, bolstering the nation's external standing and offering extra reserves for the Central Bank of Nigeria (CBN) to handle market pressures. This surge in reserves has occurred amidst relative stability in the naira, with the currency gaining strength in the official market.

However, questions are arising about the nature, structure, and longevity of the funds being amassed. The primary concern is whether the growth is primarily fueled by sustainable sources of foreign exchange, such as crude oil earnings, diaspora remittances, and non-oil exports, or by temporary inflows like portfolio investments that could easily dissipate if global financial conditions or investor sentiment shift.

Aminu Gwambe, the president of the Association of Bureaux De Change Operators of Nigeria (ABCON), views the rise in reserves as a positive trend, attributing it to several enhancements in Nigeria's external accounts. These include higher crude oil prices, increased oil production, stronger diaspora remittances, non-oil export revenues, and adjustments in monetary and foreign exchange policies.

Gwambe also highlighted the reduction in volatility in the Niger Delta and lower crude oil theft as contributing factors that have boosted production and, in turn, foreign exchange revenues. He further noted the rise in remittances through official channels, facilitated by reforms in the foreign exchange market, and higher non-oil export proceeds, alongside improvements in fiscal and monetary management, including efforts to curb foreign exchange hoarding, rent-seeking, and arbitrage.

While oil receipts continue to be crucial for Nigeria's external position, market observers suggest that portfolio investment is becoming a more significant source of foreign exchange. Dr Muda Yusuf, the CEO of the Centre for the Promotion of Private Enterprise (CPPE), points to heightened confidence among foreign investors and the business community as a reason for the reserve increase.

He also credits improved export performance and economic reforms that have bolstered foreign exchange liquidity and made Nigerian financial assets more appealing to international investors. According to a CBN insider, there has been a surge in interest from foreign investors in Nigerian government securities. A former Access Bank Treasury official adds that it might be challenging to pinpoint a single source behind the reserve buildup, with a notable uptick in foreign capital inflows.

In the first quarter of 2026, Nigeria received $10.37 billion in foreign capital, an 83.8% increase compared to $5.64 billion in the same period in 2025. The bulk of these inflows ($7.55 billion) came from the banking sector, followed by $2.43 billion from the financing sector. This concentration of investments in financial services indicates a substantial proportion of foreign capital entering Nigeria is not for productive capacity but for financial purposes.

The increase in reserves is undoubtedly beneficial, but the makeup of these inflows is critical. Financial experts caution that portfolio investments can bolster reserves and enhance foreign exchange liquidity, yet they are more vulnerable to interest rate fluctuations, exchange rate expectations, and global investor sentiment than longer-term foreign direct investments.

They emphasize that Nigeria's improving trade position is also vital. Sustained export growth would supply a more resilient source of foreign exchange than fleeting financial flows. Gwambe stresses the ongoing concern regarding the disparity between the official and parallel foreign exchange markets, advocating for greater integration of Bureaux De Change operators into the formal foreign exchange system and increased participation in the market.

While the rising reserves provide the CBN with a stronger cushion and potentially greater capacity to handle foreign exchange shocks, reserves alone do not ensure long-term naira stability. The true challenge is whether Nigeria can transform the current foreign exchange liquidity improvement into stable, diversified, and recurring foreign exchange earnings.

Experts agree that if the build-up is largely driven by crude receipts, remittances, exports, and long-term investments, the reserves could signify a genuine strengthening of Nigeria's external position.