The Central Bank of Nigeria faces a significant challenge in maintaining the stability of the Naira amid persistent inflation. According to the Nigeria Bureau of Statistics (NBS), Nigeria’s annual inflation rate fell to 23.71% in April 2025, from 24.23% in the prior month. Food inflation, the largest component of the inflation basket, remained elevated but moderated to 21.26% from 21.79% in March, mainly on account of prices of some items such as maize, wheat, yam and wheat. Core inflation, which strips out the volatile prices of agricultural produce and energy, stood at 23.39 per cent, slowing from March’s 24.43 per cent. Every month, consumer prices rose by 1.86 per cent, following a 3.90 per cent increase in the prior month. With further projection of the global fall of oil revenue, Nigeria’s foreign reserves may drop, thereby worsening the inflation rate.
A foreign exchange reserve, or forex reserves, is a stockpile of foreign currencies held by a country’s central bank. These reserves are used to settle international transactions, manage exchange rates, and provide a buffer against economic shocks. In Nigeria, the Central Bank of Nigeria (CBN) manages the country’s foreign exchange reserves.
The CBN typically holds the foreign exchange reserves in major financial institutions, such as: Foreign central banks: e.g., the Federal Reserve (USA), the Bank of England (UK), or the European Central Bank (ECB). International financial institutions, e.g, the International Monetary Fund (IMF) or the Bank for International Settlements (BIS), also hold Foreign Reserves. Other channels where the reserves are held are in major commercial banks, such as JPMorgan Chase, Citibank, or Deutsche Bank.
A country holds foreign exchange reserves for several reasons: Settling international transactions such as payment for imports, servicing foreign debt, and settling other international transactions.
By buying or selling foreign currencies, the CBN can influence the exchange rate and maintain stability in the foreign exchange market. The CBN has used Foreign reserves to provide liquidity to the financial system during times of economic stress. Holding adequate foreign exchange reserves can boost confidence in a country’s economy and currency.
The CBN manages Nigeria’s foreign exchange reserves through a variety of reserves across different currencies, assets and institutions to minimize risk. It invests reserves in low-risk, liquid assets, such as government securities or short-term deposits. It continuously monitors market trends, economic indicators, and other factors that may impact the value of the reserves to intervene in the foreign exchange market to stabilise the exchange rate or address market imbalances.
By effectively managing foreign exchange reserves, the CBN can help stabilise the economy, maintain confidence in the Naira, and support economic growth and development.
To further address this issue of volatile economic instability, the CBN must think creatively and implement creative solutions that go beyond traditional monetary policy tools such as the commonly used open market operations, which involves buying and selling government bonds with banks; reserve requirements, which determine what level of reserves a bank is legally required to hold; and discount rates, which is the interest rate charged by the central bank on the loans that it gives to other commercial banks. Anyone who has followed the monetary policy in the last year will observe that the CBN has deployed the traditional tools, and yet, economic stability is not in sight. While not wishing away the efficacy of the time-tested traditional monetary tools, the CBN can think out of the box by simultaneously conducting other approaches along with the traditional tools.
One potential approach is to introduce long-term inflation-indexed bonds, which would offer returns linked to inflation rates and provide investors with a hedge against inflation. Several countries have utilized inflation-indexed bonds. The United Kingdom was the first major advanced economy to issue them in 1981, followed by Australia, Canada, and Sweden. Other countries include New Zealand, the United States, Japan, and Germany. Emerging markets like Brazil have also successfully adopted inflation-indexed bonds.
The primary reason for issuing inflation-indexed bonds is to manage the impact of inflation on government debt and develop financial markets. By introducing the inflation-indexed bonds, the CBN can absorb excess liquidity and reduce inflationary pressures. Additionally, the CBN can engage in forward market operations to manage exchange rate expectations and reduce speculation. This would involve buying or selling Naira forward contracts to influence market expectations and stabilise the exchange rate.
Targeted interventions are also crucial in addressing specific drivers of inflation. Targeted interventions refer to specific actions taken by the Central Bank of Nigeria (CBN) to address particular economic challenges, such as inflationary pressures or exchange rate volatility. In the context of inflation targeting, the CBN employs various monetary policy strategies to achieve its objectives. The CBN can provide subsidies or support to key sectors to help reduce inflationary pressures and stabilize the Naira. It can address energy costs, food prices, and fuel costs. The CBN may consider pausing its tightening cycle if inflation shows sustained signs of decline and exchange rate stability improves.
Furthermore, reforming the Monetary Policy Committee (MPC) to make it more effective in setting monetary policy would be beneficial. This could include adjusting the committee’s composition and improving data analysis. The reform of the Nigerian Monetary Policy Committee (MPC) is a rational step towards enhancing the country’s economic stability and growth. The MPC plays a crucial role in setting monetary policy, and its decisions have a significant impact on the economy.
A reformed MPC with diverse expertise and perspectives can lead to more informed decision-making, better equipping the committee to address complex economic challenges. This could involve incorporating experts from various fields, including economics, finance, and industry, to provide a more comprehensive understanding of the economy.
The MPC’s ability to adapt to changing economic conditions is also crucial. A reformed committee can be more agile in responding to shifting economic landscapes, such as changes in global market trends or unexpected domestic economic shifts. This could involve regularly reviewing and updating the MPC’s toolkit to include modern monetary policy instruments that can help manage inflation, stabilize the currency, and promote economic growth.
Furthermore, increasing accountability within the MPC is essential. By implementing reforms that promote transparency and accountability, the committee’s decisions can be ensured to align with the country’s economic objectives and priorities. This could involve providing regular reports on the MPC’s decisions and actions, as well as robust engagement with stakeholders to ensure that the committee’s decisions are well-informed and effective.
Enhanced communication with stakeholders, including investors, consumers, and financial market participants, is critical in influencing expectations and stabilizing the Naira.
The CBN should also prioritise foreign exchange market reforms to improve liquidity and reduce volatility. Introducing new market mechanisms, such as an auction system, or allowing more flexibility in the exchange rate could help achieve this goal. Collaboration with other government agencies, such as the Ministry of Finance and the Ministry of Agriculture, is also essential in addressing the root causes of inflation.
Developing and utilizing inflation-fighting instruments, such as inflation swaps or options, could also be an effective way to manage inflation expectations and reduce volatility in the financial markets.
The CBN should provide clear and timely information about monetary policy decisions and inflation trends to help shape market expectations. Optimizing reserve management strategies to maintain adequate foreign exchange reserves and support the stability of the Naira is also vital. This could involve diversifying reserve assets, improve reserve management processes, and enhance transparency.
Ultimately, the CBN’s efforts to maintain a stable Naira amidst stubborn inflation will require a multifaceted approach that incorporates both traditional and creative solutions. By working together with other government agencies and stakeholders, the CBN can implement policies that support economic stability and growth, ultimately benefiting the Nigerian people.
The CBN’s ability to think creatively and implement innovative solutions will be crucial in addressing the challenges facing the Naira. By doing so, the CBN can help maintain economic stability, promote growth, and improve the standard of living for Nigerians.