Central Bank of Nigeria working paper reassesses reserve adequacy and finds IMF ARA benchmarks often missed

The Central Bank of Nigeria published a working paper that re-examines Nigeria’s external reserves adequacy and reserves management from Q1 2015 to Q1 2024 using traditional reserve metrics and the International Monetary Fund’s Assessing Reserve Adequacy (ARA) framework. The study finds that most traditional measures point to adequate reserves over the period, but the reserves-to-broad money indicator and the ARA-based assessment signal greater vulnerability, with potential drains linked to imports, capital flight, external debt and short-term flow reversals. Import cover remains above the three-month threshold and the reserves-to-short-term debt ratio stays above the 100% benchmark except in Q1 2023, while the reserves-to-broad money ratio remains above the upper threshold used in the paper, which the authors associate with heightened convertibility and capital flight risk during financial instability. Using a Nigeria-tailored ARA metric (30% short-term debt, 20% other investment liabilities, 10% broad money and 30% export loss), reserves are above the 125% to 150% adequacy range in 2018 and early 2019 but fall below it for much of the period from mid-2019 onward; the paper recommends closer monitoring of short-term investment liabilities and broad money supply as the highest risks to reserves accumulation and adequacy. The working paper is presented as research in progress and does not represent Central Bank of Nigeria policy.