Heavy reliance on portfolio inflows threatens Nigeria’s $51bn reserves — EBC

Global brokerage firm EBC Financial Group has cautioned that Nigeria’s external reserves, which recently climbed to about $51 billion, remain vulnerable due to the country’s heavy reliance on short-term foreign portfolio inflows and oil earnings.

In its latest market outlook released on Thursday, the brokerage acknowledged that the rebound in reserves reflects improved investor confidence following the foreign exchange reforms introduced by the Central Bank of Nigeria (CBN), but warned that the gains may not be sustainable unless supported by stronger long-term investment and diversified sources of foreign exchange.

According to the report, Nigeria’s reserves have risen significantly from about $32 billion in April 2024, when the country faced acute foreign exchange shortages, to approximately $51 billion, bringing the CBN close to its reserve target.

However, the firm noted that the increase has been driven largely by strong oil export receipts and short-term portfolio investments rather than more stable capital inflows such as foreign direct investment (FDI).

Senior Market Analyst at EBC Financial Group, David Precious, said while the reserve growth is genuine, its durability remains uncertain because most of the recent inflows can exit the country quickly if market conditions change.

“Nigeria’s reserve build is real but may not be durable yet, because nearly all of the new money is the kind that can leave quickly,” he said.

He explained that of the $10.37 billion in foreign capital attracted during the first quarter of 2026, the overwhelming majority consisted of portfolio investments rather than long-term investments.

Data cited from the National Bureau of Statistics (NBS) showed that Nigeria recorded $10.37 billion in total capital importation during the first quarter of 2026, representing an 83.83 per cent increase compared to the same period last year.

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Of the total inflows, $9.86 billion—or 95.09 per cent—came from portfolio investments, largely channelled into Treasury bills and other naira-denominated debt instruments, while foreign direct investment accounted for only $135.08 million, representing 1.3 per cent of the total.

The brokerage noted that although portfolio inflows help strengthen external reserves by boosting dollar liquidity in the foreign exchange market, they are highly sensitive to changes in global interest rates, investor sentiment and confidence in the naira.

The report also expressed concern about Nigeria’s continued dependence on oil revenue.

According to EBC, geopolitical tensions earlier this year, particularly around the Strait of Hormuz, temporarily pushed up crude oil prices and increased Nigeria’s export earnings, with the country earning $8.11 billion from crude oil exports during the first quarter, based on CBN balance of payments data.

However, with Brent crude prices retreating to around $72 per barrel and Nigeria’s oil production constrained by OPEC quotas, pipeline vandalism and ageing infrastructure, the brokerage warned that sustaining reserve growth through oil earnings alone may become increasingly difficult.

It therefore advised Nigeria to strengthen non-oil exports and continue implementing reforms that encourage stable, long-term foreign investment.

EBC also highlighted the narrowing gap between the official and parallel foreign exchange markets as a positive development, noting that the difference has fallen to about N20–N30 per dollar, with the official exchange rate trading around ₦1,380/$ compared to approximately N1,400/$ in the parallel market.

The brokerage said preserving a credible unified exchange rate would remain critical to maintaining investor confidence and ensuring that foreign investors can repatriate their funds without difficulty.

The report referenced the International Monetary Fund’s 2026 Article IV consultation, which urged Nigeria to reduce its dependence on volatile portfolio inflows while continuing reforms aimed at eliminating multiple exchange rate practices.

Nigeria’s external reserves recently climbed to $51.04 billion—the highest level in about 17 years—supported by improved foreign exchange inflows and favourable market conditions, in line with the CBN’s projections for 2026.