Nigeria’s foreign exchange backup is going down. That is not good news.

According to data from the Central Bank of Nigeria, the reserves have dropped below $47 billion, losing $251 million in the first 6 days of August.

The reserves, which stood at $47.119 billion as of July 31, fell to $46.868 billion on August 6, the lowest level in nearly four months.

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The CBN data showed that the external reserves rose from $46.845 billion on April 11 to $46.881 billion on April 12.

The reserves hit a high of $47.798 billion on July 5 and had been declining since then.

Analysts at FSDH Research, in a Monthly Economic and Financial Markets Outlook released on Tuesday, noted that the external reserves recorded persistent drawdown in July.

The analysts said: “This was due to the foreign investors’ pull-back from the Nigerian market and the increase in demand at the foreign exchange market."

Why is this story important?

There are several reasons the CBN or any other central bank hold foreign currencies. But in Nigeria’s case, they serve two major purposes.

One is to sustain the value of the naira. Today, the CBN is able to dictate at what value the naira exchanges to other currencies because it is a major supplier of foreign exchange. The weaker the reserves, the more it loses control of the value of the naira.

Two, with Nigeria depending on imports to keep the economy alive, shortage of foreign currencies resulting from depleted reserves will send the economy into a crisis.

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