How foreign reserves accumulate, what they protect, how much is enough

The radio is still announcing that Nigeria’s foreign reserves have risen when the first question arrives at the breakfast table. If we have all these dollars, why is the exchange rate still troubling us and when do we get our share? Someone jokes that the CBN should open a counter and let FAAC queue. The picture gets a laugh; it also opens the door to a story many of us have never been told, where the dollars come from, who can use them, and why a rising reserve figure does not instantly make a country feel richer.

To follow the story, we must follow the dollars. Nigeria receives foreign currency from oil and other exports. Dollars also come through remittances, investment and borrowing. But a dollar earned in Nigeria does not automatically become part of the CBN’s official reserves. An exporter may keep it for the company; a bank may hold it for a customer; a government agency may have its own balance. The monetary authorities must be able to control an asset and use it when needed for it to count as an official reserve. Not every dollar in the country reports for duty at the CBN.

When the CBN buys dollars, it pays the seller in naira. The Bank’s foreign assets rise, and the seller receives the naira equivalent through the banking system or a government account. That is the simple mechanics. The CBN has acquired an asset and credited naira in exchange.

This is why reserves are called a balance sheet item. A balance sheet is simply a record of what an institution owns and what it owes. The dollars are an asset; the naira credited in exchange appears on the other side of the CBN’s books. This accounting language can sound forbidding, but there is no mystery in it and certainly no money printing fairy waving a wand.

Where the dollars came from also matters. If Nigeria earns dollars from exports and keeps some of them, its ability to meet payments abroad may improve. If the CBN borrows dollars and adds them to reserves, the headline figure rises, but the country also owes the money back. The drawer looks fuller, but there is a repayment note inside it. A higher reserve figure, by itself, does not prove that the country has become richer by the same amount.

This is where the Federation Account enters the story. Oil receipts belonging to the Federation may be converted into naira, with the naira equivalent credited for sharing. The CBN has described reserve related funds associated with the Federation, the federal government and the Bank itself. The ownership and availability of those funds can differ. A public sector dollar is not automatically a dollar the CBN is free to sell in the market.

After FAAC allocations reach the federal, state and local governments, they are spent in naira. Some of that spending may increase demand for imported goods, services and equipment and therefore for foreign currency. If the CBN supplies the dollars, its reserves fall. If exporters, investors or other private suppliers provide them, the CBN’s reserves may not fall. So the link between FAAC and reserves runs through spending and demand for FX. There is no automatic journey from the allocation account straight to the CBN’s dollar drawer.

Why keep reserves at all? Think of them as a country’s insurance against a difficult season. If export earnings drop, foreign lenders become nervous or an important payment falls due, reserves can help the country meet its obligations and steady the foreign exchange market. They can support confidence and give policymakers time to respond. But insurance has a premium. Reserves must be kept in safe, liquid assets, which may earn less than other investments; buying dollars can also add naira liquidity that the CBN may later need to absorb.

The CBN may hold reserves in foreign currency deposits and securities, as well as gold and assets linked to Nigeria’s membership of the IMF. Its published objectives are safety, liquidity and a reasonable return within acceptable risk. The order matters. The assets must be safe and available when needed. A central bank should not chase a tempting return only to discover that its emergency dollars are difficult to reach when the emergency arrives.

When the CBN sells dollars to banks or other market participants, its foreign assets decline and the buyer pays naira. When it buys dollars, reserves rise and naira liquidity can increase. If the extra naira is more than the CBN wants in the banking system, it can use other monetary operations to absorb some of it. Buying and selling FX therefore affects both the reserve balance and the supply of naira, though the two are managed through different operations.

So how much reserve should a country hold? There is no single magic number. A familiar rule of thumb is enough to cover three months of imports. That helps answer one question. If foreign currency earnings suddenly weaken, how long can the country keep paying for goods and services from abroad? A country with significant short-term debts must also consider whether it can meet repayments falling due within a year.

The IMF uses a broader measure for many emerging markets, called the Assessment of Reserve Adequacy, or ARA. It considers several possible sources of pressure, including a fall in export earnings, short-term debt repayments, money leaving the country and other external liabilities. Reserves between 100 and 150 per cent of the ARA measure are generally considered adequate for precautionary purposes. That is a guide, not a target every country must chase. The right level depends on the risks a country faces and the cost of holding the buffer.

Benchmarking is useful, as long as we compare countries with similar circumstances. An oil dependent country with volatile export earnings, substantial short-term debt and a shallow FX market may need a different cushion from a country with varied exports and easier access to foreign borrowing. Comparing headline dollar totals alone is like comparing water tanks without asking how many people depend on them or how often the pipes run dry.

Nigeria’s latest IMF assessment gives us a useful example. In its June 2026 report, the IMF estimated that Nigeria’s gross reserves at end-2025 were US$45.8 billion under the CBN definition and equal to 157 per cent of the IMF’s ARA measure above the broad range considered adequate for precautionary purposes. The report also noted that the figure was about US$8 billion lower under the IMF’s own reserve definition, and that limited clarity about the composition of CBN reserves complicates the assessment. It put net reserves at about US$35 billion at end-2025. The lesson is not simply that one figure is right and another wrong. It is that we need to know what each figure includes and how much is readily usable.

Can a country deliberately grow its reserves? Yes, but there is no magic button marked “Add Dollars.” The durable route is to earn and attract foreign currency over time, raise reliable oil production and export receipts, expand non-oil exports, bring more remittances through formal channels, attract stable long-term investment and maintain policies that encourage people and businesses to supply FX through official markets. When dollars flow into the system, the CBN can buy some of them and add to the reserve cushion.

Borrowing can also raise the gross figure, but borrowed dollars arrive with a repayment obligation. Short-term borrowing to make reserves look fuller may leave a country with a bigger headline and a shorter fuse. Sustainable reserve growth takes time, sound policies and reliable foreign currency earnings.

The next time the reserve figure rises, we can ask more than whether the number is up. Where did the dollars come from? Who controls them? How much is readily available? What obligations sit behind the total? And is Nigeria earning foreign currency in a way that can be sustained? The reserve cushion matters because it can help the country weather a storm. The larger task is building the capacity to replenish it.

Ndanusa, PhD, OON, is an economist, lawyer, strategic studies scholar

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