Do Foreign-Exchange Reserves Predict Naira Depreciation? Evidence from Nigeria

Abstract: Nigeria’s external reserves are watched closely as a signal of the central bank’s capacity to defend the naira. This paper tests whether monthly changes in reserves help to forecast the next month’s change in the official naira–US dollar exchange rate. Using Central Bank of Nigeria Statistical Bulletin data for January 2000 to December 2025, I estimate predictive regressions in which next-month depreciation depends on reserve growth, the current rate of depreciation, recent exchange-rate volatility and three-month momentum, with an extension that adds the change in the Bonny Light oil price. Over the full sample of 308 months, reserve growth has a negative and significant coefficient (−0.117, HAC p = 0.008): faster reserve accumulation is followed by less depreciation. The relationship survives the exclusion of the large administrative devaluations of 2016, 2023 and 2024 and is weaker but still present before 2016. Oil-price changes add no significant information once reserves are included. Out of sample, however, the picture changes. Over the 83 months from February 2019 to December 2025, no model beats a random walk; the full model’s root mean squared error is 8.53 against 7.45 for the random walk, and five devaluation months account for nearly 90 per cent of the random walk’s squared forecast error. Adding reserve growth to an autoregression reduces the error slightly, but not significantly, and the same is true at a three-month horizon, where reserves have their largest in-sample effect. Reserves matter for the exchange rate, but in Nigeria the timing of large moves has been set by policy decisions that reserve data do not anticipate.

Keywords: external reserves; exchange rate; naira; forecasting; random walk; Nigeria

JEL classification: F31; F37; E58; C53