CBN research confirms deficits drive naira weakness — reserves at $46B don't stop the slide
The naira closed at ₦1,350.45/$ on November 5, down ₦4.44 in three days, while interbank turnover dropped to $82M from $101M. A CBN Journal study using 1981-2024 data confirms what the market already prices: budget deficits are the primary driver of exchange-rate depreciation — a condition economists call fiscal dominance.
The research by Ndubuisi Uguru finds deficits account for a large share of short-run currency moves and keep pushing the naira weaker over time. They also create delayed upward pressure on interest rates. Crucially, the study finds no direct link between deficits and inflation — instead, inflation tracks supply shocks and the pass-through from a weaker naira. The fiscal problem shows up first in the exchange rate and cost of money, then in prices through the currency.
This matters because net FX reserves hit a record $46B in October (up from $34.8B end-2025), yet the naira still slipped. Gross reserves rose only $295M in October — the slowest monthly increase this year. The MPR sits at 23% after September's 350bps cut, with September inflation at 14.63%. That gap looks like room to ease, but fiscal pressure is why that room can close again.
The CBN paper prescribes three fixes: a legally binding fiscal rule capping the deficit as a share of GDP (not a soft target rewritten each budget), public coordination between fiscal and monetary operations to avoid abrupt liquidity squeezes, and stopping the treatment of larger reserves as proof the exchange rate is settled. The deficit path and domestic borrowing calendar are the variables to watch.
With the government competing for dollars and domestic credit, will you hedge naira exposure now or bet on fiscal discipline finally arriving?