CBN paper links budget deficits to weaker naira despite record reserves

On 5 November 2026, the naira closed at N1,350.45 per dollar. That was N4.44 weaker than the N1,346.01 close on 2 November, according to CBN data. Interbank turnover that day was about $82 million, down from about $101 million the session before.

A soft week for the naira is not new. The CBN’s own journal has now set out a mechanism that matches the market. A paper in the CBN Journal of Applied Statistics says budget deficits are a primary driver of exchange-rate depreciation. The paper, Budget Deficit Dynamics and Macroeconomic Performance in Nigeria by Ndubuisi E. Uguru, uses annual data from 1981 to 2024. The findings were reported on 6 November.

What the paper found

The study says budget deficits account for a large share of short-run currency moves and keep pushing the currency weaker over time. They also put delayed upward pressure on interest rates. Money supply can shrink when the central bank tightens to contain the fallout from government borrowing.

The study finds no statistically significant direct link between deficits and inflation. In that framework, Nigeria’s inflation tracks supply shocks, structural bottlenecks, and the pass-through from a weaker naira into local prices. The fiscal problem shows up first in the exchange rate and the cost of money, then in prices through the currency. That pattern is fiscal dominance. Government financing needs constrain how freely the central bank can chase monetary stability on its own.

Reserves rise, naira still slips

Gross external reserves rose by only $295.35 million in October 2026. That was the slowest positive monthly increase so far this year. Net foreign exchange reserves reached a record $46 billion, up from $34.80 billion at the end of 2025. The buffer is larger. The naira still slipped in the first week of November.

Reserves help. They do not cancel a persistent deficit that competes for dollars and domestic credit. When the government borrows heavily at home, private borrowers face higher rates. When the deficit feeds depreciation fears, importers and portfolio managers bid for dollars. Both channels showed in the same week: a weaker official rate and a harder path to lower the Monetary Policy Rate.

The MPR is 23 per cent after the 350-basis-point cut on 22 September. Headline inflation was 14.63 per cent in September. The gap looks like room to ease. Fiscal pressure is why that room can close again.

What should change

First, pass a legally binding fiscal rule that caps the budget deficit as a share of GDP. The CBN paper asks for this. A soft target that can be rewritten each budget cycle is not a rule.

Second, coordinate fiscal and monetary operations publicly. Abrupt liquidity squeezes after large government disbursements are a costly way to learn that the two sides of the state are not talking. A published framework would let the CBN manage liquidity earlier, not only after the damage.

Finally, stop treating a larger reserve stock as proof that the exchange rate is settled. Watch the deficit path and the domestic borrowing calendar. Those are the variables the CBN study links to depreciation and higher rates.

Nigeria can hold more dollars and still see a softer naira if the deficit keeps setting the pace. For importers, consumers and businesses, the message is that reserve buffers alone will not settle the naira. The deficit path and domestic borrowing calendar still matter for import costs and borrowing costs.