Nigeria is burning through foreign-exchange reserves at a rate not seen in four years, raising concerns that the central bank is depleting its dollar holdings to support the naira after pledging it would allow the currency to float more freely.

Liquid reserves declined 5.6% since March 18, when the naira started its rebound from record-low levels against the dollar, to $31.7 billion as of April 12, according to Bloomberg’s calculations based on the latest available datafrom the Central Bank of Nigeria. That’s the biggest decline in a similar period since April 2020, according to data compiled by Bloomberg.

The currency of Africa’s largest oil producer has recovered most of its losses since a 43% devaluation in January. That came after the Central Bank of Nigeria introduced measures to improve liquidity, attract capital inflows and allow the market to determine the naira’s exchange rate. As part of the reforms, the CBN pledged to clear a backlog of pent-up dollar demand.

“The CBN does appear to be using its FX reserves to clear the valid backlog, and return the naira to a realistic exchange rate,” said Charles Robertson, the London-based head of macro strategy at FIM Partners. “My assumption is they hope to encourage others – local and foreign investors – to start investing in the local currency, and return private sector liquidity to the foreign exchange market.”

Nigeria still has a sizable cushion of foreign-exchange reserves, buoyed by a rally in oil prices and inflows from multi-lateral loans. Gross reserves of around $32.6 billion cover about six months’ worth of imports, according to the International Monetary Fund.

The central bank said last month it had cleared a backlog of overdue dollar purchase agreements estimated at $7 billion since the beginning of the year. That was built over years as the central bank pegged its currency against the dollar, leading to a scarcity of foreign currency that deterred foreign portfolio investment. However, it’s unclear how much dollar debt the CBN retains on its books.

The publication of the central bank’s financial statements late last year showed it had securities lending agreements with JP Morgan Chase & Co. for $7 billion and another $500 million with Goldman Sachs Group Inc. It is not clear if those obligations have been settled. A spokesperson for the central bank didn’t immediately respond to Bloomberg’s telphonic request for comment.

The FX reserves have fallen despite a surge of inflows into capital markets following 600 basis points of cumulative interest rate hikes in February and March, which increased the allure of Nigerian local debt. Foreign portfolio inflows exceeded $1 billion in February, bringing total receipts so far this year to at least $2.3 billion, according to the central bank.

“The CBN will also be aware that new inflows, from Afreximbank, the World Bank, and a possible eurobond, plus the benefit of higher oil prices and a likely return of remittances via official and semi-official channels (rather than bitcoin) will allow reserves to stabilize or rise again,” Robertson said.

Bloomberg