The Nigerian naira has shown notable improvement recently, gaining strength due to foreign exchange reforms implemented by the Central Bank of Nigeria (CBN). This progress has brought relief to businesses, with the naira appreciating 0.15% on the official market and 0.24% in the parallel market by Tuesday’s close, narrowing the gap between the two rates. As of February 2025, the naira has gained 2.6% since the beginning of the year. However, despite these gains, there are growing concerns that the currency’s strength may not be sustainable in the long term.
While the naira’s performance is being celebrated, Nigeria’s foreign reserves have experienced a significant decline, dropping by $2.34 billion since January 2025, from a high of $40.92 billion to $38.58 billion. Experts, such as Ayodeji Dawodu, a director at BancTrust & Co., have warned that if the reserves continue to fall at this rate and monetary policy easing begins, it could create uncertainty among foreign investors. The CBN’s ability to intervene in the forex market could be severely limited if reserves continue to deplete.
Another cause for concern is the CBN’s decision to discontinue its weekly dollar sales to Bureau De Change (BDC) operators. According to Stears, a financial data company, ending these sales could widen the gap between official and parallel market rates. The sales had helped stabilize the market by addressing the invisible demand for forex. Without this intervention, there could be increased arbitrage, speculative pressures, and market instability, potentially jeopardizing the progress made by the naira.
While some analysts, such as Bismarck Rewane of Financial Derivatives Company, support the CBN’s efforts to correct the naira’s undervaluation, the overall outlook for 2025 remains uncertain. Rewane emphasized that the naira’s fair value is significantly higher than its current rate, and the CBN’s interventions aim to align the currency with market realities. However, challenges such as oil revenue volatility, reduced forex reserves, and weak investor sentiment could hinder the sustainability of this progress. The stability of both the official and parallel markets hinges not only on CBN actions but also on broader economic reforms, including improved security and boosted foreign exchange inflows.
SOURCE: PUNCH