CBN’s Efforts to Stabilize Nigeria’s Forex Market and the Naira’s Rally
The Central Bank of Nigeria (CBN) has implemented various measures to curb volatility in the foreign exchange market, which speculators had been exploiting to weaken the naira.
On January 28, the apex bank introduced the Nigerian Foreign Exchange Code, aimed at promoting transparency, accountability, and ethical conduct in forex trading. This, along with other stabilization measures, has begun tightening control over currency speculators.
Impact on Dollar Holders
Forex analyst Michael Nwadike noted that individuals holding dollars are facing losses due to the naira’s recent rally. As many scramble to sell off their dollars in the open market, further losses may be inevitable.
He advised investors to weigh the risks associated with dollar-denominated assets and rethink their strategies given the naira’s recovery. Nwadike emphasized that authorities should implement pro-market strategies to attract foreign investments and encourage confidence in the naira.
“There should be policies that promote long-term capital inflows instead of short-term speculative investments. The government must also focus on economic reforms, ease of doing business, infrastructure development, and a more flexible currency regime,” he stated.
He highlighted that the Electronic Foreign Exchange Matching System (EFEMS), introduced by the CBN, has significantly reduced distortions in the forex market, contributing to the naira’s appreciation.
A Lagos-based forex trader, Olakunle Amos, echoed similar sentiments, stating that a stabilizing naira is beneficial for the economy but unfortunate for those who hoarded dollars.
Experts’ Perspectives on the Naira’s Recovery
Former CBN director Prof. Jonathan Aremu described the naira’s steady appreciation as a positive economic development. However, he stressed the need for increased domestic production to sustain the currency’s strength.
He urged the CBN to focus on economic productivity, rather than relying solely on monetary policies like interest rate adjustments.
“The Quantity Theory of Money suggests that money supply must be matched by economic transactions. If the supply of goods and services does not increase, currency appreciation will not be sustainable,” he explained.
Similarly, Aminu Gwadabe, President of the Association of Bureaux De Change Operators of Nigeria, acknowledged the CBN’s commitment to resolving forex challenges. He noted that despite the high demand for dollars in sectors like manufacturing, tuition, and healthcare, recent initiatives like the FX code policy and EFEMS have helped improve forex liquidity.
CBN Governor Olayemi Cardoso emphasized that EFEMS is a key part of Nigeria’s exchange rate unification policy, designed to enhance transparency and eliminate speculative activities.
He noted that the policy had already doubled monthly remittances, from an average of $300 million in 2023 to nearly $600 million by August 2024.
“We are integrating the Nigerian diaspora into our financial system through policies like non-resident Bank Verification Number (BVN) registration. This will enable more savings and investments back home,” Cardoso added.
Despite improvements, Cardoso argued that the current naira exchange rate does not reflect the currency’s true value. He expects the electronic forex trading system to correct distortions and enhance price discovery.
Inflation and Economic Stability
According to Comercio Partners, Nigeria’s Consumer Price Index (CPI) rebasing in 2024 could result in lower inflation figures.
The National Bureau of Statistics reported that Nigeria’s inflation rate dropped to 24.48% in January, significantly lower than the previous month’s figures.
Comercio Partners noted that factors such as exchange rate stabilization, energy price normalization after fuel subsidy removal, and improved forex liquidity could help Nigeria achieve price stability this year.
A key factor in reducing inflation is expanding local refining capacity, especially with the Dangote Refinery coming online. Domestically refined petroleum could mitigate exchange rate fluctuations, lowering production and transportation costs.
Ifeanyi Ubah, Comercio’s Head of Investment Research, predicts that headline inflation could drop to 15% by mid-2025, signaling gradual economic stabilization.
The Monetary Policy Committee (MPC) recently maintained the Monetary Policy Rate (MPR) at 27.50%, alongside other measures to control inflation and sustain forex stability.
IMF’s View on Dollarization
The International Monetary Fund (IMF) highlighted that in economies with high inflation and currency volatility, individuals often shift to dollar savings as a hedge.
However, reversing dollarization is difficult, even after the initial triggers—such as high inflation—are addressed.
The IMF noted that in heavily dollarized economies, forex is used not just for trade but also for price indexation, real estate, and high-value transactions, reducing reliance on local currencies.
Decline in Dollar Holdings by Central Banks
IMF data shows that the US dollar’s share in global foreign exchange reserves has been gradually declining over the past two decades.
While the euro, yen, and pound have not significantly increased their market share, non-traditional reserve currencies—such as the Chinese renminbi, Canadian dollar, and Australian dollar—are gaining ground.
China, in particular, has been pushing for renminbi internationalization through policies like cross-border payment systems, currency swap agreements, and digital currency pilots. However, its global reserve share remains relatively small.
Conclusion
The CBN’s recent forex policies, including the FX Code and EFEMS, have played a major role in stabilizing the naira and reducing speculative activities. While some investors have faced losses due to the naira’s appreciation, experts agree that long-term economic stability depends on increased production, improved forex liquidity, and strategic monetary policies.
With inflation expected to ease and foreign reserves diversifying, Nigeria is on a path toward a more stable and resilient economy. However, sustaining these gains will require continued reforms, foreign investment incentives, and stronger domestic economic growth.
