MARKET NEWS

BY  Sami Tunji

As Nigeria’s external sector undergoes transformation, SAMI TUNJI examines how foreign exchange reforms, declining central bank dominance, rising diaspora inflows, and transparency are redefining the dynamics of the foreign exchange market.

Nigeria’s external sector is undergoing realignment as the Central Bank of Nigeria’s foreign exchange reforms begin to alter market behavior, investor engagement, and diaspora inflows. The country is witnessing structural shifts driven by market liberalisation, policy credibility, and global conditions, as these factors are influencing Nigeria’s balance of payments, investor sentiment, and long-term external resilience.

Against a backdrop of global economic uncertainty, persistent inflation, and oil market volatility, these reforms shape the country’s foreign exchange market architecture and influence broader economic outcomes. For the first quarter of 2025, Nigeria recorded a net foreign exchange inflow of $15.2bn, a development that marks a cautious but notable shift toward a more transparent, market-determined foreign exchange system. Figures presented at the Nigerian Investor Forum during the IMF/World Bank Spring Meetings in Washington, DC, point to the early outcomes of an 18-month reform agenda aimed at stabilising the macroeconomic environment, rebuilding investor confidence, and creating more predictable FX flows.

FX inflows, outflows

Data presented by Nigerian authorities revealed that total FX inflows reached $28.92bn in Q1 2025, representing an 18.7 per cent increase from $24.37bn in the same period of 2024. On the other hand, outflows expanded significantly to $13.72bn, up by 32.7 per cent from $10.34bn. While the rise in outflows is partly attributed to increased import activity and profit repatriation by foreign investors, the stronger inflow position indicates growing engagement with Nigeria’s external sector. Monthly trends show January with inflows of $9.41bn and outflows of $4.84bn, producing a net inflow of $4.56bn. In February, inflows peaked at $10.64bn, while outflows fell to $3.72bn, resulting in the highest net inflow of $6.91bn during the quarter. However, March recorded moderate inflows of $8.88bn and outflows of $5.16bn, producing a net inflow of $3.72bn.The evolving pattern suggests a more responsive FX market, adjusting to seasonal variations in trade and investment flows while navigating lingering structural weaknesses in Nigeria’s economic framework.

Speaking at the conclusion of the 2025 Spring Meetings of the International Monetary Fund and the World Bank Group in Washington, DC, the CBN Governor, Yemi Cardoso, noted the key developments in the country’s external sector. “Nigeria’s external buffers have also strengthened considerably,” he said. “Our foreign reserves now exceed $38bn, providing nearly 10 months of import cover. This robust buffer enables us to better withstand external shocks, whether from declining oil prices or global financial turbulence, thereby safeguarding our economy.” He added, “Again, thanks to disciplined reforms and policy clarity, the naira has stabilised at a more sustainable level against the US dollar. The once-wide gap between the official and parallel market rates has all but disappeared, a first in Nigeria’s recent history, and speculative arbitrage has all but vanished.”

The Director of Trading at Verto, Charlie Bird, recently stated that dollar liquidity in Nigeria has become more balanced, enabling foreign investors and airlines to repatriate funds more easily. Speaking at the Cordros Asset Management seminar titled “The Naira Playbook”, Bird noted that improved foreign exchange liquidity, driven by recent reforms from the Central Bank of Nigeria, has made the country more attractive to foreign investors. Also, Nigeria’s non-oil export sector recorded significant growth in the first quarter of 2025, with the total value hitting $1.791bn, according to the Nigerian Export Promotion Council.

This was a 24.7 per cent increase compared to the $1.436bn recorded in the same period of 2024, the Executive Director of the council, Nonye Ayeni, noted. She said the impressive performance highlights the effectiveness of ongoing efforts to diversify the economy away from its dependence on crude oil. Market liberalisation and declining central bank dominance. Central to the external sector’s transformation is the CBN’s recalibration of its role in the foreign exchange market. Once the dominant supplier of foreign exchange, the Bank’s share of daily FX turnover has dropped to less than two per cent in 2025, a sharp decline from the double-digit contributions of previous years. The deliberate reduction in direct intervention signals a strategic shift from market dictation to market guidance. Cardoso, recently speaking at the Nasdaq MarketSite in New York, emphasised that the CBN’s intervention framework would henceforth focus on managing extreme market volatility rather than setting exchange rates.

This departure from discretionary supply mechanisms is intended to foster deeper market liquidity and facilitate autonomous price discovery. The impact is already discernible. Average monthly FX turnover rose to $8.1bn in 2025, compared to $5.5bn in 2024, suggesting that non-CBN participants, such as exporters, remittance inflows, and portfolio investors, are increasingly driving market transactions. However, the sustainability of this trend remains contingent on broader macroeconomic stability and the resilience of external inflows. The structure of reforms.

The observed shifts in Nigeria’s external sector did not occur spontaneously. They are outcomes of a series of coordinated policy measures introduced since mid-2023. Chief among these was the unification of the multiple exchange rate windows, which had previously fragmented the FX market and encouraged rent-seeking behaviour.The adoption of the “willing buyer, willing seller” model created a single, market-driven rate regime, allowing the naira’s value to be determined by supply and demand fundamentals. Although the transition initially triggered significant volatility, the stabilisation process has gradually narrowed the gap between official and parallel market rates. In December 2024, the introduction of the Electronic Foreign Exchange Matching System further tightened market operations. EFEMS ensures real-time, automated matching of FX trades in the interbank market, reducing opportunities for manipulation and promoting greater price transparency.

Mandatory use of EFEMS for all authorised dealers has reinforced regulatory oversight and improved the integrity of market pricing mechanisms. In January 2025, the CBN unveiled the Nigerian Foreign Exchange Market Conduct Code, imposing strict ethical standards on FX market participants. The code outlines rules on transparency, fairness, and accountability, and establishes mechanisms for compliance monitoring and sanctions against violators. This framework is intended to align Nigeria’s FX market practices with international norms, strengthen investor protection, and enhance overall market discipline. In addition, Nigeria’s reform strategy has increasingly positioned the diaspora community as a critical source of foreign exchange liquidity. Recognising the significance of remittances, the CBN introduced the Non-Resident Nigerian Ordinary Account and the Non-Resident Nigerian Investment Account.

The NRNOA allows Nigerians abroad to remit funds for personal use, while the NRNIA facilitates investments in domestic financial assets such as bonds and equities. Both accounts are structured to operate in either naira or foreign currency, depending on depositor preferences, and are supported by streamlined Know Your Customer protocols and digital onboarding platforms. The policy shift has begun to yield results. Remittance inflows rose by 8.9 per cent to $20.93bn in 2024, while inflows through International Money Transfer Operators grew by 43.5 per cent to $4.73bn. By making official channels more attractive and improving ease of access, the CBN aims to gradually shift remittance flows away from informal routes, boosting external reserves and supporting exchange rate stability. However, challenges persist. The cost of remitting funds to Nigeria remains relatively high compared to global averages, and concerns around political and economic risk continue to temper diaspora investment appetite.

Sustaining momentum in diaspora inflows will require further reforms in financial sector regulation, investment climate improvements, and macroeconomic governance. Global tailwinds and external vulnerabilities. While domestic reforms have provided a critical foundation, external factors have also contributed to Nigeria’s improving FX metrics. Global crude oil prices averaged $84 per barrel in Q1 2025, supported by continued OPEC+ production cuts and geopolitical tensions in Eastern Europe and the Middle East. Stable oil prices provided a fiscal cushion for Nigeria’s external reserves and allowed for greater confidence in market liberalisation.

At the same time, the deceleration in interest rate hikes by the US Federal Reserve has revived investor interest in emerging and frontier markets, leading to modest portfolio inflows into Nigerian assets. Nevertheless, the external sector remains exposed to substantial downside risks. A sharp correction in oil prices, an abrupt reversal in global risk appetite, or a resurgence of protectionist trade policies could quickly undo recent gains. Furthermore, Nigeria’s external accounts remain overly dependent on hydrocarbons, with non-oil exports accounting for a relatively small proportion of total foreign exchange receipts.

Inflation challenge

Nigeria’s external sector transformation is occurring alongside persistent inflationary pressures. In March 2025, headline inflation rose to 24.23 per cent, driven largely by food price increases and energy costs. Speaking at the conclusion of the 2025 IMF and World Bank Spring Meetings in Washington, D.C., Cardoso emphasised the urgency of tackling inflation to stabilise household incomes and improve the cost of living across the country.

He described inflation as the most significant threat to the economic welfare of Nigerians, pledging the CBN’s commitment to reducing inflation to single digits over the medium term. Meanwhile, the IMF projects Nigeria’s inflation rate to average 26.5 per cent in 2025, following the recent rebasing of the Consumer Price Index. Although this marks a decline from 33.2 per cent in 2024, inflation is expected to spike again to 37.0 per cent by 2026, underlining the volatility of Nigeria’s economic landscape. High inflation undermines Nigeria’s external competitiveness, erodes purchasing power, and complicates monetary policy management. While exchange rate unification has removed some market distortions, the depreciation of the naira has contributed to imported inflation, further exacerbating cost-of-living challenges. Addressing inflation is thus central to preserving the gains of FX reforms. Without credible inflation management, Nigeria risks a feedback loop of currency weakness, capital flight, and reserve depletion that could undermine the stability of the external sector.

External sector outlook

According to the Minister of Finance and Coordinating Minister of the Economy, Wale Edun, “Despite global uncertainty, Nigeria is poised for resilient, inclusive growth.” However, the outlook for Nigeria’s external sector in the medium term will be shaped by a complex interplay of domestic and external factors. On the domestic front, the pace and consistency of reforms in fiscal policy, trade facilitation, and sectoral competitiveness will determine whether the external sector gains are consolidated or eroded. Externally, oil price dynamics, global interest rate trends, and geopolitical developments will influence capital flows and export earnings. While Nigeria cannot control these external variables, building resilience through structural reforms and economic diversification can mitigate their impacts.

Furthermore, the sustainability of the FX market liberalisation will depend on Nigeria’s ability to continue attracting autonomous inflows from exports, diaspora remittances, and investment, without reverting to administrative measures that distort market functioning. The International Monetary Fund, while acknowledging Nigeria’s progress, has called for continued vigilance. In a recent statement, the IMF advised Nigeria to prioritise the rebuilding of fiscal buffers, sustain monetary orthodoxy, and deepen structural reforms to support private-sector-led growth.

The IMF noted that while FX market liberalisation has improved transparency, further efforts are required to enhance reserve adequacy, strengthen trade competitiveness, and improve the business environment. It also emphasised the need for enhanced social protection mechanisms to mitigate the short-term adverse effects of subsidy reforms and foreign exchange adjustments on vulnerable populations. Similarly, ratings agencies have adopted a cautious stance. While acknowledging reform momentum, they have warned that political risks, fiscal pressures, and external shocks could still derail progress if policy consistency is not maintained. In a volatile and increasingly unpredictable global environment, Nigeria’s ability to anchor its external sector reforms in sound policy frameworks and disciplined implementation will determine whether the recent gains represent a temporary reprieve or the foundation for lasting resilience.