MARKET NEWS

The Central Bank of Nigeria’s recent measures have lifted dollar liquidity in the foreign exchange market, raising hopes of a more stable naira. These reforms, coupled with rising inflows, have provided short-term relief, but sustaining the trend will depend on deeper structural changes, SAMI TUNJI reports

The naira has once again taken centre stage in Nigeria’s economic discourse. After months of turbulence, the local currency is now showing signs of resilience, due largely to the Central Bank of Nigeria’s reforms and rising foreign inflows. The naira appreciated 1.1 per cent last week, closing at N1,520/$, after a $50m injection by the Central Bank of Nigeria and higher foreign portfolio inflows from Open Market Operation auctions. The short-term gains reflect improved liquidity, with analysts pointing to stronger inflows as a key factor behind reduced volatility.

Data from the National Bureau of Statistics show that capital importation reached $5.64bn in the first quarter of 2025, compared to $3.37bn in Q1 2024, representing a 67.1 per cent increase. The banking sector attracted $3.1bn, equivalent of 55.44 per cent of total inflows. Portfolio investment accounted for $5.2bn, or 92.25 per cent of total inflows, while foreign direct investment was only $126.29m.

For the Association of Bureaux De Change Operators of Nigeria, the trend points to long-term benefits. Its President, Dr Aminu Gwadabe, said that with more foreign exchange inflows into the economy, the long-term stability of the naira is expected.

However, foreign direct investments into Nigeria dropped sharply by 70.06 per cent quarter-on-quarter to $126.29m in the first quarter of 2025, down from $421.88m recorded in the final quarter of 2024. The steep decline in FDI occurred despite an overall increase in capital importation into the country, indicating that foreign investors are favouring short-term, high-yield financial instruments over long-term, productive commitments in the Nigerian economy.

On a year-on-year basis, FDI posted a modest growth of 5.97 per cent compared to $119.18m recorded in the same period of 2024. However, this marginal increase has done little to shift the broader trend of dwindling interest in long-term investment. The data show that FDI made up only 2.24 per cent of total capital imported into the country in Q1 2025, down from 8.29 per cent in the preceding quarter and below the 3.53 per cent recorded in Q1 2024.

Although the headline rise in capital importation might suggest renewed investor confidence, a closer examination reveals that over 90 per cent of these inflows were directed into short-term money market instruments, such as government bonds and treasury bills, rather than equity or direct investments. These instruments, while important for managing liquidity and stabilising the naira, do not contribute meaningfully to industrial growth, employment generation or infrastructure development.

Nevertheless, Nigeria’s foreign exchange reserves rose to $41bn on August 19, 2025, the highest level recorded in 44 months, according to data from the CBN.

This marks the highest level since December 3, 2021, and signals a significant recovery following months of depletion, mainly due to pressure from external debt repayments.

The reserves have experienced a strong rally in August, increasing by $1.46bn month-to-date, from $39.54bn on August 1 to $41bn on August 19. This represents a 3.69 per cent increase in less than three weeks. The growth has been steady across the period, with only minor pauses.

The surge began in early August when reserves crossed the $40bn mark on August 7, after closing July at just under $39.4bn. By August 12, reserves had reached $40.5bn, and the momentum continued, pushing reserves past $41bn just a week later.

On average, the reserves have grown by $81m per day in August, reflecting an improvement in foreign exchange inflows relative to outflows. This increase is a positive development for the CBN, strengthening its ability to stabilise the naira and manage liquidity in the official market. It also enhances the bank’s capacity to defend against speculative pressures. Cordros Securities, in a market report, noted that the reserve accretion provides a stronger buffer for interventions and reflects an improvement in FX supply.

Analysts have projected that Nigeria’s external reserves would rise to about $45bn by the end of the year, thus strengthening the ability of the CBN to provide a buffer for the foreign exchange market and general economy. According to the analysts at Cowry Assets Management in their weekly market report, the momentum of reserve growth appears likely to continue, supported by steady offshore inflows and potential external borrowings planned by the government.

“The combination of these factors should keep the reserves on an upward trajectory in the coming months. Our projection suggests that Nigeria’s reserves could rise to about $45bn by the end of 2025, provided global risk conditions remain broadly supportive and offshore flows are not significantly disrupted. With the reserves position strengthening, the CBN will have greater flexibility to sustain its interventionist approach in the FX market. This, in turn, should help to maintain relative stability in the naira across both official and parallel markets,” the analysts at Cowry Assets said.

Although portfolio inflows are volatile, their immediate impact on liquidity has eased market pressure. For now, the naira’s appreciation signals that the reforms are attracting capital and reducing incentives for speculation.

 Reforms reset market expectations

The current stability stems from reforms introduced in 2023. The CBN liberalised the FX market, unified exchange rates, and halted monetary financing of fiscal deficits. The Federal Government removed fuel subsidies and focused on revenue collection and inflation management.

Clearing of the $7bn FX backlog marked a turning point for investors. Nigeria returned to international capital markets in December 2023, issuing new debt instruments. Ratings agencies responded by upgrading the country’s outlook, while multilateral lenders described the reforms as necessary for sustainability.

The World Bank, in its commentary, described the measures as “bold interventions” that address structural weaknesses. Nigeria’s sovereign risk spread fell to its lowest point since January 2020, reflecting improved investor sentiment.

According to Gwadabe, CBN has also taken steps to diversify FX sources. “From moves to improve diaspora remittances through new product development, granting licences to new International Money Transfer Operators, implementing a willing buyer-willing seller FX model, and enabling timely access to naira liquidity for IMTOs, the apex bank has simplified dollar-inflow channels for authorised dealers and other players in the value chain.”

Portfolio managers have noted the shift. “Nigeria appears to be back in business as long-awaited economic reforms take shape,” said East Capital’s Emre Akcakmak. He highlighted improved liquidity and flexibility in profit repatriation as key factors in renewed interest.

These reforms have not eliminated risks, but they have created a clearer policy framework that investors can respond to.

 Capital inflows, GDP rebasing and banking sector

The structure of inflows reveals a heavy reliance on short-term capital. Afrinvest West Africa reported that money market instruments attracted $4.2bn in Q1 2025, up 162.2 per cent year-on-year. Bond inflows reached $877.4m, while equities attracted $117.3m. The United Kingdom was the dominant source of inflows, contributing $3.68bn, or 65.26 per cent of the total.

While this provides liquidity, the low level of FDI underscores that Nigeria has not yet secured long-term investment commitments. Still, the volume of inflows reflects improved investor confidence compared to 2024.

At the same time, Nigeria’s rebased GDP has provided a clearer picture of the economy. The National Bureau of Statistics reported that nominal GDP stood at N372.82tn in 2024, compared with N314.02tn in 2023 and N274.23tn in 2022. The rebasing showed a rising share for services and agriculture, while industry declined.

Statistician-General Adeyemi Adeniran explained, “It’s not just about a bigger number but about accurate, timely data that supports smarter policy and economic planning.”

Development economist Aliyu Ilias added that previously uncaptured sectors are now reflected. “By rebasing our GDP now, the NBS included those areas properly. This new visibility will make Nigeria appear much stronger to foreign investors, which will naturally help us attract more capital,” he said.

In parallel, the CBN has pressed ahead with banking recapitalisation to prepare the sector for larger credit demands. CBN Governor Olayemi Cardoso earlier said, “Will Nigerian banks have sufficient capital relative to the financial system’s needs in servicing a $1tn economy in the near future? In my opinion, the answer is ‘No’ unless we take action.” The recapitalisation is expected to strengthen balance sheets and enable banks to support the Federal Government’s $1tn GDP target by 2030.

Outlook for naira stability

The naira’s recent gains reflect improved liquidity and policy clarity. Inflation has also eased, falling to 21.88 per cent in July, from higher levels earlier in the year. Lower global commodity prices and improved domestic supply have contributed to the decline.

Analysts at CSL Stockbrokers recently warned that FX inflows could remain under pressure in the second half of the year, thereby limiting the scope for further appreciation of the naira. However, a report by CSL Stockbrokers noted, “We believe that the Central Bank will remain committed to defending the naira, which could allow the exchange rate to trade between the N1,500-N1,600/US$ band in the second half of the year.

Standard Chartered’s Head of Africa Strategy, Samir Gadio, said, “Portfolio inflows have likely been supported by improved confidence amid key structural reforms, better FX market functioning and moderating dollar-naira volatility, as well as the still-robust nominal yield buffer.”

The primary risk is Nigeria’s reliance on portfolio flows, which are highly susceptible to global economic conditions. If yields in advanced economies rise or global risk appetite weakens, outflows could re-emerge. The low level of foreign direct investment remains a concern, as it limits the durability of inflows.

Nonetheless, the current reserve build-up, the naira’s appreciation, and the reform agenda have created a stronger platform than in previous years. The CBN governor has repeatedly pledged to sustain its measures.