Market News

By Sami Tunji

The foreign exchange reforms implemented by the Central Bank of Nigeria have helped lift external reserves to $50.45bn and supported relative stability in the naira. SAMI TUNJI examines how the measures have eased distortions in the FX market, while warning that the improvements remain vulnerable to external shocks, volatile capital flows, and domestic inflationary pressures

Nigeria’s foreign exchange story has shifted from crisis management to cautious optimism, with the naira staging a notable recovery across market segments and external reserves climbing above projections.

When the CBN moved in 2023 to unify exchange rates, the immediate effect was a sharp depreciation of the naira. The adjustment exposed distortions that had built up over years of multiple windows and administrative controls. Businesses faced higher input costs, inflation accelerated, and foreign investors reassessed currency risk.

Since then, the naira has recovered part of its losses. It ended February 2026 at N1,368.50/$ in the official market, up from N1,384.50/$ at the start of the month, reflecting a modest month-on-month appreciation. Data from the CBN shows that despite late-month volatility, the currency maintained a firmer position relative to January. The naira’s performance shows signs of gradual improvement compared to the previous month as the local currency opened January 2026 at N1,431/$ and closed at N1,391/$. February’s opening rate was N1,384.5/$, with a closing rate of N1,368.5/$. The recovery has coincided with improved foreign exchange liquidity and a rebound in external reserves.

The current rate is higher than an earlier projection by investment house Afrinvest, which estimated that the naira would trade at N1,431.06/$ in 2026. In its 2025 Macroeconomic Review and 2026 Outlook, it considered five methodologies, including the REER Model, MZM Model, M3/FX Reserves Model, the Federal Government’s budget benchmark, and the PPP Model, to arrive at its projection of N1,431.06/$.

Providing reasons for the projection, analysts at Afrinvest said, “Our outlook for the naira’s resilience in 2026 is underpinned by the following assumptions: the Federal Government will formally align its CGT policy change with FPI expectations (a complete reversal to 10.0 per cent or a competitive range of 20.0–25.0 per cent) before implementation in January 2026. Crude oil production volatility is expected to skew upwards in 2026, supported by improved security around oil assets and continued strategic investments by major domestic operators.

“Reduced speculation on the naira (notwithstanding the risk of pre-election spending) is anchored on the success of the CBN’s EFMES since its November 2024 launch. A lower import bill is also expected due to the growing domestic supply of PMS, related products, and fertilisers, which previously accounted for about 50.0 per cent of the import bill monthly.”

The apex bank noted that reforms are expected to further enhance efficiency and transparency, narrow the premium between the Nigerian Foreign Exchange Market and Bureau de Change rates, and sustain exchange rate stability. In addition, improved domestic oil refining capacity is expected to reduce foreign exchange demand for fuel imports.

The structural question is whether the reforms have fully entrenched a market-clearing system or whether stability still depends on tight liquidity control and favourable oil dynamics.

Rising reserves amid sustainability questions

Nigeria’s gross external reserves rose to $50.45bn as of 16 February 2026, marking the highest level in 13 years, as the CBN signalled stronger confidence in the country’s external position. CBN Governor, Olayemi Cardoso, disclosed this at the end of the 304th Monetary Policy Committee meeting in Abuja. Cardoso said the gross reserves position now provides an import cover of 9.68 months for goods and services. The reserves rose from $40.19bn at the end of 2024 to $45.71bn at the end of 2025, reflecting a $5.52bn increase. The apex bank attributed the improvement to robust accretion to foreign exchange reserves, supported by higher export earnings and increased remittance inflows.

The CBN is expected to exceed its projection for the reserves in 2026. In its 2026 Macroeconomic Outlook, the apex bank, “The external reserves are projected at $51.04bn in 2026, compared with $45.01bn in 2025. The external reserves are expected to be boosted by reduced pressure in the FX market based on the anticipated rise in oil earnings, sovereign bond issuance, and diaspora remittance inflows.

“Additionally, the Dangote refinery’s expansion of its nameplate capacity to 700,000 bpd from 650,000 bpd in 2025 and eventually to 1.4 million bpd in the medium term would further support the growth in external reserves,” the report read.

The factors cited include higher oil earnings, bond issuance, diaspora transfers and expanded domestic refining. Brent crude has recently traded around $72 per barrel amid renewed geopolitical tensions in the Middle East, raising concerns about possible supply disruptions through the Strait of Hormuz.

However, part of the naira’s recent stability also reflects active liquidity management by the CBN. The Managing Director of Afrinvest West Africa Limited, Ike Chioke, said in a note to investors that the currency is likely to trade within a similar band in the near term, supported by the bank’s liquidity operations and domestic refining activity.

The President of the Association of Bureaux De Change Operators of Nigeria, Aminu Gwadabe, said the naira had remained relatively stable for several months. Stability, though, is not the same as equilibrium. The market continues to respond to official liquidity injections, and exchange rate levels remain sensitive to shifts in capital flows and fiscal operations.

Headline reserve growth tells only part of the story. In a recent statement, it was noted that Cardoso disclosed that Nigeria’s net foreign exchange reserves rose sharply to $34.80bn at the end of 2025, representing a 772 per cent increase from $3.99bn recorded at the end of 2023 and signalling what he described as a significant strengthening in the country’s external buffers.

‘Gross reserves’ refer to the total stock of foreign assets held by the CBN, including foreign currencies, gold and other external assets. Net reserves, however, strip out short-term liabilities and obligations, providing a clearer picture of the portion of reserves that is readily available to defend the naira and meet external commitments.

According to the CBN governor, the figures “emphasised the benefits of increased transparency and credibility in foreign exchange management, boosting investor confidence, attracting stronger FX inflows, and improving reserve management practices aimed at preserving capital, ensuring liquidity, and supporting long-term sustainability”. He noted in the statement that the improvement represents “a substantial strengthening in both the level and quality of Nigeria’s external buffers over the past three years.” Cardoso also said that the apex bank would continue “supporting orderly foreign exchange market operations, enhancing confidence in Nigeria’s external position and sustaining macroeconomic stability in line with its statutory mandate”.

The improvement indicates a stronger buffer against external shocks and debt service obligations. Nigeria’s sovereign risk spread has declined to levels last seen before the pandemic, reflecting improved investor perception.

Yet the composition of inflows matters. Workers’ remittances for the first nine months of 2025 stood at $15.466bn, according to CBN data. Portfolio flows, bond issuance and diaspora transfers have contributed to reserve accretion. Oil exports remain relevant, but analysts note that non-oil inflows have played an increasing role.

The Chief Executive Officer of the Centre for the Promotion of Public Enterprise, Dr Muda Yusuf, said the reforms underpin the improvement. “Well, the outlook for me is positive because I do not see anything derailing these reforms [forex reform, fuel subsidy, etc.]. It is these reforms that have brought about stability. And it is this stability that has inspired confidence. It is the confidence that has allowed the improvement in the reserves,” he said.

He added that the reserves were not driven solely by oil, citing foreign direct investment, portfolio flows, diaspora transfers and non-oil exports.

Other analysts, however, caution that election cycles in Nigeria have historically been associated with policy uncertainty, increased foreign exchange demand and potential capital flow reversals. They argue that sustaining reserve growth in 2026 will require restraint in fiscal spending and limited foreign exchange intervention.

The scale-up in reserves strengthens Nigeria’s external position for now, but durability will depend on consistent policy signals and the stability of capital inflows, which can reverse under stress.

The CBN governor acknowledged potential risks, including global shocks, oil price volatility, pre-election spending pressures and fiscal deficits. However, he expressed optimism that the current trajectory is sustainable, provided policy consistency is maintained and diversification efforts continue. He noted that the elimination of multiple exchange rate windows, clearance of foreign exchange backlogs and strengthened market surveillance have contributed to steady accretion. “As long as we are able to continue in this particular manner, we will see a regular accretion to our reserves,” Cardoso said.

Reform agenda, monetary shift and policy trade-offs

The foreign exchange reforms form part of a broader adjustment programme launched in 2023. The government liberalised the FX market, ended CBN financing of fiscal deficits and removed fuel subsidies. The CBN also cleared more than $7bn in FX backlog and reduced multiple exchange rate practices.

Nigeria returned to international capital markets last December, and rating agencies have since upgraded the country. A new private refinery operating in a deregulated market has reduced demand for foreign exchange for refined fuel imports, easing structural pressure.

At the same time, inflation surged following the initial reforms, eroding purchasing power. The CBN tightened monetary policy aggressively before recently easing its stance.

Speaking at the Monetary Policy Forum themed ‘Managing the Disinflation Process’, Cardoso said coordination was essential. “Managing disinflation amidst persistent shocks requires not only robust policies but also coordination between fiscal and monetary authorities to anchor expectations and maintain investor confidence. Our focus must remain on price stability, the planned transition to an inflation-targeting framework, and strategies to restore purchasing power and ease economic hardship,” he said.

He added that the Monetary Policy Committee reduced the policy rate after months of disinflation. The CBN also introduced new minimum capital requirements for banks, effective March 2026, aimed at strengthening financial sector resilience.

The Managing Director of Financial Derivatives Company, Bismarck Rewane, said the naira’s fair value based on purchasing power parity is about N1,256.79 to the dollar, suggesting the currency is undervalued by roughly 11 per cent. He noted that exchange rates tend to converge towards parity-implied values over a five-year period.

The reforms have changed the operating framework of the foreign exchange market and rebuilt reserves from low levels. The trade-offs are visible in higher prices, tighter liquidity conditions and ongoing vulnerability to external shocks. The policy challenge now is less about announcing reforms and more about sustaining discipline when fiscal and political pressures intensify.

Sami Tunji