Market News

BY Chima Nwokoji

The Central Bank of Nigeria (CBN) is navigating a delicate balancing act as it seeks to stabilise the naira without allowing it to swing too far in either direction. After recently intervening in the foreign exchange market to slow the currency’s rapid appreciation, CHIMA NWOKOJI looks at the rationale behind the apex bank’s stability signal in latest intervention. 

In a delicate and high-stake monetary balancing act, the Central Bank of Nigeria (CBN) is confronting a paradox that defines emerging market currency management: how to shield the naira from destabilising depreciation without allowing a surge in appreciation that could prove equally disruptive.

On February 23, the apex bank reportedly stepped into the foreign exchange market to purchase dollars, effectively slowing the naira’s recent rally. The intervention surprised some observers who had welcomed the currency’s strengthening streak and anticipated a return to the symbolic N1,000 per dollar mark — a milestone publicly championed by prominent business figures such as Femi Otedola and Aliko Dangote.

Yet, monetary authorities appear cautious. Analysts describe the recent momentum as a potential “flash appreciation”—a rapid strengthening not fully anchored in structural fundamentals. For policymakers, the risk is clear: sharp movements in either direction can unsettle markets, distort incentives and undermine long-term competitiveness.

Stability is not one-sided

Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, said exchange rate stability must be understood as a two-way objective.

“Exchange rate stability is not only about ensuring that there is no depreciation. It is also about avoiding unsustainable appreciation,” he explained in a chat with the Nigerian Tribune.

According to Yusuf, when the naira appreciates at a pace that may not be sustained, it presents a strategic opportunity for the CBN to accumulate foreign reserves. By purchasing dollars, the central bank becomes a net buyer in the foreign exchange market, strengthening its buffer against future volatility.

“The whole idea is to build reserves so that when challenges arise, the CBN can support the currency. Stability means avoiding undue depreciation and also avoiding appreciation that cannot be sustained,” he said.

Yusuf further cautioned that a strong currency is not universally beneficial. Rapid appreciation makes imports cheaper, potentially discouraging local production and weakening export competitiveness. “If it becomes cheaper to import than to produce locally, that is a disadvantage. The objective is balance—not too weak, not too strong,” he stated.

Political signals and market reality

Public reaction to the naira’s rebound has been mixed. Supporters of President Bola Tinubu have cited the appreciation as evidence that reforms are gaining traction. Others argue that external dollar weakness, rather than domestic policy adjustments, is driving the trend.

Vice-President Kashim Shettima added a political dimension to the debate. Speaking at the Progressive Governors Forum’s Renewed Hope Ambassadors Strategic Summit, in Abuja, he said the naira could have strengthened to N1,000 per dollar within weeks if the CBN had not intervened to ensure stability.

“Our currency is strong and stable. But for the purpose of market stability, the CBN generously intervened,” Shettima said, describing the action as prudent, rather than restrictive.

Dr. Yemisi Ayinde of Covenant University urged caution in attributing exchange rate gains solely to global shifts away from the U.S. dollar.

“Exchange rates are relative asset prices determined within a macro-financial equilibrium framework shaped by interest rate differentials, capital mobility, sovereign risk premia and monetary credibility,” she said.

While acknowledging incremental reserve diversification and bilateral trade settlements globally, Ayinde stressed that the dollar remains dominant in global reserves, trade invoicing and foreign exchange turnover. She argued that Nigeria’s recent currency movement is more coherently explained by domestic reforms—exchange rate unification, monetary tightening to anchor inflation expectations, enhanced FX transparency and improved liquidity management.

However, she warned that sustainability hinges on deeper structural reforms.

According to her, “Without productivity growth, export diversification, fiscal consolidation and institutional strengthening, currency stability may remain cyclical and sentiment-driven.”

Progress with exposure

Former Head of Research at Financial Derivatives Company Limited and founder of ACPAE Consulting, Izuchukwu Clement Igboanugo, partly agrees.

He recalled that in 2023–2024, the naira weakened regardless of global dollar movements — a pattern suggesting domestic distortions and weak price discovery. The recent alignment of naira appreciation with moderating inflation and rising reserves, he said, reflects improved market coherence and policy credibility.

“That is positive news,” he noted. “But increased responsiveness to global conditions also implies greater exposure to external shocks.”

On claims that the world is abandoning the dollar, Igboanugo described the narrative as overstated. While the dollar’s share of global reserves has declined modestly over the years, its nominal value has continued to grow. “What we are seeing is diversification at the margin, not a regime shift,” he said.

Group Chief Executive Officer of Cowry Asset Management, Mr. Johnson Chukwu, warned that macroeconomic stability achieved without productivity gains may prove fragile.

“Forget about macroeconomic stability being permanent. What we have achieved at the macro level, without supporting productivity and infrastructure, will be temporary,” he said.

Chukwu highlighted the composition of foreign inflows as a concern. Of the approximately $17.78 billion recorded in the first nine months of last year, only about $565 million was foreign direct investment (FDI), representing roughly 3 per cent. The bulk comprised foreign portfolio investment (FPI), which is highly sensitive to exchange rate expectations and interest rate differentials.

Portfolio investors are attracted by high yields and prospects of exchange gains. However, if confidence falters and expectations of depreciation return, capital could exit swiftly, putting renewed pressure on reserves and the naira.

“If foreign portfolio investors begin to leave, the naira will come under pressure again. Inflation will reverse, and the gains we are celebrating could evaporate,” Chukwu warned.

Food, production and competitiveness

Chukwu also raised concerns about the impact of appreciation and import policies on domestic agriculture. Lower food inflation, he argued, has partly been supported by duty waivers on imported food. Yet, farmers report that farm-gate production costs exceed the retail cost of imported staples.

If domestic producers struggle to compete, loan defaults may rise and future planting seasons could be compromised, weakening food security. A subsequent exchange rate reversal could then amplify food inflation.

Data compiled from the CBN and peer African central banks show that since 2015, the naira has depreciated more sharply than several regional counterparts. From N192.44 per dollar in 2015 to around N1,359.50 today, the decline exceeds 600 per cent — steeper than Egypt, Ghana, Kenya or South Africa over the same period.

This history explains the CBN’s caution. Having endured years of volatility, policymakers are wary of both abrupt depreciation and unsustainable appreciation.

Managing expectations

The CBN’s dilemma is therefore not simply about defending a number on a screen. It is about managing expectations, smoothing volatility, building buffers and fostering competitiveness in a structurally import-dependent economy.

For households, currency stability protects purchasing power. For businesses, predictability reduces hedging costs and supports investment planning. For policymakers, the ultimate test is whether exchange rate management can transition from reactive intervention to structurally anchored stability.

Preventing excessive depreciation guards against inflation and debt-servicing stress. But unchecked appreciation risks eroding export competitiveness and encouraging import dependence. The challenge is to convert episodic gains into durable strength.

As Nigeria navigates this tightrope, the message from analysts is consistent: sustainable stability requires productivity, diversification and institutional credibility. Without these, the naira’s fortunes—whether rising or falling—may remain vulnerable to the next shift in sentiment.