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The naira’s real effective exchange rate is now arguably the most competitive in two decades, a development hailed as a major milestone for Nigeria’s economic policy.

Yemi Kale, group chief economist and managing director of Afreximbank, made this observation in his keynote address titled “Reform and Resilience: Strengthening Nigeria’s Economic Foundations” at The Platform Nigeria event in Lagos.

Kale explained that, in practical terms, Nigeria is no longer compelled to sell scarce foreign exchange at subsidised rates. Exporters have also been freed from the penalties of an overvalued currency, creating a healthier environment for trade and investment.

The introduction of a more flexible exchange rate regime acts as a natural shock absorber, allowing the currency to adjust gradually to fluctuations in oil prices or global economic conditions, rather than triggering sudden crises in the balance of payments.

Investors have responded positively to these reforms, as reflected in rising foreign exchange reserves, which climbed from approximately $32.9 billion at the end of 2023 to over $38.8 billion by mid-October 2024. By mid-2025, verified foreign exchange backlogs had largely been cleared, and reserves had surpassed $42 billion, a three-year high, signaling renewed confidence in Nigeria’s economic outlook.

For businesses, the new foreign exchange system has been transformative. Companies no longer waste energy lobbying for scarce official foreign exchange allocations and can instead focus on improving productivity and competitiveness.

A more competitive naira has made Nigerian products more affordable on the international market, stimulated non-oil exports, discouraged wasteful imports, and encouraged local production.

Non-oil exporters and domestic companies reliant on imported inputs have reported stronger earnings, while Nigeria’s trade balance is reportedly improving.

The naira’s performance on the foreign exchange markets underscores these positive trends. On Thursday, October 2, 2025, the currency converged at N1,455 per dollar in both the official foreign exchange market and the parallel (black) market, effectively closing the long-standing exchange rate gap.

At the Nigerian Foreign Exchange Market (NFEM), the naira appreciated by 1.4 percent, with the dollar quoted at N1,455.23, up from N1,475.34 at the end of September. Similarly, in the parallel market, the naira strengthened by 2.7 percent to close at N1,455, up from N1,495 just two days earlier.

Read also: Naira ends week with N14.98 gain on sustained liquidity

Bala Moh’d Bello, a member of the Monetary Policy Committee (MPC), attributed the naira’s relative stability to tighter liquidity conditions, growing investor confidence, and recent reforms in foreign exchange management.

He noted that speculative activities in the foreign exchange market have declined significantly, enhancing transparency and supporting market-based price discovery. Bello added that this stability is expected to persist in the medium term, supported by rising reserves, which stood at $40.11 billion as of July 18, 2025, enough to cover about 9.5 months of imports.

Kale further emphasised that these reforms have strengthened macroeconomic management by providing the Central Bank of Nigeria (CBN) with clearer policy signals through a unified, more market-reflective, and rules-based exchange rate system. This shift has enhanced the effectiveness and credibility of monetary policy, laying firmer foundations for sustainable growth.

“Reforms are not merely policy adjustments but deliberate, strategic decisions aimed at stabilizing the present and securing a prosperous future,” Kale said. “They require patience, persistence, disciplined execution, and the capacity to follow through.”

However, these reforms have come with a painful short-term cost that was not sufficiently cushioned. Inflation, which had already accelerated after the removal of petrol subsidies, surged further following the naira float, as imported goods, central to family consumption and critical inputs for manufacturers became more expensive.

This experience is not unique to Nigeria. When Egypt floated its pound in 2016, inflation quickly exceeded 30 percent within months. However, Egypt managed to restore investor confidence and stimulate growth by allowing the currency to reach market-clearing levels, coupled with efficient and targeted social safety nets that cushioned vulnerable households from the initial cost shocks.

Unlike Nigeria, Egypt expanded food subsidy cards and rolled out cash allowances to low-income families, providing a valuable lesson: stabilising the currency market is fundamental to long-term economic health, even if it causes short-term price turbulence.

Strengthening Nigeria’s social protection systems will be critical to ensuring the long-term benefits of reform are more widely and equitably shared, he said.

Early evidence indicates that despite the initial hardships, Nigeria’s foreign exchange reforms are opening doors to a more diversified and export-oriented economy.

The transparent foreign exchange regime has attracted a surge of foreign portfolio inflows (FPIs), which help stabilise the naira in the short term.

Yet, foreign direct investment (FDI), essential for job creation and industrial capacity will take longer to rebound as investors continue to test the staying power of reforms, especially given Nigeria’s history of policy reversals.

Monetary policy adds another layer of complexity. The surge in portfolio inflows has been supported by the CBN’s decision to maintain policy rates above 20 percent. While this approach supports short-term liquidity and reserve accumulation, it also discourages long-term FDI.

Investors often prefer the almost guaranteed returns of government securities offering close to 20 percent over the risks associated with longer-term productive investments. This creates a trade-off between short-term liquidity stability and long-term capital formation.

As inflation gradually eases, Kale said the CBN is expected to shift its focus from attracting foreign portfolio inflows to encouraging FDI by carefully lowering interest rates in a sequenced manner.

Timing will be crucial: cutting rates too soon could reignite inflationary pressures, prolong reform-induced hardships, and undermine exchange rate stability; waiting too long risks crowding out domestic investment and critical FDI necessary for industrialization and job creation.

On the occasion of Nigeria’s 65th independence anniversary, Kale’s message is clear: hope grounded in action, resilience, and strategic reforms can unlock a prosperous future for the nation.