Foreign exchange speculators are facing significant losses as the naira continues to strengthen against major global currencies.
The sustained stability of the Nigerian currency has created uncertainty among investors who had bet on continued depreciation, putting billions of naira at risk.
Despite a 3.2 percent month-on-month decline in Nigeria’s external reserves to $38.46 billion by the end of February, the naira appreciated by 8.5 percent within the same period, closing at 1,490/$ in the parallel market.
Similarly, in the official Nigerian Foreign Exchange Market, the naira has gained 2.69 percent this year, trading at 1,499.23/$ despite a minor dip of 1.7 percent in February.
The naira’s strengthening has forced many currency speculators into a difficult position, with analysts estimating that they collectively lost about N10 billion in February alone.
The trend has been attributed to a combination of the Central Bank of Nigeria’s (CBN) proactive policies and market adjustments that have begun to restore confidence in the currency.
CBN’s Measures to Curb Forex Volatility
To stabilize the forex market and counter speculative activities, the CBN has introduced several regulatory measures. Notably, on January 28, the bank launched the Nigerian Foreign Exchange Code (FX Code), designed to enhance transparency, accountability, and ethical conduct in foreign exchange transactions.
Additionally, the CBN has strengthened oversight through the implementation of the Electronic Foreign Exchange Matching System (EFEMS). This system has curtailed forex market distortions, thereby discouraging speculation while improving the liquidity and stability of the naira.
A forex analyst, Michael Nwadike, remarked that dollar holders who had expected continuous naira depreciation are now offloading their stockpiles to cut losses. “Investors need to understand the risks involved in forex speculation,” he noted. “With the naira’s recent appreciation, holding onto dollars in anticipation of further depreciation is no longer a profitable strategy.”
Nwadike further emphasized the importance of pro-market policies to attract long-term foreign investments.
He urged policymakers to create a business-friendly environment by implementing reforms that foster ease of doing business and infrastructure development while adopting a more liberalized forex regime.
Market Reactions and Expert Opinions
Professor Jonathan Aremu, a retired CBN director and international economic relations expert at Covenant University, described the naira’s appreciation as a positive economic signal.
However, he stressed that sustaining the rally would require increased domestic production and economic diversification.
“The CBN must go beyond interest rate adjustments and address underlying factors affecting liquidity and productivity,” Aremu advised. “To achieve sustained naira appreciation, Nigeria must boost its output of goods and services. Inflation control alone will not drive long-term currency stability.”
Aminu Gwadabe, President of the Association of Bureaux De Change Operators of Nigeria (ABCON), commended the CBN for its commitment to tackling forex challenges. He noted that while forex demand remains high—driven by manufacturing, tuition fees, and medical expenses—the CBN has strategically worked to enhance inflows.
Among the successful interventions is the FX Code policy, which has encouraged market transparency. Furthermore, the EFEMS initiative has significantly improved foreign exchange supply, contributing to the naira’s resurgence.
CBN’s Strategy for Strengthening Forex Inflows
CBN Governor Olayemi Cardoso attributed the success of the exchange rate unification policy to increased forex inflows. He noted that the initiative has led to a doubling of monthly remittances, rising from $300 million in 2023 to nearly $600 million by August 2024.
“We are committed to integrating the Nigerian diaspora into our financial system,” Cardoso stated. “With the introduction of non-resident Bank Verification Number (BVN) registration, we expect financial institutions to develop innovative products that encourage diaspora investments in Nigeria.”
He also emphasized that the prevailing exchange rate does not accurately reflect the naira’s real value, as market distortions had previously driven speculative pricing. With EFEMS enhancing price discovery, the naira is expected to continue its upward trajectory in the coming months.
Economic Implications and Inflationary Trends
Comercio Partners, in its 2025 macroeconomic outlook, highlighted the potential for Nigeria to achieve price stability. The firm noted that the recent rebasing of the Consumer Price Index (CPI) has contributed to lower inflation figures, with Nigeria’s annual inflation rate dropping to 24.48 percent in January 2025.
The report emphasized that factors such as the stabilization of exchange rates, energy price normalization following subsidy removals, and improved forex liquidity would help control inflation.
Moreover, the expansion of local refining capacity—especially with the commissioning of the Dangote Refinery—is expected to reduce the impact of exchange rate fluctuations on energy prices.
Comercio Partners’ Head of Investment Research, Ifeanyi Ubah, projected that headline inflation could decrease to approximately 15 percent by mid-2025, marking a return to economic stability.
The decline would be driven by a combination of a stable naira, reduced import dependence, and a drop in production costs across industries.
IMF’s Position on Dollarization and Forex Reserves
A recent report from the International Monetary Fund (IMF) indicated that reversing dollarization in highly forex-dependent economies is challenging.
The IMF noted that inflationary pressures and currency instability often push market participants to store wealth in dollars.
However, as the naira stabilizes, experts anticipate that dollar holdings could decline.
Meanwhile, the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) data revealed a gradual reduction in the dollar’s dominance in global foreign reserves.
While the U.S. dollar remains the world’s primary reserve currency, its share has decreased as central banks diversify holdings into nontraditional reserve currencies such as the Chinese renminbi, Australian dollar, and South Korean won.
China, in particular, has intensified efforts to promote the renminbi as an international currency.
Policies such as cross-border payment system development, central bank digital currency piloting, and forex swap agreements have helped increase the renminbi’s global reserve share.
The naira’s recent rally has upended forex speculation strategies, leaving investors who hoarded dollars at risk of further losses. With the CBN’s continued commitment to forex market transparency and liquidity enhancement, the outlook for the naira remains positive.
Analysts believe that sustained policy interventions, increased production, and growing investor confidence could pave the way for long-term currency stability.
As Nigeria navigates these economic shifts, policymakers must focus on balancing monetary controls with measures that promote economic growth.
With improved business conditions and increased foreign investment, the country could achieve a more sustainable and resilient foreign exchange market in the years ahead.
