Can Nigeria sustain the FX recovery despite record external Nig....

Nigeria’s foreign exchange market appears to be entering its most stable phase in more than a decade as the country’s external reserves climbed to their highest level since 2009, surpassing the $51 billion mark before easing slightly, while the naira has maintained one of its longest periods of relative stability since the foreign exchange reforms began.

The twin developments have boosted investor confidence, improved liquidity in the foreign exchange market and renewed optimism that years of exchange-rate volatility may finally be giving way to a more stable regime.

The Central Bank of Nigeria’s reserve accumulation, supported by stronger capital inflows, improved oil receipts, reduced fuel import demand and exchange-rate reforms, has significantly strengthened the country’s external buffers.

Yet beneath the optimism lies a critical question: Are these gains evidence of a fundamentally stronger foreign exchange system, or merely a reprieve supported by favourable oil prices and short-term capital inflows?

Economists are increasingly divided. While many acknowledge that the reforms have restored confidence and improved external liquidity, they caution that the real test lies in sustaining the gains through structural reforms capable of generating long-term foreign exchange earnings.

Reserves Provide a Stronger Buffer

Nigeria’s gross external reserves recently climbed above $51 billion, representing the country’s strongest reserve position in nearly 17 years and one of the most significant improvements in its external finances since January 2009.

The reserve build-up has considerably strengthened the Central Bank of Nigeria’s capacity to finance imports, meet external obligations, support market liquidity and intervene in periods of excessive volatility. Reserve adequacy has also improved significantly, with the CBN indicating that the country’s reserves now provide more than nine months of import cover, comfortably above internationally accepted benchmarks for emerging economies.

For investors, stronger reserves send an important signal of macroeconomic stability. They reduce concerns over external financing risks, improve sovereign credit perception and enhance Nigeria’s capacity to withstand external shocks.

Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, believes the reserve accumulation reflects growing confidence in Nigeria’s macroeconomic reforms. According to him, stronger reserves improve market confidence and reduce vulnerability to external shocks.

However, he argues that the quality of reserve inflows is just as important as their size, stressing that sustainable reserve growth should increasingly come from exports and productive investments rather than volatile financial inflows.

What Is Driving the Reserve Surge?

Unlike previous episodes when rising crude oil prices alone accounted for reserve growth, the latest increase reflects multiple sources of foreign exchange.

Among the major drivers are: Improved crude oil export receipts following higher production; Reduced petrol import bills due to expanding domestic refining capacity; Strong foreign portfolio investment into Nigerian fixed-income securities following tighter monetary policy; Eurobond proceeds; Improved diaspora remittances; and renewed investor confidence following foreign exchange market reforms.

The International Monetary Fund recently acknowledged that Nigeria’s stronger current account position, improved oil exports and declining refined fuel imports have substantially strengthened the country’s external position. The Fund also noted that sizeable non-resident investments in the Central Bank’s Open Market Operations (OMO) securities contributed significantly to reserve accumulation.

Analysts at EBC Financial Group also attribute the reserve growth to improving investor confidence following exchange-rate liberalisation. However, they caution that a sizeable portion of recent reserve gains has been supported by portfolio investments—often referred to as “hot money”- which can reverse quickly if global financial conditions become less favourable.

Naira Shows Its Longest Period of Relative Calm

After years of persistent depreciation and sharp daily fluctuations, the naira has entered one of its most stable periods since exchange-rate reforms were introduced.

Trading at the Nigerian Foreign Exchange Market (NFEM) has become significantly more predictable, with the exchange rate largely hovering within a relatively narrow range compared to the extreme volatility witnessed over the past three years.

The improved liquidity has narrowed pricing distortions, reduced speculative demand and restored greater confidence among importers, exporters and investors.

Manufacturers say greater exchange-rate predictability has improved budgeting, procurement planning and contract pricing, while financial institutions report improved confidence among foreign investors returning to Nigerian fixed-income assets.

Managing Director of Financial Derivatives Company, Bismarck Rewane, believes the current stability represents a notable improvement over previous periods of market turbulence. Nevertheless, he maintains that lasting currency stability will ultimately depend on sustained productivity growth, stronger exports and continued policy consistency rather than temporary market interventions.

The Inflation Connection

A more stable naira could also have significant implications for inflation.

Exchange-rate depreciation has remained one of the principal drivers of rising consumer prices in recent years, increasing the cost of imported goods, industrial raw materials, machinery and transportation.

Should exchange-rate stability persist, economists believe imported inflation could moderate considerably, easing cost pressures on manufacturers while providing much-needed relief to households already grappling with elevated food prices and rising living costs.

Lower exchange-rate volatility could also improve business confidence by reducing uncertainty surrounding future production costs and investment decisions.

The IMF’s Verdict

Perhaps the strongest endorsement of Nigeria’s recent foreign exchange reforms has come from the International Monetary Fund.

The IMF observed that Nigeria’s external position has strengthened considerably following exchange-rate liberalisation, stronger oil exports, declining fuel imports and renewed investor confidence.

It noted that gross international reserves rose sharply while the naira appreciated year-on-year during the first quarter of 2026.

Nevertheless, the Fund urged Nigerian authorities to maintain transparency in foreign exchange operations, preserve fiscal discipline and sustain market-oriented reforms to consolidate recent gains.

According to the IMF, continued policy credibility will remain essential in preserving investor confidence and attracting long-term capital.

Beyond Gross Reserves: The Net Reserve Story

While the headline figure focuses on gross external reserves, economists increasingly argue that net foreign exchange reserves provide a more meaningful measure of a country’s financial strength.

According to the Central Bank of Nigeria, net reserves rose to about $34.8 billion at the end of 2025 from less than $4 billion two years earlier, reflecting improved reserve quality and significantly lower short-term external liabilities.

The improvement suggests Nigeria’s reserve position is becoming structurally stronger rather than merely expanding on paper.

The Big Question: How Durable Are the Gains?

Despite the encouraging figures, significant risks remain. Nigeria’s foreign exchange earnings continue to depend heavily on crude oil exports, leaving reserves vulnerable to fluctuations in international oil prices and domestic production disruptions.

Similarly, foreign portfolio investments, which have played an important role in recent reserve growth, remain highly sensitive to global interest rates and investor sentiment.

Should advanced economies begin easing interest rates or investors seek safer assets elsewhere, capital outflows could place renewed pressure on Nigeria’s foreign exchange market.

Dr Muda Yusuf argues that while recent reforms have improved confidence, sustaining reserve growth will require bigger structural changes capable of generating consistent foreign exchange earnings from agriculture, manufacturing, solid minerals, technology and other non-oil exports.

Analysts at EBC Financial Group share similar concerns, warning that reliance on portfolio inflows leaves Nigeria exposed to sudden shifts in global financial markets.

Looking Ahead

Nigeria’s record external reserves and improving exchange-rate stability represent perhaps the strongest evidence yet that recent macroeconomic reforms are beginning to deliver tangible results.

The stronger external buffers provide policymakers with greater flexibility to manage external shocks, moderate imported inflation and reinforce investor confidence.

Yet history offers a note of caution.

Nigeria has experienced previous episodes of reserve accumulation and exchange-rate stability, only for external shocks, policy inconsistencies or declining oil receipts to reverse the gains.

The true measure of success will therefore not be whether reserves remain above $50 billion, but whether the economy can consistently generate foreign exchange through diversified exports, higher productivity, stronger foreign direct investment and sustained policy credibility.

As Bismarck Rewane recently observed, economic reforms should be viewed as a continuous process rather than a one-off achievement. Building lasting exchange-rate stability requires institutions capable of supporting investment, improving competitiveness and sustaining confidence over the long term.

In many respects, Nigeria has passed the first test by restoring confidence to its foreign exchange market. The more difficult challenge now begins.

Can the country transform its stronger reserves into sustainable economic competitiveness?

The answer will determine whether today’s optimism marks the beginning of a genuinely stronger foreign exchange regime or simply another reprieve in Nigeria’s long-running currency journey.