The naira has kicked off the year with its strongest rally in 13 years, mirroring an early surge in 2024 that was ultimately undone by foreign investors cashing out. But this time, the forces at play suggest the story may unfold differently.
Since December 2024, the naira has gained 9 percent, strengthening from N1,662/$ on Dec. 2 to N1,509/$ on Feb. 13, the biggest gain among African currencies, according to BusinessDay data.
In January alone, it appreciated 4 percent (N63.14), hitting a seven-month high of N1,478.22/$. The last time the currency appreciated in the month of January was in 2012.
Although the rally has cooled slightly in February, with the naira stabilising around N1,500/$, its strength in the parallel market has continued. It climbed to N1,545/$, up from N1,620/$ at the start of the month.
The last time the naira surged this quickly, the gains were short-lived. In March 2024, the currency rallied from N1,600/$ the previous month to a peak of N1,300/$ on the back of surging foreign portfolio inflows (FPIs) and diaspora remittances. That remarkable turnaround saw the naira go from the world’s worst-performing currency to its best performer in a matter of weeks.
However, as dollar inflows slowed, cracks in the FX market reappeared. By July, the naira had not only erased its gains but had fallen to an even weaker N1,660/$.
Market insiders attributed the sharp reversal to a decline in dollar supply and profit-taking by foreign investors. Many had entered the market at N1,600/$, only to exit when the rate dropped to N1,300/$, locking in gains. Those who invested in Nigerian bonds—after the CBN adjusted rates to align with inflation—saw even higher returns upon exiting.
“If the naira appreciates too quickly, foreign investors may seize another profit-taking opportunity, as they did last year,” a market expert told BusinessDay.
To prevent history from repeating itself, the CBN appears to be taking a more measured approach, evident in the naira’s controlled performance in February.
“My advice to the CBN is to buy the dollars coming in at a rate,” the market expert said.
What’s driving naira rally?
The naira’s resurgence is largely fueled by improved FX supply in the official market, driven by CBN reforms aimed at enhancing transparency and investor confidence. Analysts widely expect the currency to remain largely stable throughout 2025.
“The continued rally reflects improved supply within the official segment, which has dampened demand in the parallel market,” said Wale Okunrinboye, head of research at Access Pensions.
One of the key policy shifts credited with the naira’s turnaround is the Electronic Foreign Exchange Matching System (BMatch), introduced in December 2024. This CBN-backed platform, operating via Bloomberg’s BMatch system, allows authorised dealers to place anonymous orders into a central limit order book, ensuring greater transparency and efficient price discovery in the FX market.
By reducing market distortions and giving the CBN greater oversight, the system has made it easier to manage exchange rate fluctuations.
Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise (CPPE), noted that clearer information on supply and demand has reduced information asymmetry and made demand more realistic.
Another major reform came in January 2025, when the CBN launched the Nigeria Foreign Exchange Code (FX Code), which sets out principles for ethical conduct, governance, execution, information sharing, risk management, and settlement processes in the FX market.
With these reforms aligning Nigeria’s FX market with global best practices, investor confidence has strengthened.
To reinforce stability, the CBN has extended its $25,000 weekly dollar sales to BDC operators until May 2025, ensuring the parallel market does not derail official market pricing.
Net reserves data to shape investor sentiment
Despite these reforms, Nigeria’s external reserves continue to shrink, dropping to $39.4 billion due to significant outflows in January—including the repayment of Nigeria’s COVID-19 IMF facility and CBN interventions in the FX market.
A potential game-changer could be the CBN’s plan to start publishing net external reserves data, a move aimed at addressing longstanding concerns from foreign investors about Nigeria’s actual FX liquidity.
“Nigeria currently publishes only a 30-day moving average of gross reserves,” Okunrinboye noted. “Introducing net reserves figures could boost transparency but may also trigger market volatility, as investors reassess Nigeria’s FX position.”
With the naira in uncharted territory, the coming months will test whether the rally is built to last—or merely another fleeting illusion.
