Naira Stability at Stake: Analysts Call for Decisive CBN Action Amid FX Woes
The Nigerian Naira's recent depreciation has once again cast a spotlight on the nation's persistent foreign exchange challenges. Financial analysts are emphatically reiterating the critical need for robust intervention by the Central Bank of Nigeria (CBN) and a significant surge in foreign exchange (FX) liquidity to stabilize the embattled currency.
The Recent Slide:
Last week, the Naira experienced a notable weakening. After briefly touching a four-month high of N1,518.88/$ on Monday, July 14, 2025, in the official Nigerian Foreign Exchange Market (NFEM), it subsequently weakened, closing the week around N1,532.34/$. The parallel market mirrored this trend, with the currency trading between N1,535.00/$ and N1,544.00/$. This consistent differential underscores deep-seated supply-demand imbalances.
Understanding the Naira's Vulnerability:
Several interconnected factors contribute to the Naira's ongoing depreciation:
Persistent Supply-Demand Imbalances: The fundamental issue remains an imbalance where the demand for foreign currency (predominantly the U.S. Dollar) consistently outstrips its available supply in Nigeria. This is driven by:
High Import Bill: Nigeria's heavy reliance on imports for a vast array of goods—from refined petroleum products (despite being a major oil producer) to consumer goods and industrial raw materials—generates continuous demand for dollars.
Capital Outflows: Foreign investors repatriating profits or divesting from the Nigerian market due to economic uncertainties or more attractive global yields can trigger substantial dollar outflows.
Sub-optimal Oil Production and Price Volatility: While recent improvements in oil output have been observed (meeting OPEC quotas in some instances), Nigeria's production often falls short of its potential. This, combined with fluctuations in global oil prices (projected lower at $67.7/barrel for 2025 by the IMF compared to $79.9 in 2024), directly impacts Nigeria's primary source of foreign exchange earnings.
Limited Non-Oil Exports: Despite diversification efforts, non-oil exports have not yet generated sufficient foreign exchange to significantly alleviate pressure on the Naira.
Strained Foreign Reserves: Nigeria's gross external reserves have been under pressure. They stood at $37.37 billion at the end of June 2025, representing a $3.5 billion drop from December 2024. Although there was a slight increase to $37.85 billion as of Thursday last week, the overall trend has been influenced by external debt payments and CBN interventions. The IMF had previously projected reserves to decline further to $36.4 billion by the end of 2025.
Inflationary Pressures: High domestic inflation, which moderated to 22.22% in June 2025 (a decline from 22.97% in May 2025), continues to erode the Naira's purchasing power. This makes foreign currencies a more attractive option for holding value, further fueling demand for dollars.
CBN's Stabilization Strategies and Expert Recommendations:
Financial analysts, including those from AIICO Capital Limited, consistently advocate for decisive CBN intervention and a significant increase in FX liquidity as crucial for Naira stabilization. The CBN has, indeed, been actively involved:
Significant FX Injection: The CBN injected a substantial $4.1 billion into the foreign exchange market in the first half of 2025 alone. This marks a significant 215% increase compared to the $1.3 billion provided during the same period last year, underscoring a stronger commitment to supporting market liquidity and defending the Naira. These interventions primarily involve selling dollars directly to eligible participants.
Managed Float System: The CBN continues to operate a "managed float" exchange rate system. This allows the Naira to fluctuate based on market forces while enabling the CBN to conduct regular interventions to ensure relative stability and prevent excessive volatility.
FX Reforms and Policies:
Rate Unification: In October 2023, the CBN unified multiple exchange rate windows, transitioning to a 'willing buyer, willing seller' model. This aimed to eliminate arbitrage opportunities and enhance market transparency.
Nigerian FX Code: Launched in January 2025, this code seeks to reinforce ethical standards, professionalism, and accountability among authorized dealers in the foreign exchange market.
Boosting Diaspora Remittances: Initiatives such as the introduction of new financial products (Non-Resident Nigerian Ordinary and Investment Accounts) and licensing more international money transfer operators are designed to boost formal remittance inflows, a vital source of foreign exchange.
Export Earnings Retention: Directives aimed at ensuring a significant portion of export earnings are retained within the domestic market also seek to improve FX availability.
Monetary Policy Tightening: The CBN has maintained a tight monetary policy stance, having raised its benchmark Monetary Policy Rate (MPR) to curb inflation and stabilize the Naira. The MPR was held at 27.50% in May 2025, with the Cash Reserve Ratio (CRR) for Deposit Money Banks (DMBs) remaining high at 50.00%. The Monetary Policy Committee (MPC) is currently holding its next meeting (July 21-22, 2025), and analysts are keenly watching for further policy adjustments.
Collaboration with Fiscal Authorities: The CBN has repeatedly called for enhanced collaboration with fiscal authorities to boost overall foreign exchange earnings, particularly from oil and non-oil exports, and to ensure sustainable FX liquidity.
Outlook:
Analysts suggest that the Naira could experience further appreciation if improved oil output and elevated global oil prices lead to increased dollar inflows. Combined with stable capital inflows and sustained, strategic CBN intervention, these factors could provide continued support and enhance near-term stability in the FX market. However, underlying structural issues—such as high import dependency, challenges in diversifying non-oil exports, and attracting stable foreign direct investment—remain long-term concerns that necessitate comprehensive and coordinated policy efforts beyond mere FX market interventions.
I'm Aisha shehu
Talksocialtalka News
