The Nigerian Naira (NGN) experienced a surprising rally in January 2025, moving from a rate of approximately 1670-1680 NGN/USD at the beginning of the year to around 1605-1610 NGN/USD by early February. This unexpected appreciation has defied expectations, and now questioning the reason behind this relatively high N70 gain against the dollar, is this sustainable? and what are the factors behind it?
Central Bank of Nigeria’s Strategic Interventions
At the forefront of the Naira’s recent gains is the Central Bank of Nigeria’s (CBN) active role, often described as “midwifing” the currency’s value. In January 2025, the CBN introduced a new Foreign Exchange Code, aiming to enhance transparency and reduce speculative activities in the FX market. This initiative has been instrumental in stabilizing the exchange rate by enforcing a more disciplined trading environment.
Furthermore, the CBN has managed FX liquidity with precision, ensuring adequate supply meets demand, which has directly contributed to the Naira’s strength. For instance, selling foreign currency to BDCs at rates below the market average has been a critical step in alleviating pressure on the Naira.
Additionally, the quick waiving of license fees for BDCs has encouraged more legitimate market participation, further supporting the currency’s stability. As a result, the Naira ended January at N1,475/$1 on the Nigerian Autonomous Foreign Exchange Market (NAFEM), marking a 3.91% appreciation from the end of 2024, showcasing the effectiveness of these interventions.
Seasonal Liquidity and Event-Driven Inflows
Seasonal liquidity and event-driven inflows, such as holiday remittances in December, and securities auctions in January have temporarily bolstered the Nigerian Naira’s value. However, these gains are often questioned for sustainability due to their short-term nature. With structural economic reforms, diversification, and consistent policy support, the Naira’s appreciation might just be sustainable.
Foreign Direct and Portfolio Investments
The Nigerian Naira’s recent appreciation against the US Dollar has been significantly driven by a surge in Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI), particularly through the allure of Nigerian bonds and Treasury Bills (T-Bills). In January 2025, the Central Bank of Nigeria (CBN) maintained high yield rates on government securities, with the average yield on 10-year bonds at 21.92%, making Nigerian investments attractive to both local and foreign investors. The 364-day T-Bills, for example, saw their stop rates rise to 19% per annum, reflecting a hawkish monetary policy aimed at controlling inflation and supporting the Naira.
The influx of foreign investment into Nigerian securities, lead to increased conversion of foreign currencies into Naira, increasing foreign exchange reserves and directly contributing to the local currency’s strength. This dynamic is supported by data from the DMO in January 2025, which showcases the increased interest in Nigerian securities, underpinned by the market’s performance where the average yield on Nigerian T-Bills was high amidst inflationary pressures. The high returns and active market participation have fostered a positive investor sentiment towards the Naira, reinforcing its value through increased demand for Naira-denominated assets.
With the freezing of rates in the US, investors are looking for better yield opportunities elsewhere. Nigeria, offering high yields on bonds and T-Bills (e.g., 19% on 364-day T-Bills), could see an influx of foreign portfolio investment. , thus supporting its value.
Market Sentiment and the Psychological Impact
The psychological aspect of currency valuation cannot be underestimated. When the Naira strengthens quickly, investors who bought in at higher rates might see it as an opportune moment to exit, securing profits. This behaviour, while beneficial in the short term, poses a risk of rapid capital outflow if not managed well. If too many investors decide to cash out simultaneously, it could lead to a depreciation of the Naira. The key here is managing investor expectations and ensuring that the gains are not just seen as a fleeting opportunity but part of a sustainable trend.
Policy and Economic Stability
Global economic policies, particularly the freezing of U.S. Federal interest rates, affect the Naira’s value. A weaker Dollar globally can make the Naira relatively stronger. Further US rate cuts might just appreciate the Naira further.
The Nigerian Naira’s recent appreciation is a complex interplay of deliberate policy actions, CBN Interventions, and investor behaviour. While the immediate gains are clear, the path forward will require a delicate balance between intervention and allowing market dynamics to play out. The CBN’s role has been crucial, but the true test will be in maintaining this momentum while fostering an environment where foreign and domestic investors see long-term value in the Naira and Nigerian Securities.
