Why the CBN Is Managing the Naira’s Rise Carefully

By Ayobami Oyalowo [@AyoOyalowo]

Stronger reserves and sweeping FX reforms are giving Nigeria’s central bank room to stabilise the naira while protecting investment flows and domestic production.

For years, Nigeria’s foreign-exchange market seemed trapped in a cycle of pressure. The naira weakened, investors worried about dwindling reserves, and businesses struggled to access dollars. In 2023, Nigeria’s net usable foreign-exchange reserves had fallen to barely $4 billion, raising doubts about how much financial firepower the Central Bank of Nigeria (CBN) truly had.

Three years later, the picture looks remarkably different.

Nigeria’s external reserves have climbed to about $50.45 billion, their highest level in roughly 13 years. More strikingly, net usable reserves have surged to around $34.8 billion, representing a nearly nine-fold increase from the $3.99 billion recorded in 2023. This turnaround marks one of the fastest rebuilds of external buffers in Nigeria’s recent economic history.

The numbers matter because foreign reserves act as a country’s financial shock absorber. They provide the dollars needed to stabilise the currency during market turbulence, reassure investors that the country can meet its external obligations and reduce the risk of sudden exchange-rate crises.

But the real story is not simply about larger reserves. It is about stronger reserves.

For years, analysts warned that Nigeria’s headline reserve figures overstated the amount of foreign currency the central bank could actually deploy. Much of the stockpile was tied up in swap arrangements and other short-term obligations. Economists therefore focused less on gross reserves and more on net usable reserves, which represent the portion the central bank can readily mobilise.

Here the improvement has been dramatic

By the end of 2025, Nigeria’s gross reserves stood at about $45.71 billion while net usable reserves reached $34.8 billion. At the same time, short-term reserve encumbrances — essentially financial obligations that reduce usable reserves — fell sharply from roughly $29 billion in 2023 to about $10.9 billion.

In practical terms, Nigeria has moved from having reserves that looked impressive on paper to reserves that are genuinely usable.

The scale of the turnaround is striking. Nigeria’s net reserves at the end of 2025 exceeded the country’s entire gross reserve stock recorded in 2023, underscoring how dramatically the quality of the reserve position has improved.

This balance-sheet repair has strengthened the CBN’s ability to manage the foreign-exchange market without appearing defensive. When reserves are both large and liquid, central banks can intervene calmly rather than react in crisis mode.

Yet the rebuilding of reserves is only part of the story.

The CBN has also reshaped the structure of Nigeria’s foreign-exchange market itself. In October 2023 the bank unified Nigeria’s multiple exchange-rate windows into a single market, ending a long-criticised system that created distortions and encouraged arbitrage. A year later, it introduced an electronic foreign-exchange matching system designed to improve transparency in currency trading.

These reforms have gradually restored confidence in Nigeria’s FX market and encouraged fresh inflows of capital.

Still, one aspect of the central bank’s strategy remains widely misunderstood: its management of the naira’s recovery.

Many observers assume that policymakers should celebrate a sharply rising currency. A stronger naira reduces the cost of imports and can help ease inflation. But a currency that appreciates too quickly can create problems of its own.

Rapid appreciation often attracts speculative capital — so-called “hot money” — seeking quick gains from exchange-rate movements. These investors rush into markets when currencies rise and exit just as quickly when momentum fades, creating volatility.

Central banks therefore often prefer gradual appreciation rather than dramatic surges.

The CBN appears to be following this approach. Officials have signalled that they favour a measured strengthening of the naira, allowing the currency to recover in line with improving economic fundamentals while avoiding speculative swings.

There is also a domestic economic logic behind this strategy. When a currency appreciates sharply, imported goods become significantly cheaper, placing local producers at a disadvantage. Nigeria has spent years trying to expand domestic industrial production in sectors ranging from agriculture to manufacturing. A sudden flood of cheap imports could undermine those gains.

By moderating the pace of the naira’s rise, the CBN is effectively balancing several competing priorities: attracting foreign investment, protecting domestic industry and maintaining exchange-rate stability.

The improved reserve position has also given policymakers room to adjust monetary policy. At its February 2026 meeting, the Monetary Policy Committee reduced the benchmark Monetary Policy Rate to 26.5 percent, signalling that inflation pressures and foreign-exchange volatility may be easing.

The move was modest, but it hinted at a more stable macroeconomic environment.

Still, the progress remains fragile. Foreign-exchange stability ultimately depends not only on central-bank policy but also on fiscal discipline, steady oil revenues and sustained investor confidence. Without those supports, even strong reserves can erode quickly.

For ordinary Nigerians, however, the lesson is straightforward. When reserves are strong and the foreign-exchange market is transparent, businesses can plan more confidently, investors are more willing to commit capital and the risk of sudden currency shocks declines.

Currency stability rarely arrives through dramatic announcements. More often, it is built quietly — through stronger buffers, steady reforms and disciplined economic management.

Nigeria’s foreign-exchange story may finally be moving in that direction.

Ayobami Oyalowo is the Executive Director Finance and Administration Ogun-Oshun River Basin Development

@cenbank @olayemicardoso1 @woye1 @trueNija