…Suggests phased easing of limits on banks’ net open foreign exchange positions
…Strengthened FX market withstands April 2025 global financial shocks
…Currency depreciates by 5%
The World Bank has presented a comprehensive roadmap for Nigeria to secure enduring stability for the naira, highlighting the necessity for deeper reforms in the foreign exchange (FX) market, clearer communication of monetary policies, and boosting non-oil revenue streams.
These insights are detailed in the October 2025 issue of the Nigeria Development Update, titled “From Policy to People: Bringing the Reform Gains Home,” published recently.
While acknowledging that recent policy changes have contributed to stabilizing the naira and enhancing FX market operations, the report warns that Nigeria remains susceptible to external shocks due to its limited export diversity and reliance on short-term capital inflows. To foster sustainable currency stability, the World Bank recommends prioritizing long-term FX inflows from oil exports, remittances, and especially non-oil export growth. It also calls for a more transparent FX policy framework and gradual adjustments to banking regulations concerning foreign currency holdings.
FX Market’s Dependence on Short-Term Capital
The report notes that despite reforms, Nigeria’s FX market continues to depend heavily on foreign portfolio investments (FPI) and Central Bank of Nigeria (CBN) interventions. Attractive yields on Open Market Operations (OMO) instruments have drawn short-term foreign capital, while the CBN has leveraged positive net FX inflows to bolster reserves and stabilize the exchange rate.
For the FX market to achieve sustainable liquidity and operate on market-driven principles, the World Bank emphasizes the need to attract more stable foreign exchange sources, particularly through enhanced oil revenues and formalized remittance channels. Equally critical is expanding and diversifying Nigeria’s export base beyond oil by addressing persistent supply-side challenges.
Gradual Relaxation of FX Position Limits for Banks
As part of a broader strategy to deepen the FX market and promote exchange rate flexibility, the report advocates for a cautious, phased easing of restrictions on banks’ net open FX positions within prudent macroprudential boundaries. With domestic yields rising and reduced incentives to hold U.S. dollars, this policy shift could help align the naira’s value more closely with economic fundamentals, thereby supporting its stability.
In January 2024, the CBN set the Net Open Position (NOP) limit for banks’ foreign currency assets and liabilities-both on and off-balance sheet-at a maximum of 20% short or 0% long relative to shareholders’ funds unimpaired by losses, using the gross aggregate method.
The World Bank stresses that any relaxation of these limits should be implemented carefully, accompanied by efforts to build market confidence. It also highlights the importance of the CBN providing clear, consistent communication regarding its FX intervention policies, including reserve management strategies and intervention thresholds during external shocks.
Positive Outcomes from FX Market Reforms
Recent reforms have significantly improved Nigeria’s FX market dynamics. The unification of exchange rates, enhancements to interbank trading platforms, and resolution of FX backlogs have revived an active market characterized by willing buyers and sellers. Additionally, regulatory changes targeting the bureau de change (BDC) sector and remittance channels have helped formalize inflows and stabilize the official exchange rate.
During the global financial turbulence in April 2025, the reformed FX market showed resilience. The CBN intervened to moderate volatility but permitted a controlled 5% depreciation of the naira in response to falling oil prices, reflecting greater exchange rate flexibility.
External Accounts Bolstering Naira Stability
The World Bank reports that Nigeria’s external position remained robust in 2025 following marked improvements in 2024. The current account balance (CAB) surged from a marginal 0.1% GDP surplus in early 2023 to 6% in Q1 2024, driven by naira depreciation that boosted exports and curtailed imports. In Q1 2025, the CAB recorded a $3.9 billion surplus (6.1% of GDP), supported by a strong trade-in-goods surplus of $4.2 billion.
A 50% year-on-year increase in non-oil exports significantly contributed to this performance, alongside reduced petroleum product imports following the removal of fuel subsidies and the restart of domestic refining. However, remittance inflows declined by 4.2% year-on-year in Q1 2025, partly due to a global economic slowdown and diminished employment opportunities for Nigerians abroad.
Despite these positive trends, the report cautions that Nigeria’s relatively higher inflation compared to the U.S. is beginning to erode the competitive advantage gained from earlier exchange rate adjustments.
Challenges in Financial Account and Reserve Levels
The World Bank also highlights ongoing difficulties on the financial account side. In Q1 2025, net financial outflows occurred due to divestments, repayments of foreign debt by the CBN and corporations, and withdrawals from bank deposits. Although foreign direct investment (FDI) saw a net inflow of $798 million during this period, it remained below 1% of GDP, constrained by structural issues in the business environment.
These outflows, contrasting with the current account surplus, led to a temporary decline in external reserves from $40.9 billion at the end of 2024 to $38.3 billion by March 2025. However, reserves recovered to $41.3 billion by August 2025, equivalent to 8.6 months of import cover, as net FX inflows turned positive again.
Maintaining Progress Demands Continued Effort
The World Bank concludes that Nigeria has made notable progress in stabilizing the naira through decisive policy reforms and improved FX market operations. Nonetheless, preserving these achievements requires sustained efforts to attract long-term FX inflows, broaden non-oil exports, enhance policy transparency, and reinforce investor confidence.
Absent these measures, the current stability of the naira risks being short-lived amid future economic shocks or global financial volatility.