Market News

By Sami Tunji

Nigeria’s foreign exchange environment is seeing a notable turnaround as reforms by the Central Bank of Nigeria combine with a fresh rally in oil prices to support the naira, boost external reserves and rebuild confidence in FX markets. SAMI TUNJI examines how stricter FX governance, higher oil earnings and improving capital inflows are influencing exchange-rate movements and reducing long-standing market distortions

Nigeria’s foreign exchange outlook has received a fresh boost from the recent rally in global oil prices, with Brent crude trading comfortably above the Federal Government’s 2026 budget benchmark of $64.85 per barrel. At around $69 per barrel, the price level improves the country’s near-term revenue expectations, strengthens dollar inflows and eases pressure on external buffers at a time when FX market reforms are beginning to stabilise pricing dynamics.

Oil prices rose for a third consecutive session last week as markets reacted to escalating geopolitical tensions involving Iran and the wider Middle East, a region critical to global energy supply. Brent crude futures climbed by 94 cents, or 1.4 per cent, to $69.34 per barrel, while US West Texas Intermediate rose 1.5 per cent to $64.13. The gains reflected heightened concerns that possible US military action against Iran could disrupt regional output and shipping routes.

Analysts say the rally is driven largely by a geopolitical risk premium rather than by underlying supply-and-demand imbalances. The Strait of Hormuz, a narrow waterway through which about 20 per cent of global oil flows pass, has become the focal point of market anxiety. Any disruption, even temporary, could trigger sharp price spikes. Some analysts have warned that a full-scale conflict affecting the strait could push Brent prices towards $91 per barrel or higher within weeks, with more extreme scenarios projecting levels as high as $150 per barrel.

Beyond the Middle East, unplanned supply disruptions have also added to price pressures. Unscheduled outages in Kazakhstan and weather-related production disruptions in parts of the United States have tightened short-term supply conditions, reinforcing the upward momentum in crude prices. While these factors are considered temporary, they have amplified the impact of geopolitical fears on market sentiment.

For Nigeria, the implications are significant. Oil exports still account for more than 80 per cent of foreign exchange earnings and a substantial share of fiscal revenues. Higher prices increase dollar inflows into the economy, support government finances, and reduce the strain on the balance of payments. More importantly, when combined with improved FX market governance, higher oil prices can help stabilise exchange rate expectations and restore confidence among investors and market participants.

However, analysts caution that oil prices alone cannot guarantee FX stability. Past cycles show that oil windfalls can be squandered without strong policy discipline. This time, the difference lies in the Central Bank of Nigeria’s reforms, which have altered how FX is priced, supplied and supervised. The oil rally, therefore, is best seen as a tailwind that reinforces reforms already in motion rather than a silver bullet.

Naira breaks below N1,400 as sentiment improves

The naira showed resilience in the final week of January 2026, gaining significant ground against the United States dollar in the official Nigerian foreign exchange market.

According to data from the Central Bank of Nigeria, the Nigerian foreign exchange market rate, which is the official rate used for corporate international payments and eligible transactions such as medical needs and school fees, strengthened from a weekly high of N1,422.07/$ on the previous Friday, 23 January, to close the month at N1,386.55/$ last Friday, indicating a 2.47 per cent appreciation.

The naira recorded a consistent upward trend starting from 26 January, moving from 1,418.95 per dollar to its strongest point of 1,386.55 per dollar by Friday. Although the market saw a high rate of 1,423.50/$ early in the week, the gap between the highest and lowest daily rates narrowed towards the end of the month, indicating a period of relative stability. The naira’s recent movement below the N1,400-to-dollar mark on the official market has been widely interpreted as a key psychological and market milestone. After spending months trading above that level, the currency’s appreciation reflects improving liquidity conditions and greater confidence in the restructured FX framework.

Analysts at Cowry Assets Management Limited, in their weekly report, said, “The naira is expected to maintain moderate gains, supported by steady oil receipts, stronger non-oil inflows, and a trade surplus. Oil prices are likely to remain stable to mildly bullish, reflecting steady global demand and the unchanged interest rates from the United States Federal Reserve.”

Also, the gradual improvement, rather than a sudden jump, has reassured analysts that the strengthening is being driven by better price discovery and FX supply rather than administrative pressure. Market participants note that tighter supervision, improved transparency and reduced arbitrage opportunities have helped align rates across trading windows.

The parallel market has mirrored this trend. Cowry Asset Management Limited said the naira appreciated 1.06 per cent to N1,454/$1 in the informal market, attributing the move to “improved currency sentiment across both the regulated official segment and the informal foreign exchange market”. Operators say the narrowing gap between official and parallel rates is one of the clearest indicators that reforms are gaining traction.

In its outlook, experts at AIICO Capital projected that the naira will “remain volatile but broadly stable, with modest appreciation in February. Robust external reserves and expectations of sustained high crude oil prices should provide support alongside ongoing monetary and fiscal reforms aimed at boosting foreign inflows. Downside risks from external shocks are expected to remain limited in the near term.”

The president of the Association of Bureaux De Change Operators of Nigeria, Aminu Gwadabe, said the naira has remained broadly stable across markets for several months, marking a sharp departure from years of extreme volatility.

On valuation, Managing Director of Financial Derivatives Company, Bismarck Rewane, argued that the naira remains undervalued despite recent gains. He estimated the currency’s fair value at about N1,257/$1 and said it is undervalued by roughly 11 per cent based on purchasing power parity analysis. Rewane made the submission during his keynote address at the 2026 Economic Outlook organised by the Association of Corporate Treasurers of Nigeria, noting that currencies typically converge towards their PPP-implied values over a five-year horizon.

Reserves climb past $46bn as inflows return to official channels

Nigeria’s external reserves have emerged as a key barometer of the success of FX reforms and broader macroeconomic adjustments. The country’s reserves climbed to about $46.11bn as of 28 January 2026, up roughly $5.8bn from levels recorded in late 2024. The rise pushed reserves above the $46bn mark for the first time in about eight years.

Data from the CBN indicate that reserves grew by about $510m in the first 22 days of 2026, from $45.50bn on 31 December 2025 to just over $46bn by 22 January. Analysts say the steady accumulation reflects stronger FX inflows and improved market confidence following the liberalisation and restructuring of the FX regime.

CBN Governor, Olayemi Cardoso, has repeatedly stressed that the reserve build-up is organic rather than debt-driven. “What is most important here is that our FX reserves are being rebuilt organically, not by borrowing, but through improved market functioning, stronger non-oil exports, and robust capital inflows,” he said during the Chartered Institute of Bankers of Nigeria’s 60th annual bankers’ dinner in Lagos.

He noted that Nigeria’s external sector strengthened markedly in 2025, with the current account balance rising by more than 85 per cent to $5.28bn in the second quarter from $2.85bn in the first quarter. According to him, reserves reached about $46.7bn by mid-November 2025, providing over 10 months of import cover and significantly enhancing the economy’s resilience to external shocks.

Foreign capital inflows have also rebounded strongly. Cardoso disclosed that inflows totalled $20.98bn in the first 10 months of 2025, representing a 70 per cent increase over 2024 and a 428 per cent jump from the $3.9bn recorded in 2023. He said the naira now trades within a narrow range, with the gap between official and parallel markets shrinking to under two per cent from over 60 per cent.

Diaspora remittances have followed a similar trajectory. The CBN governor said remittance inflows rose by about 12 per cent as confidence returned to official channels following improvements in transparency, settlement efficiency and reporting. He added that the rollout of the Non-Resident BVN is expected to further support inflows in 2026.

Analysts say the challenge now is sustaining momentum, particularly in an election cycle, which historically tests fiscal discipline.

While short-term buffers look stronger, they argue that maintaining reserve growth will depend on continued policy consistency and restraint.

Policy coordination and domestic fundamentals underpin stability

Economists say Nigeria’s improving FX fortunes are rooted not only in oil prices and reserves but also in deeper structural and policy shifts. Founder and Chief Consultant of B. Adedipe Associates Limited, Prof. Abiodun Adedipe, said recent reforms have removed long-standing distortions in the economy. He noted that FX market reforms have eliminated arbitrage and round-tripping opportunities, while petrol subsidy removal has ended an estimated annual waste of about $10.7bn and created a more competitive downstream market.

Adedipe said bank recapitalisation is strengthening the financial system’s capacity to fund a $1tn economy, while fiscal consolidation is plugging leakages, expanding the use of technology and improving accountability across government agencies. He described tax reforms as the potential “real game-changer”, capable of igniting regional competition and driving sustainable growth.

The CBN has also emphasised the importance of fiscal-monetary coordination. Cardoso said monetary reform cannot succeed in isolation, adding that alignment with fiscal policy has helped reduce domestic borrowing costs, improve liquidity conditions and enhance predictability in fiscal operations. He stressed that the discontinuation of direct deficit financing is irreversible. “There will be no return to the practice of financing fiscal deficits by the Central Bank,” he said, pointing to revenue optimisation frameworks and upgrades to the Treasury Single Account as key supporting reforms.

Nigeria’s domestic fundamentals also provide a buffer. The country’s population, estimated at over 237m in mid-2025, is one of the youngest globally, with a median age of about 18 years. Analysts say this demographic profile offers long-term growth potential if matched with investment in jobs, skills and infrastructure.

In the energy sector, Nigerian National Petroleum Company Limited reported revenue of N5.08tn in October 2025, up from N4.27tn in September, while profit after tax rose to N447bn from N216bn. Gas production increased to 6,997mmscf per day, while gas sales climbed to 4,713mmscf per day. Although crude oil production dipped slightly to 1.58m barrels per day, NNPC said it would sustain collaboration and recovery initiatives.

Taken together, analysts say Nigeria’s FX outlook is being reshaped by a combination of firmer oil prices, disciplined monetary policy, improving reserves and stronger institutional coordination. The durability of these gains, however, will depend on whether reforms are sustained when external conditions inevitably shift.