Market News

written by Bamidele Ogunwusi 

 For years, Nigeria’s parallel foreign exchange market was the undisputed barometer of the naira’s value. Whether for importers sourcing raw materials, parents paying school fees abroad, manufacturers settling invoices or travellers seeking foreign exchange, the black market often dictated the exchange rate that shaped pricing decisions across the economy. 

Its dominance was fuelled by chronic dollar shortages, multiple exchange rates and limited access to foreign currency through official channels. As businesses struggled to obtain foreign exchange from banks, the parallel market became the default source of dollars and, in many cases, the benchmark for pricing goods and services. 

Today, however, that long-standing order is beginning to change. 

A combination of sweeping reforms by the Central Bank of Nigeria (CBN), improved liquidity in the Nigerian Foreign Exchange Market (NFEM), stronger foreign portfolio inflows, rising external reserves, and increased investor confidence is steadily eroding the influence of the parallel market. 

Although analysts caution that it is premature to write off the informal market, they agree that its ability to dictate the naira’s direction has weakened considerably, marking one of the most significant shifts in Nigeria’s foreign exchange market in recent years. 

Unlike previous years when the gap between the official and parallel market exchange rates stretched to several hundreds of naira, creating huge arbitrage opportunities, the spread has narrowed significantly. 

The convergence has reduced speculative trading, discouraged round-tripping and encouraged businesses to source foreign exchange through authorised channels instead of relying on street traders. 

For many analysts, the narrowing premium is perhaps the strongest evidence that confidence is gradually returning to Nigeria’s foreign exchange market. 

According to Cordros Research, exchange rate stability has emerged as one of Nigeria’s most important macroeconomic gains over the past year. 

The firm attributed the improvement to stronger foreign portfolio investment inflows, improved oil receipts, higher diaspora remittances and sustained implementation of the CBN’s foreign exchange reforms. 

“The narrowing premium between the official and parallel markets suggests that distortions within the foreign exchange market are gradually disappearing. This is helping to strengthen investor confidence and improve market efficiency,” the firm stated. 

Analysts at Cowry Asset Management share a similar view, noting that the parallel market naturally loses relevance when businesses and individuals can access foreign exchange through official channels within a reasonable period. 

“The more transparent and liquid the official market becomes, the weaker the influence of the black market,” the firm observed. 

The improvement represents a remarkable turnaround from the situation that existed only a few years ago. 

For decades, Nigeria operated a fragmented foreign exchange system characterised by multiple exchange rates, limited dollar supply and administrative allocation of foreign exchange. Those distortions encouraged speculation and rent-seeking, with many market participants exploiting the wide gap between official and parallel market rates. 

Unable to obtain foreign exchange from commercial banks, many manufacturers and importers had little choice but to patronise the black market, where exchange rates were substantially higher. 

Consequently, businesses priced goods using the parallel market rate rather than the official rate because it reflected the true cost of obtaining dollars. That practice fuelled inflation, distorted investment decisions and weakened confidence in the naira. 

The CBN’s recent reforms have begun to reverse that trend. 

The unification of exchange rate windows, enhanced transparency in forex transactions, tighter oversight of Bureau de Change operators and improved liquidity have redirected genuine demand towards the official market while reducing speculative activities. 

Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, said the shrinking influence of the parallel market reflects improving confidence in the official market. 

“The parallel market thrives where there is scarcity,” Yusuf said. “When businesses cannot obtain dollars through official channels, they naturally migrate to the informal market. As liquidity improves and confidence returns, the relevance of the parallel market diminishes.” 

He, however, warned that the gains must be sustained through structural reforms rather than short-term interventions. 

“What will sustain exchange rate stability is increased export earnings, higher crude oil production, stronger diaspora remittances, foreign direct investment and improved productivity. These are the real drivers of a stable foreign exchange market.” 

Another major factor supporting the naira is Nigeria’s stronger external reserves, which have risen above $50 billion, giving the apex bank greater capacity to intervene whenever excessive market volatility emerges. 

Economists believe the stronger reserve position has reassured investors that the CBN possesses adequate buffers to support market stability during periods of pressure. 

At the same time, Nigeria’s attractive fixed-income yields have continued to attract foreign portfolio investors into Treasury Bills and Federal Government securities, increasing dollar inflows and improving liquidity in the official market. 

According to Johnson Chukwu, Managing Director of Cowry Asset Management, improved investor confidence has become one of the strongest pillars of recent exchange rate stability. 

“There is much greater confidence in the market today than there was two years ago,” Chukwu said. “The reforms have improved transparency, liquidity has increased and investors now have greater confidence that they can enter and exit the market without major disruptions.” 

The impact is becoming increasingly visible across the real economy. 

Manufacturers report easier access to foreign exchange for importing raw materials and machinery, while businesses say improved liquidity has reduced production disruptions and enhanced inventory planning. More predictable exchange rates have also helped companies make pricing decisions with greater certainty, reducing the frequency of price adjustments that characterised previous years. 

The moderation in exchange rate volatility has equally complemented the recent easing in headline inflation, helping to reduce imported inflationary pressures. 

Nevertheless, analysts insist that the progress remains fragile. 

Food inflation continues to pose significant risks despite moderation in headline inflation, reflecting persistent supply constraints and seasonal pressures in the agricultural sector. 

External risks also remain. 

Renewed geopolitical tensions in the Middle East continue to create uncertainty in global oil markets. While higher crude oil prices could boost Nigeria’s oil earnings, they could also increase domestic energy costs and complicate inflation management. 

Another issue attracting attention is Dangote Refinery’s decision to begin purchasing crude oil in dollars instead of naira. 

Some economists believe increased dollar demand from Africa’s largest refinery could place additional pressure on the foreign exchange market unless matched by stronger dollar inflows from exports and investment. 

Analysts at CardinalStone Research argue that the recent stability should be viewed as encouraging rather than permanent. 

According to the firm, sustaining exchange rate stability will require Nigeria to strengthen its economic fundamentals by diversifying exports, increasing non-oil foreign exchange earnings, improving productivity and attracting long-term foreign direct investment. 

“The current improvement is positive,” the analysts noted. “But long-term exchange rate stability must ultimately be supported by stronger economic fundamentals rather than administrative measures.” 

Afrinvest West Africa also believes speculative demand has reduced considerably but warns that the foreign exchange market remains vulnerable to external shocks. 

The investment house noted that a sharp decline in global oil prices, reversal of foreign portfolio inflows or deterioration in global financial conditions could quickly widen the gap between official and parallel market rates if policymakers fail to sustain confidence. 

Analysts also emphasise that although the parallel market is losing influence, it is unlikely to disappear completely. 

Like many emerging economies, Nigeria will continue to maintain an informal retail foreign exchange market serving travellers, students, medical tourists and individuals with relatively small foreign currency needs. 

The critical difference, experts say, is that the market is gradually losing its role as the country’s principal price discovery mechanism. 

“The issue is not whether the parallel market disappears,” Yusuf said. “The issue is whether it continues to determine exchange rate expectations across the economy. Increasingly, that no longer appears to be the case.” 

For businesses, the implications are significant. A more stable exchange rate reduces uncertainty, lowers import costs, improves corporate planning and strengthens investment decisions. For investors, narrowing exchange rate volatility enhances confidence in Nigeria’s financial markets and improves the country’s attractiveness as an investment destination. 

For policymakers, however, the task is far from complete. Sustaining the gains will require disciplined monetary and fiscal policies, stronger crude oil production, accelerated export diversification and reforms capable of attracting stable, long-term foreign capital. 

Analysts agree that Nigeria has made measurable progress in restoring confidence to the official foreign exchange market. Yet they warn that maintaining that confidence will depend less on periodic interventions and more on strengthening the structural and economic foundations. 

For the first time in many years, the official foreign exchange market—not the streets—is increasingly setting the tone for the naira. If the current reform momentum is sustained, 2026 could be remembered as the year the parallel market finally began to lose its long-held

grip on.