BY Hope Moses-Ashike

The naira rallied to its strongest level in two years last week, buoyed by a weakening US dollar, rising oil prices, and the cumulative impact of ongoing economic and foreign exchange reforms by the Federal Government and the Central Bank of Nigeria (CBN).

The local currency strengthened to N1,396.99 per dollar in the official foreign exchange market on Thursday and further to N1,386.55 on Friday, marking its strongest performance since 2024. The rally reflects improving fundamentals across Nigeria’s external sector and renewed investor confidence.

Brent crude has been trading around $69 per barrel, above Nigeria’s 2026 Federal budget benchmark of $64.85. This price level is expected to bolster fiscal revenues, strengthen foreign exchange inflows, and support exchange rate stability. Analysts have also warned that a full-scale conflict disrupting the Strait of Hormuz, a critical chokepoint for about 20 percent of global oil supply could push Brent prices sharply higher, potentially to $91 or even $150 per barrel within weeks.

With the naira and external reserves already gaining momentum following reforms implemented by the Olayemi Cardoso-led CBN, the current oil price rally presents an opportunity for further consolidation of recent gains in the currency and foreign reserves.

Oil prices extended gains for a third consecutive day on Thursday amid growing concerns that the United States could take military action against Iran, a major oil producer in the Middle East, potentially disrupting regional supply flows. Brent crude futures rose by 94 cents, or 1.4 percent, to $69.34 per barrel, while US West Texas Intermediate (WTI) climbed 1.5 percent to $64.13 per barrel.

The rally has been driven largely by heightened geopolitical risk premiums surrounding Iran and the broader Middle East, alongside unplanned supply disruptions in Kazakhstan and temporary weather-related outages in the United States. Rising tensions between the US and Iran have led analysts to project sustained price strength, even as markets entered the year expecting oversupply due to increased output and moderating demand.

For Nigeria, higher oil prices translate directly into stronger revenue inflows and macroeconomic stability, given that over 80 percent of government earnings are derived from oil-related receipts.

Notably, the naira traded below the N1,400/$1 psychological level in the official market for the first time in more than a year, a milestone widely seen by analysts as a signal of improving market confidence.

Data from the CBN show that the Nigerian Foreign Exchange Market (NFEM) rate strengthened to N1,396.99/$1 on Thursday from N1,400.48/$1 on Wednesday. This confirmed the naira’s return below N1,400/$1 after a prolonged period above that level.

The NFEM rate had weakened to N1,422.07/$1 on January 22 and N1,421.63/$1 on January 23 before easing to N1,418.95/$1 on Monday and N1,401.22/$1 on Tuesday, eventually improving to N1,400.47/$1. The break below N1,400/$1 therefore represents a clear improvement in official market pricing.

At the parallel market, the naira also recorded gains. According to Cowry Asset Management Limited, the currency appreciated by 1.06 percent to N1,454/$1, reflecting improved sentiment across both the official and informal segments of the foreign exchange market.

Aminu Gwadabe, president of the Association of Bureaux De Change Operators of Nigeria (ABCON), said the naira has remained relatively stable across markets for several months, marking an end to years of extreme volatility.

Meanwhile, Bismarck Rewane, managing director of Financial Derivatives Company, estimated the fair value of the naira at about N1,257 to the US dollar, arguing that the local currency remains undervalued.

According to Rewane, the naira is undervalued by approximately 11 percent based on the purchasing power parity (PPP) model. He made the submission during his keynote address at the 2026 Economic Outlook organised by the Association of Corporate Treasurers of Nigeria (ACTN), where he analysed the structural and cyclical forces shaping Nigeria’s exchange-rate dynamics.

Rewane noted that currencies typically gravitate towards their PPP-implied values over a five-year horizon, adding that current estimates place the appropriate exchange rate at N1,256.79/$1.

“A weak dollar is dislocating many global markets, but it is good for Africa, as we are seeing with the naira,” said Charlie Robertson, author of The Time Travelling Economist.

The naira’s rally also reflects broader improvements in Nigeria’s macroeconomic outlook, supported by stronger foreign exchange inflows, rising external reserves, and improved market governance.

Reserves also upbeat

Nigeria’s external reserves have continued their upward trajectory, rising by $5.82 billion or 14.45 percent to $46.11 billion as of January 28, 2026, from $40.29 billion recorded on December 2, 2024, according to CBN data.

The reserves crossed the $46 billion mark for the first time in nearly eight years, underscoring steady accumulation since 2025. Data show that reserves increased by about $510 million in 22 days, from $45.50 billion on December 31, 2025, to $46.01 billion on January 22, 2026.

Industry data indicate that reserves were last at similar levels on August 27, 2018, when they stood at $45.9 billion. Analysts say the reserve build-up strengthens import cover and currency buffers, reflecting improved inflows and foreign exchange management following forex reforms.

The CBN data also signal a turnaround from the volatility experienced during the early phase of the new FX regime, with reserves closing 2025 at about $45.5 billion after opening the year near $40.8 billion.

While analysts expect the reserve growth trend to continue, they caution that sustaining momentum throughout an election year will require fiscal discipline and policy consistency.

Foreign capital inflows rise

Foreign capital inflows rose to $20.98 billion in the first 10 months of 2025, representing a 70 percent increase over total inflows in 2024 and a 428 percent surge from the $3.9 billion recorded in 2023.

Olayemi Cardoso, governor of the CBN, said the naira now trades within a narrow and stable range, with the gap between the official and parallel markets shrinking to under two percent, from over 60 percent previously.

Nigeria’s external sector also strengthened in 2025, with the current account balance increasing by over 85 percent to $5.28 billion in the second quarter, from $2.85 billion in the first quarter. Foreign reserves reached $46.7 billion by mid-November, the highest level in nearly seven years, providing over 10 months of import cover.

Cardoso stressed that reserves are being rebuilt organically through improved market functioning, stronger non-oil exports, and robust capital inflows, rather than through borrowing.

While oil production averaged 1.45–1.52 million barrels per day in 2025, non-oil exports expanded by more than 18 percent year-on-year, supported by exchange-rate flexibility and competitiveness under the market-driven FX framework. Diaspora remittances also rose by about 12 percent, boosted by enhanced transparency and the rollout of the Non-Resident BVN.

Major policy shifts lifting economy

Abiodun Adedipe, founder and chief consultant of B. Adedipe Associates Limited, said key policy reforms are yielding positive results. He cited the elimination of arbitrage and round-tripping through FX reforms, petrol subsidy removal, bank recapitalisation, and fiscal consolidation measures aimed at plugging leakages and expanding fiscal space.

He described tax reforms as a potential game changer capable of igniting regional competitiveness, while initiatives such as the Nigerian Education Loan Fund, Consumer Credit Corporation, National Credit Guarantee Company, recapitalised Bank of Agriculture, and single-digit mortgage schemes could support sustainable growth.

Adedipe added that Nigeria’s economy is underpinned by a large, youthful population, rapid urbanisation, deepening internet penetration, expanding local refining capacity, and renewed growth in manufacturing and non-oil exports.

Fiscal, monetary coordination

The CBN noted that monetary reform must be aligned with fiscal discipline to deliver lasting stability. The discontinuation of direct deficit financing signals a commitment to discipline, alongside fiscal reforms such as revenue optimisation frameworks, creation of a National Revenue Agency, and upgrades to the Treasury Single Account.

Cardoso said closer fiscal and monetary coordination would support Nigeria’s transition to inflation targeting and ensure durable price stability.