Economy and Business

Naira Shows Mixed Performance in February 2025 as Forex Reserves Dip

The Nigerian naira experienced a mixed performance in February 2025, closing the month with an 8.5% gain on the parallel market but a 1.7% decline on the official market. This development comes amid ongoing efforts by the Central Bank of Nigeria (CBN) to stabilize the currency and address the country’s foreign exchange (FX) challenges. According to the Afrinvest Monthly Market Report, the naira closed at 1,490/ $o n t h e p a r a ll e l ma r k e t an d 1, 500/$ on the official market, reflecting the complexities of Nigeria’s FX landscape.

Naira’s Performance: A Tale of Two Markets

The naira’s performance in February 2025 highlighted the divergence between the parallel and official FX markets. On the parallel market, the currency appreciated by 8.5% month-on-month (m/m), settling at 1,490/ $. T hi s g ain w a s a tt r ib u t e d t ore d u ce dd e man d p ress u re an d im p ro v e d l i q u i d i t y in t h e u n o ff i c ia l ma r k e t . Ho w e v er, o n t h eo ff i c ia l ma r k e t, t h e nai r a d e p rec ia t e d b y 1.7$ . This decline underscores the challenges faced by the CBN in maintaining stability across all FX segments.

Analysts at Afrinvest linked the naira’s mixed performance to the CBN’s efforts to stabilize the currency, particularly through the resumption of payments for the verified portion of the outstanding $7.0 billion FX backlog. These payments have helped to ease some of the pressure on the official market, but the parallel market continues to reflect the underlying demand for dollars among businesses and individuals.

Foreign Reserves Decline Amid FX Challenges

Nigeria’s foreign reserves also faced pressure in February 2025, declining by 3.2% m/m to $38.46 billion as of the end of the month. This drop was primarily driven by the CBN’s interventions in the FX market to support the naira. The central bank has been supplying dollars to Bureau de Change (BDC) operators and Deposit Money Banks (DMBs) in a bid to improve liquidity and stabilize the currency.

Despite these efforts, the decline in foreign reserves highlights the persistent challenges facing Nigeria’s FX market. The country’s reliance on oil exports for a significant portion of its foreign exchange earnings has made it vulnerable to fluctuations in global oil prices. In February 2025, the price of Nigeria’s benchmark crude oil, Bonny Light, fell by 3.2% week-on-week to $75.88 per barrel. This decline was attributed to weakened global demand, which weighed on crude prices across the board.

Impact of Oil Prices on Forex Reserves

The sustained pressure on oil prices has had a direct impact on Nigeria’s foreign exchange reserves. Lower oil earnings have reduced the inflow of dollars into the economy, exacerbating the country’s FX liquidity challenges. According to Cowry Asset Research, Nigeria’s forex reserves declined by $240 million, or 0.61% week-on-week, reflecting weaker oil earnings and highlighting the need for diversification of the economy.

The decline in oil prices and foreign reserves has also raised concerns about the naira’s stability. Experts have warned that mounting debt burdens, declining reserves, and high inflation rates could undermine the potential gains of ongoing FX reforms. These challenges underscore the need for a comprehensive approach to addressing Nigeria’s economic vulnerabilities.

CBN’s Efforts to Stabilize the Naira

In response to these challenges, the CBN has intensified its efforts to defend the naira and stabilize the FX market. The central bank has implemented a range of measures, including tightening liquidity and enhancing FX supply mechanisms. These efforts have helped to ease some of the pressure on the naira, particularly on the parallel market.

Analysts at Afrinvest project that the naira will maintain its positive performance across FX segments in March 2025, supported by the CBN’s continued supply of dollars to BDCs and DMBs. However, they caution that adverse market shocks could undermine these gains. The CBN’s ability to sustain its interventions will be critical in determining the naira’s trajectory in the coming months.

Outlook for the Naira and FX Market

Looking ahead, analysts expect the battle for stability in the FX market to continue. The CBN is likely to take more decisive steps to support the naira, including further tightening of liquidity and enhancing FX supply mechanisms. These measures could help the naira gain further ground against the dollar in the coming weeks.

However, the outlook for the naira remains uncertain, given the challenges facing Nigeria’s economy. The country’s reliance on oil exports, mounting debt burdens, and high inflation rates continue to pose significant risks to the currency’s stability. Addressing these challenges will require a coordinated effort by the government, the CBN, and other stakeholders.

The Role of Economic Diversification

One of the key lessons from the recent performance of the naira and the FX market is the need for economic diversification. Nigeria’s over-reliance on oil exports has made it vulnerable to external shocks, such as fluctuations in global oil prices. Diversifying the economy and boosting non-oil exports could help to reduce this vulnerability and create a more stable foundation for the naira.

Efforts to diversify the economy should focus on sectors such as agriculture, manufacturing, and services, which have the potential to generate significant foreign exchange earnings. Additionally, improving the ease of doing business and attracting foreign investment could help to boost economic growth and support the naira.