Table of Contents
Naira Strengthens to Near Two-Year High Amid Enhanced Forex Market Liquidity
The Nigerian naira has recently climbed to one of its most robust levels in almost two years, closing at ₦1,347.78 to the US dollar in the official foreign exchange market as of Monday, according to the latest macroeconomic insights from CardinalStone.
Year-to-Date Gains Reflect Improved Forex Market Dynamics
Since the start of the year, the naira has appreciated by approximately 6.9% within the official trading window. This upward movement is largely attributed to better liquidity conditions in Nigeria’s foreign exchange market, signaling a healthier supply-demand balance.
Persistent Disparity Between Official and Parallel Market Rates
Despite the naira’s official market gains, a notable divergence remains between the official exchange rate and the parallel (black) market rate. Initially, the parallel market traded at a premium of about 5.7%, but this gap has narrowed to roughly 3.2% following renewed interventions by the Central Bank of Nigeria (CBN) to stabilize the currency.
Central Bank’s Strategic Forex Interventions and BDC Policy Updates
CardinalStone highlights that the shrinking spread between official and parallel rates indicates stronger liquidity in the official market compared to the informal segment. Recently, the CBN authorized licensed Bureau de Change (BDC) operators to purchase foreign currency through authorized dealers at prevailing market rates. Each BDC is allowed to buy up to $150,000 weekly, contingent on compliance with Know-Your-Customer (KYC) protocols.
To prevent currency hoarding, BDC operators must offload any unused foreign exchange balances within 24 hours. Additionally, cash transactions are limited to 25% of total trades, with all settlements required to be processed through licensed financial institutions.
BDC Market Supply and Its Impact on Forex Stability
With 82 licensed BDCs currently operating, the potential monthly foreign exchange supply to this segment could reach around $50 million. This figure is significantly lower than the pre-pandemic monthly supply, which exceeded $1 billion. CardinalStone attributes this decline to improved forex market conditions that have reduced speculative demand and shifted most corporate foreign exchange requirements to the official market window.
This renewed supply has alleviated pressure on retail foreign exchange demand and contributed to narrowing the premium in the parallel market.
Implications for Foreign Investment and Currency Outlook
Market analysts caution that continued appreciation of the naira might lead foreign investors to reconsider their portfolio allocations. Nigeria’s carry trade remains appealing among emerging and frontier markets, attracting substantial foreign portfolio investment (FPI), with outstanding positions estimated between $12 billion and $14 billion.
Given that many of the 2025 capital inflows likely entered the market at exchange rates near ₦1,500 per dollar, a strengthening of the naira to a range between ₦1,200 and ₦1,250 could yield currency gains of approximately 22.4%. Such attractive returns may increase the risk of capital outflows, especially as political uncertainties intensify ahead of Nigeria’s upcoming general elections.
Looking Ahead: Navigating Forex Market Volatility
As Nigeria approaches a critical political cycle, the interplay between forex market liquidity, currency valuation, and foreign investment flows will be pivotal. Policymakers and market participants alike will need to monitor these dynamics closely to sustain the naira’s stability and support economic growth.
