Why Naira Exchange Rate Stability Is Unsustainable

Exchange Rate Volatility and Economic Uncertainty

Despite the recent surge in the value of the Naira in the foreign exchange market, financial experts warn that maintaining this stability in the long run may be challenging.

A market analysis conducted over the weekend indicates that the Naira has appreciated by 9.61% in the parallel market, strengthening to N1,505/$1 from its previous peak of N1,665/$1. Similarly, in the official market, the currency recorded a 3.1% appreciation, improving to N1,500/$1 from N1,548/$1.

This positive trajectory is seen as beneficial for businesses, fostering economic growth and financial planning. However, experts emphasize that the sustainability of this trend depends on multiple economic factors.

Experts Weigh in on Naira’s Appreciation

Naira’s Strength Alone Cannot Guarantee Price Stability

David Adonri, Executive Vice Chairman of Highcap Securities Limited, acknowledges the recent improvement in the exchange rate but cautions that it may not immediately translate into lower prices for goods and services. Economic cause-and-effect mechanisms take time to materialize, and other inflationary factors beyond currency volatility remain at play.

Adonri also referenced a respected economist’s claim that the Federal Government of Nigeria (FGN) has injected approximately $8 billion to stabilize the Naira. This intervention, he suggests, may have artificially influenced the recent appreciation rather than reflecting strong economic fundamentals.

Nonetheless, he believes that reduced pressure on the Naira from the petroleum sector, coupled with declining energy costs, justifies some level of appreciation. However, he notes that lasting economic change will only come if the government successfully addresses rural economic development and tackles insecurity, particularly by mitigating the impact of banditry and terrorism.

Sustained Gains Depend on Strong Economic Fundamentals

Clifford Egbomeade, an analyst and communications expert, views the Naira’s recent appreciation as a positive development, especially for businesses dependent on imported goods. However, he warns that the real economic benefits will only materialize if the trend is backed by strong fundamentals such as increased foreign exchange reserves, a boost in foreign investment, and improved export performance.

If the appreciation is merely driven by short-term interventions, such as Central Bank of Nigeria (CBN) liquidity injections or speculative activities, the gains could be short-lived. A stronger Naira requires consistent forex inflows from non-oil exports, heightened investor confidence, and reduced reliance on speculative demand. Without these, external shocks or policy reversals could erase any progress.

Egbomeade also stresses that inflation control is crucial, as continuous price hikes could offset the benefits of currency appreciation. To achieve lasting stability, the government must focus on local production, reduced import dependence, and a well-structured monetary policy.

Business Planning and Economic Growth

Dr. Femi Egbesola, President of the Association of Small Business Owners of Nigeria (ASBON), highlights how exchange rate stability has aided business planning and economic projections. He notes that the strengthening of the Naira has contributed to disinflation and GDP growth.

Egbesola explains that the stability has restored some investor confidence, encouraging investment in the Nigerian economy. Small and medium enterprises (SMEs), in particular, have benefited from lower input costs, making their products more competitive and boosting profitability.

Conclusion: The Long-Term Outlook for Nigeria’s Foreign Exchange Market

While the recent appreciation of the Naira offers short-term benefits, experts remain cautious about its sustainability. Achieving long-term exchange rate stability requires structural reforms, diversification of forex sources, and enhanced security measures to stimulate economic growth. Without these changes, the current trend may be temporary, and Nigeria’s economy could face renewed volatility in the foreign exchange market.

IMF Economic Outlook on Nigeria