By SpringsNewsNG | February 27, 2025

The naira has continued to strengthen following foreign exchange reforms by the Central Bank of Nigeria (CBN), but concerns are mounting over the nation’s declining forex reserves.

At the close of trading on Tuesday, the naira appreciated by 0.15% to N1,501.42/$ at the official market, while the parallel market rate gained 0.24% to N1,497/$. This has significantly narrowed the gap between both markets.

According to Bloomberg, the naira has strengthened by 2.6% since the start of the year. However, during the same period, Nigeria’s foreign reserves dropped by $2.34 billion, falling from a peak of $40.92 billion on January 6 to $38.58 billion as of Monday.

“If reserves continue to decline at an accelerated pace and we don’t have clarity on net reserves, and monetary policy easing commences, then foreign investors could become nervous,” said Ayodeji Dawodu, Director of Fixed Income at BancTrust & Co.

Financial intelligence firm Stears has also expressed concerns that the CBN’s decision to halt weekly dollar sales to Bureau De Change (BDC) operators may widen the spread between official and parallel market rates.

In its Stears Africa Capital in 2025 report, the firm warned, “Discontinuing these sales could widen the spread, increase arbitrage, and fuel speculative pressures, destabilizing the market.” It projected that proactive CBN interventions would slow naira depreciation from 41% in 2024 to around 8-9% annually by 2025/26, with the currency expected to close 2025 at N1,674/$.

The report highlighted key risks to forex stability, including oil revenue volatility, declining reserves limiting CBN interventions, and weak investor sentiment. It emphasized that maintaining stability requires government efforts to tackle insecurity and economic uncertainty while boosting forex inflows from oil, non-oil exports, foreign investments, and remittances.

In December, the CBN temporarily allowed BDC operators to purchase forex from the Nigerian Foreign Exchange Market, later extending access until May 30, 2025. However, purchases were restricted to a maximum of $25,000 per week per authorized dealer bank.

Meanwhile, Financial Derivatives Company Managing Director, Bismarck Rewane, commended the CBN’s forex policies, stating that the naira remains undervalued. Speaking on Arise TV, he noted that a Purchasing Power Parity analysis placed the fair value of the naira at N1,102.15/$, making it 26.35% undervalued.

“If you intervene to support an undervalued currency, you’re actually bringing it back from misalignment to alignment,” Rewane said. He praised the narrowing gap between official and parallel markets, improved price discovery, and a trade balance of $18.6 billion—the highest in a long time—as signs that the policies are working.

Despite the short-term gains, analysts warn that continued forex reserve depletion could challenge long-term stability unless sustained policy measures bolster dollar inflows and investor confidence.