Agora: Nigeria’s FX Stability Remains Fragile, Needs Urgent Structural Reforms

• Seeks inflation targeting, stronger non-oil forex supply

Emmanuel Addeh in Abuja

A new policy memo by Agora Policy has warned that Nigeria’s recent foreign exchange stability is built on a fragile foundation of high-interest-rate inflows rather than durable structural improvements, cautioning that the country remains exposed to external shocks that could quickly reverse recent gains.

In the new brief, the Waziri Adio-led think tank acknowledged that the sweeping reforms introduced in 2023 under President Bola Tinubu marked a necessary and significant correction to longstanding macroeconomic distortions.

At the time, it said Nigeria faced a combination of an overvalued exchange rate, an unsustainable petrol subsidy regime, and a central bank heavily involved in quasi-fiscal interventions.

According to the report, the removal of fuel subsidies, liberalisation of the exchange rate, and tightening of monetary policy helped restore a degree of credibility to the FX system. These measures, it explained, dismantled the previous regime of multiple exchange-rate windows and administrative rationing, allowing for improved price discovery and a more market-driven determination of the naira.

But nearly three years after those reforms,  Agora stressed that the gains represent only the first phase of reform and do not yet amount to a resilient or self-sustaining FX system. It argued that the apparent stability of the naira in 2025 and early 2026 has been largely supported by foreign portfolio inflows attracted by elevated domestic interest rates, rather than by strong underlying fundamentals.

The report described this as “rented stability,” warning that such inflows are inherently volatile and can reverse rapidly in response to changes in global financial conditions, oil prices, or investor risk appetite.

It noted that as inflation declines and global markets become more uncertain, the yield premium that currently attracts foreign capital could narrow, exposing the naira to renewed pressure.

Providing further context, Agora pointed to Nigeria’s external balance sheet vulnerabilities. While the country recorded a current account surplus of $12.1 billion in the first nine months of 2025, driven largely by oil exports and remittances and saw external reserves rise to about $50 billion by February 2026, these improvements, it argued, masked deeper structural weaknesses.

Although the exchange rate is now broadly competitive following the sharp depreciation of 2023–2024, Agora cautioned that this alone does not guarantee stability. It emphasised that Nigeria’s historical experience shows that even periods of apparent equilibrium can be followed by episodes of FX shortages, capital outflows, and exchange-rate crises.

Against this backdrop, the think tank argued that Nigeria must move decisively into a second phase of reform aimed at building what it termed “earned stability”, a system anchored in durable sources of foreign exchange, credible policy frameworks, and stronger market institutions.

A central pillar of this transition, according to the memo, is the recalibration of monetary policy. Agora criticised the current use of the Central Bank of Nigeria’s Open Market Operations (OMO) as a de facto external borrowing tool designed to attract foreign capital through high yields. It warned that this approach creates a dependency that forces authorities to maintain elevated interest rates even as inflation moderates.

This, the report said, distorts domestic financial conditions, weakens the transmission of monetary policy to the real economy, and subordinates domestic objectives, such as price stability and credit growth to the need to sustain foreign inflows.

To address this, Agora recommended a gradual shift toward a more conventional monetary framework in which interest rates are primarily used to manage inflation and liquidity. It suggested aligning the policy rate more closely with OMO rates and reducing the reliance on instruments such as high cash reserve requirements, which raise the cost of financial intermediation.

The report also called for a clearer and more credible exchange-rate regime. While acknowledging that the 2023–2024 reforms moved Nigeria away from a rigidly managed system, it argued that the next step is to institutionalise exchange-rate flexibility by making the naira a genuine shock absorber rather than an implicit policy target.

In particular, Agora urged the adoption of a transparent, rules-based intervention framework that clarifies when and how the central bank intervenes in the FX market. It also recommended making inflation targeting an explicit and binding objective, with a defined timeline of 18 to 24 months, to anchor expectations and improve policy credibility.

The memo warned that Nigeria’s current approach, where inflation targeting is nominally adopted but exchange-rate stability is pursued in practice, creates inconsistency and undermines confidence. Establishing a clear hierarchy of objectives, it said, would help resolve this tension and strengthen the overall policy framework.

Beyond monetary policy, Agora emphasised the need to expand and diversify sources of foreign exchange supply. It identified remittances, non-oil exports, and foreign direct investment as key areas with significant untapped potential.

Although Nigeria is already one of the largest recipients of remittances globally, the report noted that a substantial portion of these flows still bypasses the official FX market due to high transaction costs and regulatory barriers. It called for measures to reduce transfer costs, expand fintech channels, and introduce competitive diaspora investment instruments to attract more of these inflows into formal channels.

In the non-oil sector, the report highlighted agriculture and solid minerals as major opportunities.

The think tank also underscored the importance of developing industrial exports through targeted policies such as special economic zones, improved logistics, and reliable power supply. It noted that sustained growth in manufacturing exports would provide a more stable and predictable source of foreign exchange over time.

In addition, the report called for reforms to ensure that a larger share of oil-related foreign exchange earnings is channelled through the official FX market. It argued that the current system, where a significant portion of oil revenues is handled administratively, limits market depth and transparency.

“Nigeria’s first phase of monetary reforms was an act of correction. After years of overvaluation, administrative rationing, and the distortions that came with them, the 2023–24 reforms restored a basic market logic to the foreign exchange system. That was necessary and significant. But it is not sufficient.

“The diagnosis presented here suggests a specific vulnerability: the exchange rate is now broadly competitive, but the external balance sheet — with portfolio liabilities nearly matching reserve assets and a deeply negative NIIP — remains exposed to flow reversals.

“Competitiveness gains are eroding through domestic inflation. FX stability is still too dependent on maintaining high carry differentials, which subordinates domestic monetary policy to external financing conditions and limits the exchange rate’s capacity to function as a genuine shock absorber,” it added.

According to Agora, the reforms proposed address existing vulnerabilities as a system, stressing that recalibrating OMO rates and deepening market-making capacity will change the basis of stability from rented to earned.

“Transparent intervention rules and a genuine float will make the exchange rate do the work it is designed to do in an oil economy. Building durable autonomous FX supply — through remittances, export-proceeds repatriation, and better routing of oil inflows — will reduce the market’s dependence on hot money. And addressing supply-side inflation will close the loop between monetary policy, real competitiveness, and the FX framework.

“None of this is straightforward. Each reform requires sustained institutional effort and political tolerance for adjustment. But the alternative — drifting back toward implicit pegs, excessive OMO reliance, and a carry-trade-dependent stability — recreates the vulnerabilities that made the 2023–24 correction necessary in the first place.

“The question is not whether Nigeria needs a second phase of FX reform. It is whether the institutional momentum from the first phase can be converted, deliberately and quickly, into the structural changes that the second phase demands,” it argued.