When Naira and External Reserves Appreciate

By Lawal Dahiru Mamman 

Nigeria’s financial outlook opened the month of July with an encouraging sign as the naira recorded a slight appreciation against the United States dollar, accompanied by a modest but meaningful rise in the country’s external reserves.

While the currency gain may appear marginal at first glance, its implications for domestic economic stability, investor sentiment, and Nigeria’s global competitiveness extend far beyond the immediate figures. This development comes at a time when market participants have been yearning for signs of resilience currency volatility and economic pressures.

According to data from the Central Bank of Nigeria (CBN), the naira strengthened in the Investors and Exporters window, an official market improvement occurring against the backdrop of a slight depreciation in the parallel. While gap between the official and informal market rates underscores challenge in Nigeria’s foreign exchange regime, yet the official gain offers a symbolic and practical boost to market confidence.

More notably, Nigeria’s external reserves rose from $38.63 billion on July 24 to $38.77 billion on July 25. Analysts have linked this upward movement to improved oil export earnings—driven partly by favorable global crude prices—and renewed investor confidence following recent monetary and fiscal reforms introduced by the federal government.

The reserves growth, though modest in numerical terms, is a powerful indicator that Nigeria is regaining some of the financial breathing space required for critical economic activities and reassure foreign creditors.

A currency appreciation, even at this small scale, can have ripple effects across the economy. It signals to both domestic and international investors that the market is beginning to stabilize, which in turn helps reduce speculative attacks on the naira.

Importers and exporters gain greater confidence to plan transactions without the fear of sudden currency depreciation, and inflationary pressures can be moderated as the cost of importing goods becomes slightly more predictable. This is particularly significant in Nigeria, where exchange rate volatility has historically eroded business confidence, discouraged long-term investments, and undermined macroeconomic stability.

The role of external reserves in this context cannot be overstated. They serve as a crucial buffer against sudden capital outflows, commodity price swings, and geopolitical shocks that could destabilize the naira. At $38.77 billion, Nigeria’s reserves remain below their pre-2020 peaks, but their current trajectory upward strengthens the country’s standing with global credit rating agencies, reassures multilateral lenders, and bolsters its negotiating leverage in international trade.

A healthy reserves position allows the CBN to step into the market when necessary to prevent disorderly depreciation, ensuring that businesses and households are shielded from abrupt currency shocks.

Furthermore, growing reserves enhance Nigeria’s ability to meet external debt obligations without jeopardizing domestic fiscal stability. They also improve the country’s capacity to import essential goods such as machinery, industrial inputs and pharmaceuticals among other sectors that are directly linked to economic productivity and public welfare.

In global trade, such financial resilience projects the image of an economy capable of honoring its commitments, which in turn fosters trust among trading partners.

With the naira showing resilience and reserves building up, Nigeria finds itself better positioned to secure favorable terms in trade and investment negotiations. Foreign direct investors are more likely to commit capital when they perceive currency stability, and this could spur growth in sectors like manufacturing, agriculture, technology, and renewable energy.

In addition, the improved financial optics could strengthen Nigeria’s position within the African Continental Free Trade Area (AfCFTA), where stable currency environments are critical for facilitating predictable cross-border trade and investment flows.

However, while these developments are promising, sustaining them will require discipline and consistency in both monetary and fiscal management. It is not enough to rely on oil exports alone; diversifying the sources of foreign exchange earnings through expanded non-oil exports, fostering innovation-driven industries, and harnessing the potential of diaspora remittances will be critical.

Policymakers must also address the distortions in the foreign exchange market by reducing the attractiveness of parallel market speculation, strengthening anti-money laundering frameworks, and ensuring transparency in forex allocation.

Nigeria’s economy has endured a prolonged period of currency instability, policy uncertainty, and vulnerability to global commodity shocks. This latest combination of a stronger naira and growing reserves represents a potential inflection point. A moment when the country could begin transitioning from a reactive economic posture to a proactive, growth-oriented trajectory.

If policymakers and the CBN consolidate recent gains through sustained reforms, strategic investment in productive sectors, and stronger institutional frameworks, Nigeria could not only stabilize its economy but also enhance its competitiveness in the global market, reclaiming its status as a leading economic force in Africa.