Why the Naira Has Stabilized Around ₦1,365/$ — And Why the Calm May Not Last

After months of sharp swings, the naira has entered a period of relative stability.

The exchange rate has remained close to ₦1,365 per US dollar, giving businesses and investors a level of predictability that was largely absent over the past two years.

This stability has improved confidence in Nigeria's foreign exchange market. However, it has also raised an important question.

Has the naira finally found its fair value, or is this stability being supported by conditions that may not last?

The answer lies in a combination of aggressive monetary policy, stronger foreign exchange inflows, and lower demand for dollars. While these factors have helped stabilize the currency, they also expose vulnerabilities that investors should not ignore.

Monetary Policy Has Tightened Liquidity

One of the biggest reasons for the naira's stability is the Central Bank of Nigeria's tight monetary policy.

The CBN has maintained high benchmark interest rates between 26.5 percent and 27.5 percent while keeping the Cash Reserve Ratio at elevated levels.

Higher interest rates reduce the amount of money circulating in the economy.

With less excess naira available, demand for foreign currency also falls.

The CBN has also continued issuing Open Market Operations (OMO) bills and Treasury bills with attractive yields.

These securities offer institutional investors strong returns, encouraging them to invest in government debt instead of speculating against the naira.

This strategy has helped reduce pressure on the foreign exchange market.

High Interest Rates Are Attracting Foreign Capital

Nigeria's high interest rates have created another important advantage.

Foreign investors searching for better returns have increased their exposure to Nigerian financial markets.

This strategy, often called the carry trade, involves borrowing in countries with lower interest rates and investing in markets offering much higher yields.

Nigeria's interest rate differential has made its government securities attractive to foreign portfolio investors.

As these investors convert dollars into naira to purchase local assets, they increase foreign exchange supply in the official market.

This additional dollar liquidity has contributed to exchange rate stability.

However, these investments are usually short term.

The same capital can leave just as quickly if market conditions change.

Stronger Foreign Exchange Buffers Are Supporting the Market

Nigeria's external reserves have also played an important role.

Foreign exchange reserves above $51 billion provide the Central Bank with greater capacity to intervene when market volatility increases.

These reserves improve confidence because they signal that the country has sufficient foreign currency to meet external obligations.

Diaspora remittances have also strengthened official foreign exchange supply.

By encouraging remittances through licensed International Money Transfer Operators, more foreign currency now enters official market channels instead of informal networks.

Oil earnings have also supported reserves.

Combined with sovereign borrowing in international markets, these inflows have improved overall dollar liquidity.

Lower Import Demand Is Reducing Pressure

Another structural change is taking place.

Nigeria's foreign exchange demand is no longer as heavily driven by fuel imports.

The expansion of domestic refining capacity, particularly through the Dangote Refinery, has reduced the amount of foreign currency previously required to import refined petroleum products.

For many years, fuel imports accounted for a large share of Nigeria's annual foreign exchange demand.

Producing more refined fuel locally reduces that pressure.

The settlement of long-standing foreign exchange backlogs has also improved investor confidence.

As confidence returned, the gap between the official exchange rate and the parallel market narrowed considerably.

A smaller gap reduces opportunities for currency speculation and strengthens confidence in the formal market.

The Stability Still Has Weak Points

Despite these improvements, important risks remain.

The biggest concern is that much of the naira's stability depends on tight monetary policy and foreign portfolio investment.

High interest rates attract capital today, but they also increase borrowing costs for Nigerian businesses.

Manufacturers, small businesses, and industrial companies face more expensive loans, making expansion and job creation more difficult.

This slows growth in the real economy.

Another risk comes from foreign portfolio investors.

Unlike factories or long-term infrastructure projects, these investors can withdraw their money quickly.

If global interest rates become more attractive elsewhere or investors become worried about Nigeria's economy, capital outflows could increase.

That would place fresh pressure on the naira.

Nigeria also remains vulnerable to oil price movements.

Crude oil exports continue to provide a large share of foreign exchange earnings.

If global oil prices fall or production declines because of operational challenges or production quotas, foreign reserves could weaken.

What Investors Should Watch

The coming months will reveal whether the current stability can be maintained.

Investors should monitor:

• Foreign exchange reserve levels

• Oil prices and production volumes

• Foreign portfolio investment flows

• Inflation trends

• Future CBN interest rate decisions

These indicators will provide a clearer picture of whether the naira's current stability reflects lasting structural improvement or temporary financial conditions.

The naira's stability around ₦1,365 per dollar is not the result of a single policy.

It reflects aggressive monetary tightening, stronger foreign exchange reserves, improved official inflows, and lower import-related demand for dollars.

These developments have created greater confidence in Nigeria's foreign exchange market.

However, much of that confidence still depends on high interest rates, foreign portfolio inflows, and strong oil earnings.

Long-term currency stability will require something more durable.

Nigeria must continue expanding exports, strengthening domestic production, and reducing dependence on volatile sources of foreign exchange. Only then can the naira remain stable without relying heavily on short-term financial support.