…Proposes gradual relaxation of restrictions on banks’ net open FX positions
… Reformed FX market show resilience during April 2025 global market turbulence
… As currency depreciated by 5%
The World Bank has outlined key strategies Nigeria must adopt to achieve and sustain long-term stability for the naira, emphasising the importance of deeper foreign exchange (FX) market reforms, improved communication of monetary policy, and enhanced non-oil revenue generation.
These recommendations are contained in the October 2025 edition of its Nigeria Development Update titled “From Policy to People: Bringing the Reform Gains Home”, released on Wednesday.
According to the report, while recent reforms have helped stabilise the naira and improve FX market functioning, the country remains vulnerable to external shocks due to a narrow export base and dependence on short-term capital inflows. To ensure lasting stability of the local currency, the World Bank urged the government to focus on longer-term foreign exchange inflows from oil, remittances, and especially non-oil exports. It also called for a more transparent FX policy framework and progressive adjustments to regulations governing banks’ foreign currency positions.
FX Market Still Dependent on Short-Term Inflows
The World Bank observed that the Nigerian FX market, despite notable reforms, still heavily relies on inflows from foreign portfolio investors (FPI) and interventions by the Central Bank of Nigeria (CBN). High yields on Open Market Operations (OMO) instruments have continued to attract short-term foreign capital, while the CBN has used positive net FX inflows to build reserves and maintain exchange rate stability.
However, for the FX market to become sustainably liquid and market-driven, the World Bank stressed that Nigeria must focus on attracting more durable sources of foreign exchange, particularly through increased oil earnings and formalised remittance channels. Equally important is the urgent need to expand and diversify the country’s export base beyond oil, which requires tackling longstanding supply-side constraints.
Read also: World Bank flags Nigeria’s rising revenue collection costs
Allowing Banks Greater FX Flexibility
The report proposed a gradual relaxation of restrictions on banks’ net open FX positions within safe macroprudential limits as part of a broader strategy to deepen the FX market and support exchange rate flexibility. With higher domestic yields and reduced incentives to hold U.S. dollars, the World Bank noted that this policy shift could help stabilise the naira by aligning market forces more closely with fundamentals.
The CBN in January 2024 said the Net Open Position (NOP) limit of banks’ overall foreign currency assets and liabilities both on and off-balance sheet should not exceed 20 percent short or 0 percent long of shareholders’ funds unimpaired by losses using the gross aggregate method.
Nonetheless, the report emphasised that any such adjustments should be made cautiously and alongside measures to build market confidence. It also underscored the need for the CBN to clarify and consistently communicate its FX intervention policies, including its reserves management strategy and thresholds for intervention during external shocks.
FX Reforms Yielding Positive Results
Recent reforms have already yielded significant improvements in Nigeria’s FX market. The unification of exchange rates, upgrades to interbank trading platforms, and clearing of the FX backlog have led to the re-emergence of an active, willing-buyer-willing-seller market. Additionally, regulatory reforms targeting the bureau de change (BDC) sector and remittance channels have helped formalise inflows and stabilise the official exchange rate.
During the global market turbulence of April 2025, the reformed FX market demonstrated resilience. While the CBN intervened to reduce volatility, it also allowed the naira to depreciate modestly by 5% in response to declining oil prices, an indication of increased exchange rate flexibility.
Read also: Nigeria’s poverty paradox: Growth without prosperity
External Accounts Supporting Naira Stability
The World Bank noted that Nigeria’s external position has remained strong in 2025 following significant improvement in 2024. The current account balance (CAB) rose sharply from a 0.1 percent GDP surplus in early 2023 to 6 percent in Q1 2024, driven by naira depreciation, which boosted exports and curtailed imports. In Q1 2025, the CAB posted a surplus of $3.9 billion (6.1% of GDP), supported by a robust trade-in-goods surplus of $4.2 billion.
The increase in non-oil exports, up 50 percent year-on-year played a major role in this performance, alongside reduced petroleum product imports following the removal of the fuel subsidy and resumption of domestic refining. However, inward remittances declined by 4.2 percent year-on-year in Q1 2025, partly due to a slowdown in global economic activity and lower employment prospects for Nigerians abroad.
Despite these gains, the report warned that Nigeria’s higher inflation relative to the U.S. has begun to erode the competitive edge gained from earlier exchange rate adjustments.
Financial Account Weakness and Reserve Depletion
The World Bank also highlighted continued challenges on the financial account front. First quarter (Q1) 2025 witnessed net financial outflows driven by divestments in investment positions, foreign debt repayments by the CBN and corporate entities, and outflows from bank deposits. Although foreign direct investment (FDI) recorded a net inflow of $798 million during the period, it remained below 1% of GDP, constrained by structural bottlenecks in the business environment.
These outflows, in contrast to the current account surplus, contributed to a temporary depletion of external reserves from $40.9 billion at the end of 2024 to $38.3 billion by March 2025. However, reserves later rebounded to $41.3 billion by the end of August 2025, equivalent to 8.6 months of import cover, as net FX inflows turned positive again.
Sustaining the Gains Requires Commitment
The World Bank stated that Nigeria has made significant strides in stabilising the naira through bold policy reforms and improved FX market functioning. However, sustaining these gains will require a continued focus on attracting longer-term FX inflows, expanding non-oil exports, enhancing policy transparency, and strengthening investor confidence.
Without these efforts, the naira’s current stability may prove short-lived in the face of future economic shocks or global financial volatility.