Central Bank of Nigeria Buys $190M to Stabilize Naira

In a significant move, the Central Bank of Nigeria (CBN) bought about $189.8 million in foreign exchange last week to control the naira’s rapid rise in the official market. This shows a clear change in the bank’s method of managing the currency’s value.

Market reports, including one from TrustBanc Financial Group Limited, confirmed the intervention comes during a time when the naira has been gaining strength. Analysts worry that if this continues unchecked, it could disrupt Nigeria’s financial stability.

A Shift in Strategy

Traditionally, the CBN has preferred to sell dollars from its reserves to support the naira during downturns. This time, instead of supplying dollars, the bank absorbed excess foreign currency, which slowed the currency’s rise.

At the official exchange window, the naira saw significant gains before dropping in the last three trading sessions of the week. By the end of the week, the naira strengthened by ₦9.09 to close at ₦1,346.32 to the U.S. dollar.

The parallel market experienced an even larger change, with the currency gaining ₦60 to settle around ₦1,340/$.

Reasons for the CBN’s Actions

According to reports, analysts have raised concerns about a fast-rising naira and how it could impact foreign investment. This is especially true in fixed-income markets.

A much stronger currency could push foreign investors to exit Nigerian assets too soon, leading to higher demand for dollars and potential instability.

Observers warned that if foreign investors sell their holdings to take profits, the resulting surge in dollar demand could disrupt market liquidity. This explained the CBN’s decision as a way to manage the market proactively instead of reactively.

Market Effects and Wider Context

The dollar-naira spread, which has historically distorted the market, sharply narrowed after the intervention, falling to 0.47% from 3.29% just a week earlier. This alignment between official and parallel rates is seen as a positive sign for continuity in the foreign exchange market.

Economists note that Nigeria’s improving economic conditions are supporting the naira’s strength and reducing the risk of sudden exchange rate changes. These include rising global oil prices, increasing external reserves, and ongoing capital inflows.

However, they warn that global geopolitical issues and external shocks could still create challenges. For now, the CBN’s approach seems to balance steady currency strengthening with actions to prevent excessive growth, maintaining confidence among local and foreign investors.

Implications for Policy

CBN Governor Olayemi Cardoso and his monetary policy team have shown a readiness to move away from traditional currency defense strategies when market conditions require it.

This approach highlights the bank’s aim to keep the market orderly while avoiding volatility that could unsettle investors or harm the economy.

As one market strategist pointed out, by absorbing excess dollars instead of releasing them, the CBN seeks to protect currency strength while avoiding an unstable market path.