Naira’s Path to Recovery: A Closer Look at 2025 Projections

As 2024 draws to a close, Nigeria’s naira continues to face significant challenges, having endured a dramatic decline against the dollar throughout the year. However, the outlook for 2025 offers cautious optimism. Experts predict a rebound, driven by a combination of higher foreign exchange inflows, domestic economic reforms, and a reduction in key imports. With Nigeria’s economy at a crossroads, these developments provide a potential path to stability, but the road ahead remains complex and fraught with challenges.

The Oil Sector: A Lifeline for the Naira

Nigeria’s dependence on oil remains a double-edged sword. On one hand, the country’s oil exports make up a substantial portion of foreign exchange earnings, and any disruptions in the sector can exacerbate FX pressures. On the other, the recent increase in Nigeria’s oil production offers a glimmer of hope. In October 2024, Nigeria’s oil output rose to 1.69 million barrels per day — the highest level since April 2021. This growth, coupled with stabilizing global oil prices, provides the opportunity for increased petrodollar inflows, which would go a long way in replenishing the nation’s foreign exchange reserves and supporting the naira.

The significance of oil cannot be overstated. In the past, even slight fluctuations in oil production have led to dramatic shifts in the naira’s value. With sustained improvements in oil production and pricing, analysts are hopeful that 2025 could see a more stable naira.

Reducing Fuel Imports: The Role of Domestic Refining

One of the most promising factors for the naira’s recovery is the decline in fuel imports, which have long placed undue pressure on Nigeria’s foreign exchange reserves. According to Uche Uwaleke, Director of the Institute of Capital Market Studies at Nasarawa State University, an increase in domestic refining capacity could significantly reduce the nation’s reliance on costly imported petroleum products. This would not only ease FX demand but also help reduce the country’s import bill, strengthening the naira.

Additionally, Nigeria’s recent moves toward boosting its export capacity for petroleum products could further support the naira. By diversifying exports, Nigeria can reduce its FX deficits and gain more control over its exchange rate dynamics.

Agricultural Improvements: Easing Pressure on Food Imports

Another factor that could contribute to a more favorable FX position in 2025 is the growing strength of Nigeria’s agriculture sector. Over the past few years, the country has made significant strides in improving local food production, particularly through initiatives like the Anchor Borrowers Programme (ABP). With rising agricultural output, Nigeria has the potential to reduce its dependency on imported food products, which have been a significant drain on foreign reserves.

The reduction in food imports would ease some of the pressure on the naira by curbing the demand for foreign currency to finance imports. The boost in local production can also drive rural economic growth, creating a multiplier effect that benefits the broader economy.

Increased FX Inflows: A Key Pillar for Recovery

Foreign exchange inflows are set to increase in 2025, largely due to rising remittances and foreign portfolio investments (FPIs). According to the World Bank, Nigeria remains the largest recipient of remittances in Africa, with Nigerians abroad sending home over $23 billion in 2023. These remittances play a crucial role in supporting the naira by providing much-needed liquidity to the economy.

In addition to remittances, the Nigerian government has taken steps to encourage foreign investment through various policy reforms. While foreign portfolio investment (FPI) flows have been somewhat volatile in recent years, the outlook for 2025 remains positive, particularly with the ongoing efforts to improve the ease of doing business in Nigeria.

EFEMS: A Step Toward FX Market Transparency

The introduction of the Electronic Foreign Exchange Matching System (EFEMS) has been a critical move towards greater FX market transparency. By addressing speculative trading and providing clearer pricing mechanisms, EFEMS aims to enhance liquidity and help stabilize the naira. While the black market remains a concern, the positive early results from EFEMS suggest that improved transparency could help align the official and parallel markets in the long term.

Central Bank Governor Olayemi Cardoso’s commitment to policy consistency and increased transparency is essential in rebuilding investor trust. His efforts to improve the credibility of the CBN’s interventions, including the relaxation of restrictions on foreign exchange access, are seen as pivotal to achieving a more stable exchange rate in the near future.

Challenges Remain: Volatility and Speculation

Despite these promising indicators, the path to naira stability is not without obstacles. Speculation and black market activities continue to create distortions in the currency’s value, leading to high volatility in the official and parallel markets. Although the CBN’s interventions through policies like EFEMS are an important step, achieving lasting stability requires greater coordination between monetary policy, fiscal policy, and structural reforms.

The lack of transparency in the FX market remains a key challenge. As Zeal Akaraiwe, CEO of Graeme Blaque Advisory, notes, information asymmetry among market participants continues to fuel uncertainty. Until market participants have access to accurate and timely information about the true state of FX reserves, volatility is likely to persist.

Outlook for 2025: A Gradual Recovery

Looking ahead, 2025 holds promise for the naira, but the recovery will likely be slow and gradual. A more favorable balance of oil exports, agricultural production, and FX inflows could create the conditions for a more stable currency. However, this will require continued reforms, particularly in improving market transparency and reducing reliance on volatile external sources of FX.

Some analysts, such as Olaolu Boboye of CardinalStone Securities, predict that the naira could stabilize within the range of N1,000 to N1,200 per dollar, which, though an improvement, would still represent a significant devaluation from previous years. Others, like Abdulrauf Bello of Cowrywise, believe that the naira’s true value will ultimately reflect the broader realities of Nigeria’s macroeconomic environment — suggesting that while the naira may not return to the levels seen in 2022, there is room for modest appreciation.

Conclusion

The road to naira recovery in 2025 is complex, but not impossible. Key factors such as rising oil production, decreased fuel imports, improved agricultural output, and increased foreign inflows offer hope. However, achieving true stability will require continued commitment to policy consistency, transparency, and addressing long-standing market inefficiencies.

While the road ahead is uncertain, the steps taken so far suggest that Nigeria is set for a gradual recovery in the coming year. With the right policies in place, the naira may be able to regain some of its lost ground, laying the foundation for a more stable and resilient economy in the years to come.