Global shocks, weak inflows test Nigeria’s FX stability

Nigeria’s foreign exchange stability came under renewed strain in March as global risk aversion and weakening capital inflows combined to pressure the naira, underscoring the economy’s vulnerability to external shocks, according to analysts at Quest Merchant Bank.

The naira depreciated by about 1.3 percent month-on-month to close at N1,387 per dollar, reversing the relatively stronger performances recorded in the first two months of the year as FX liquidity tightened across the market.

Quest Merchant Bank analysts attributed the softer performance primarily to a sharp decline in offshore investor participation, driven by heightened geopolitical uncertainty.

“The naira came under renewed pressure due to tight FX liquidity resulting from dwindling offshore investor inflows,” the analysts said. “The ongoing conflict in the Middle East has triggered a global risk-off sentiment toward emerging market assets, including Nigeria.”

They added that foreign investors have largely adopted a wait-and-see approach. “Foreign investors have largely remained on the sidelines, choosing to monitor the duration and potential escalation of the Middle East conflict,” the report noted.

The retreat of offshore investors is particularly significant for Nigeria, where foreign portfolio inflows play a critical role in supporting FX liquidity. With reduced participation, supply conditions tightened further, exacerbating pressure on the currency.

To contain volatility, the Central Bank of Nigeria (CBN) sustained its interventions in the FX market.

“Against the backdrop of weaker foreign investor participation, the CBN maintained a strategic presence in the FX market to moderate pressure on the naira,” Quest analysts said.

However, persistent interventions and external obligations appear to be weighing on the country’s reserves. Gross official reserves declined by $455 million month-on-month to $49.2 billion, marking the first drop since June 2025.

Although the apex bank did not provide a formal explanation, Quest analysts linked the decline to a mix of debt service commitments and FX market support.

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“Debt service obligations and the CBN’s active intervention in the FX market during the month are likely explanations for the decline in reserves,” they said.

At the same time, domestic demand for foreign exchange remained elevated. A rebound in import activity increased pressure on the FX market, while global uncertainty boosted demand for the dollar as a safe-haven asset.

“Persistent demand pressures stemming from the rebound in import activity,” alongside “increased demand for the US dollar by foreign investors as a haven asset,” further amplified pressure on the naira, according to the report.

Global currency dynamics reinforced these trends, with the Dollar Index rising to 99.8 in March from 97.6 in February, reflecting stronger demand for the US currency.

The naira’s weakness was also reflected in the parallel market, where it depreciated by about 4 percent month-on-month to N1,426 per dollar, pointing to broader underlying FX pressures.

Looking ahead, Quest Merchant Bank expects Nigeria’s FX environment to remain fragile in the near term, as external uncertainties persist and capital inflows remain subdued.

“We expect tight FX liquidity conditions in the near term, driven by persistent global risk aversion among offshore investors, with no immediate signs of a resolution to the ongoing conflict,” the analysts said.

Still, they noted that the Central Bank’s continued intervention, supported by relatively strong external buffers, should provide short-term relief.

“Continued FX sales by the CBN, supported by external reserves, will help ease pressure on the naira in the near term,” the report added, though a sustained recovery will depend on the return of foreign inflows and an improvement in global risk sentiment.

Hope Moses-Ashike

Hope Moses-Ashike is an Associate Editor, Banking and Finance, with more than a decade of experience reporting on Nigeria’s financial system and broader economy. She closely tracks market movements, monetary policy decisions, company disclosures, regulatory actions, economic indicators, and global developments, and interprets what they mean for businesses, investors, policymakers, and households. Her reporting helps readers understand complex issues such as inflation trends, foreign exchange market dynamics, interest rate decisions, bank performance, and investment risks. She also covers major international events and periodically travels to Washington, D.C., to report on the World Bank/IMF Spring and Annual Meetings. Her dedication to financial journalism has earned her multiple recognitions and invitations to high-level professional development programmes. She is an alumna of the International Visitors Leadership Programme (IVLP) in the United States and holds an Advanced Financial Journalism Certificate from the Press Association Training in London, UK. Her other notable achievements include completing the Lagos Business School CMC Programme, the Bloomberg Media Africa Initiative Programme, and a Master Class in Journalism at Rhodes University in South Africa.