Nigeria’s financial sector debates allowing market forces to determine currency exchange rates

Nigeria’s financial sector debated allowing market forces to fully determine currency exchange rates following President Bola Ahmed Tinubu’s June 2023 termination of the controlled float system, according to Central Bank of Nigeria officials. The move aimed to unify exchange rates, eliminate speculation, and boost confidence in the naira by aligning official and parallel market rates under a free float regime.

The Central Bank of Nigeria (CBN) ended the controlled float exchange rate system in June 2023, introducing a unified exchange rate regime based on a free float principle, officials said. The policy, described as an imperfect free float, relies on the “willing buyer-willing seller” principle to converge official and parallel market rates, according to CBN statements. This move removed prior prohibitions on 43 products from the foreign exchange market to improve access and eliminate speculation, officials added.

The unification effort raised the official naira rate from around 460 to the dollar near the 2023 elections to just below 1,500 by early 2025, representing one of the largest currency adjustments globally, according to economic data.

Before the reform, Nigeria operated multiple exchange rate windows, including an official market managed by the CBN, a parallel black market, and an Investors & Exporters (I&E) window. The official rate served as a reference, with the CBN intervening to manage volatility and limit naira depreciation. However, parallel market rates diverged significantly, prompting stricter oversight of Bureau de Change operators, records show. The existence of multiple windows created arbitrage opportunities and market distortions, which the CBN aimed to resolve by consolidating all rates into a single I&E window rate determined by demand and supply.

This devaluation coincided with a narrowing fiscal deficit from 6.4% of GDP in early 2023 to 4.4% in early 2024, aided by the naira’s fall and the removal of petrol subsidies. The naira later strengthened from a late-2024 peak of just below 1,700 to the dollar amid ongoing debates about managing inflation risks, sources confirmed.

The reforms aimed to improve transparency, eliminate arbitrage from multiple exchange rates, and attract foreign direct investment, according to the CBN and policy analysts. Expected benefits included reduced government intervention in the foreign exchange market, better price discovery, increased foreign exchange supply, and higher capital inflows. The policy also sought to enhance the business environment by fostering greater competition and stability while protecting the foreign exchange market from speculation, officials said.

Economic challenges driving the unification included persistent exchange rate arbitrage, market inefficiency, high inflation, low interest rates, and declining oil prices, according to studies cited by the CBN. Foreign exchange market inefficiency and low central bank supply were identified as major factors behind volatility, while adverse stock market performance and macroeconomic uncertainties further exacerbated exchange rate fluctuations. Historical analysis of CBN policy decisions from 2014 to 2015 highlighted the impact of policy shifts on market volatility.

The reforms have had mixed economic impacts. Inflation rose following the devaluation as import costs increased, but analysts such as those from Chatham House noted that the reform path is crucial for Nigeria’s future economic trajectory. CrossBoundary, a financial advisory firm, emphasized the need for coordination among the government, the CBN, and the private sector to ensure successful implementation and sustain macroeconomic stability.

Recent developments include a scheduled CBN Monetary Policy Committee meeting on February 23-24, 2026, to assess foreign exchange reforms amid ongoing discussions, sources confirmed. The Nigeria Customs Service issued clarifications on foreign exchange rates applicable to imports and exports, reflecting the evolving regulatory environment. In February 2026, Yinka Ogunnubi, president of the Association of Corporate Treasurers in Nigeria, discussed the reforms’ impacts and broader economic implications in a video statement.

Proposed remedial actions focus on improving forex market efficiency, reducing uncertainties, and avoiding hostile financial policies that could undermine macroeconomic stability, according to policy experts. The reforms are expected to enhance macroeconomic performance, productivity, and the export of tradable goods, while promoting greater policy consistency.

Nigeria’s multiple exchange rate windows prior to 2023 created significant distortions. The official market was managed by the CBN to curb volatility, but the parallel market often traded at substantially higher rates. The I&E window, introduced earlier, was based on market forces but operated alongside other rates, leading to arbitrage opportunities. The 2023 reforms consolidated these into a single rate to improve market functioning and transparency, officials said.

The policy’s objective to align official and parallel market rates under a free float regime reflects efforts to unify the foreign exchange market and restore confidence in the naira. The CBN’s approach aims to balance market forces with measures to prevent excessive volatility and speculation, according to central bank communications. The ongoing debate within Nigeria’s financial sector centers on how fully market forces should determine exchange rates while maintaining economic stability.