The dangers of an appreciating Naira

Two weeks ago, I urgently needed forex and did what most Nigerians do in that situation: I called my supplier and prepared to negotiate like a Lagos market veteran.

He quoted N1,488/$1, which felt painful compared to the N1,421 official rate I was using as a mental reference, even though that rate is mostly theoretical for retail buyers.

After a brief internal debate about principles versus reality, I paid the N1,488 and moved on with my life.

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Days later, it touched N1,490, and suddenly my purchase felt like foresight rather than surrender, because the real fear was a sprint to N1,500.

Fast forward two weeks, and the parallel market is flirting with N1,420/$1. Now I am not sure whether to congratulate myself or demand a refund from the universe.

Meanwhile, analysts are confidently projecting N1,200/$1 as a reasonable target, and billionaire investor Femi Otedola has suggested the naira could even strengthen below N1,000 on the back of domestic refining and stronger exports.

For a country that has spent over a decade adjusting to depreciation headlines, this feels almost suspiciously pleasant.

Politically, a stronger naira is irresistible because it feels like vindication, signals stability, and hints at cheaper imports and softer inflation after a reform season that has stretched wallets and patience.

Economically, however, rapid appreciation deserves a raised eyebrow, especially if it is powered more by short-term capital than by factories, farms, and actual output.

Nigeria’s recent monetary reset explains why the applause should be measured.

Over the past two years, the Central Bank under Governor Olayemi Cardoso raised benchmark interest rates aggressively, tightened liquidity, and dialled back intervention practices that had blurred price signals.

Treasury bills and bonds were issued at yields above 20 per cent, restoring a high price of money and turning Nigeria into a yield hotspot. Inflation, which peaked above 30 per cent in 2024, has eased to roughly 16 per cent, exchange rate volatility has moderated, and reserves have improved.

The medicine worked, but it also made Nigeria very attractive to global investors hunting for returns.

As developed economies cooled their own rate cycles, Nigeria’s double-digit yields began to shine.

According to data cited by the National Bureau of Statistics, about $16.7 billion flowed into Nigeria in the first nine months of 2025, yet only $565 million of that was foreign direct investment, representing just 3.3 per cent.

The rest was largely portfolio investment, which is another way of saying money that packs light and travels fast.

Portfolio capital buys bonds, not factories. It attends auctions, not factory openings. As the naira appreciates, investors who entered at weaker levels now sit on tidy currency gains in addition to generous yields.

The stronger the naira becomes, the more tempting it is to take profit and head for the airport lounge. If too many decide to leave at once, dollar demand could spike, and today’s strength could become tomorrow’s scramble.

An appreciating currency driven mainly by yield-seeking flows can therefore end up chasing its own tail.

**There is also the quieter export story. **Nigeria’s non-oil exports stood at about $6.4 billion in 2024 and roughly $5.7 billion in the first nine months of 2025, comfortably above levels from a decade ago but still modest for an economy of this size.

A stronger naira makes Nigerian goods more expensive abroad, and for agro-processors and manufacturers already juggling high input costs, appreciation without productivity gains squeezes margins just when diversification needs momentum.

Then there is the fiscal math. Federal export earnings arrive in dollars before conversion into naira for FAAC sharing, and a stronger exchange rate means fewer naira per dollar earned.

States that rely heavily on those allocations could find their budgets tighter even while headlines celebrate currency strength.

The Central Bank cannot keep rates elevated forever just to keep the naira looking good.

High yields defend the currency, but they also raise debt servicing costs and crowd out private credit. Yet cutting rates too quickly to engineer a weaker naira would risk reigniting inflation and undoing the painful progress households have endured.

That is the policy paradox in everyday language: strength powered by hot money is shaky, while weakness engineered carelessly is costly.

What Nigeria needs is not a naira that looks strong on paper, but one that is strong because exports are rising, foreign direct investment is deepening, and productivity is improving.

That requires clear non-oil export targets, better trade logistics, incentives that reward real capacity expansion, and regulatory certainty that attracts builders rather than traders.

Nigerians understandably want relief because inflation has slowed, but price levels remain far above where they were in 2022, and slower price increases do not feel the same as lower prices.

A stronger naira alone cannot rewind the clock if appreciation rests on capital flows rather than real output.

The real danger of an appreciating naira is confusing excitement with endurance. A currency supported by production and exports has staying power. A currency supported mainly by interest rate differentials has mood swings.

A strong naira built on factories, farms, and exporters is an economy that goes to the gym and lifts its own weight.

A strong naira built on hot money is an economy borrowing someone else’s muscles for a photo shoot. One is strength, the other is lighting. Only one still looks good when the lights go out.

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