Nigeria's economic outlook presents a fascinating dichotomy. While the Central Bank of Nigeria (CBN) espouses confidence in a stabilizing foreign exchange (FX) market, the African Development Bank (AfDB) projects a notable depreciation for the naira in the coming years. This divergence highlights the complex interplay of global economic forces and domestic policy reforms shaping the nation's financial landscape.
According to the African Economic Outlook 2025, a flagship publication by the AfDB, the Nigerian naira is anticipated to depreciate by at least 6% between 2025 and 2026. This projection is largely attributed to escalating volatility within global financial markets, a factor expected to exert considerable pressure on the stability of various African currencies. This outlook paints a broader picture for the continent, forecasting similar depreciations of 6% or more for 21 African nations in 2025, including economic giants like Egypt, Ethiopia, Ghana, and Zambia. The primary driver behind this anticipated trend is a potential decline in export earnings, which inherently places upward pressure on national currencies.
This analysis from the AfDB comes just a week after CBN Governor Olayemi Cardoso presented a more sanguine assessment of Nigeria's FX market. Speaking at a press briefing following the 300th Monetary Policy Committee (MPC) meeting in Abuja, Governor Cardoso reported a significant decline in FX market volatility, with the rate dropping below 0.5%. He credited this improvement to a series of monetary and fiscal reforms meticulously implemented to stabilize the macroeconomic environment. The CBN Governor emphasized that reduced exchange rate volatility is a clear indicator of bolstered investor confidence, a steady increase in foreign exchange reserves, and enhanced transparency in the CBN's operational procedures.
Despite Nigeria's recent domestic stabilization efforts in the FX market, the AfDB's report underscores the pervasive impact of global uncertainty. While the naira faces a projected depreciation, the report offers a contrasting view for some African economies. Currencies in Kenya, Morocco, and the CFA franc zone are expected to appreciate by over 3% against the US dollar, buoyed by stronger market fundamentals.
Reflecting on 2023, the AfDB noted that 28 African nations experienced currency depreciation, yet a significant portion – 17 of them – managed to reverse these losses or at least slow down the rate of decline. Notable examples include the South African rand, which, after weakening by 11.3% in nominal terms in 2023, rebounded to appreciate by 0.7% year-on-year. Similarly, the Kenyan shilling showcased remarkable resilience, recovering by 3.1% in 2024 after a 15.4% decline in the preceding year.
Market Sentiment and Global Economic Trends
The recovery of the Kenyan shilling serves as a compelling case study of how strong market sentiment can influence currency performance. This resurgence was largely fueled by the successful issuance of $1.5 billion in Eurobonds, a strategic move that facilitated the buyback of a $2 billion Eurobond set to mature in June 2024. This action led to a phenomenal 121% surge in portfolio investment inflows, effectively overturning the $233.4 million in net outflows recorded in June 2023.
Conversely, some currencies, such as those of Guinea, Mauritania, and Seychelles, continued to grapple with depreciation pressures, reflecting persistent macroeconomic challenges and fragile market conditions. The report also highlighted that most other African currencies, particularly those pegged to the euro, experienced relative stability or appreciation. The CFA franc, Cabo Verdean escudo, São Tomé and Príncipe dobra, and Comoros franc remained largely stable, benefiting from the euro’s stabilization against the US dollar in 2024.
Challenges Ahead: Structural Issues and Policy Recommendations
Despite pockets of improvement, several African nations continue to battle exchange rate depreciation rates exceeding 30%. This persistent vulnerability is often linked to deep-seated macroeconomic imbalances, dwindling export revenues, and political instability. The AfDB report meticulously outlines the significant role of global factors in shaping currency trends, but it also critically points to domestic challenges. These include misaligned FX regimes, the monetization of fiscal deficits, political instability, and consistently low productivity.
To effectively address these systemic issues, the AfDB report offers crucial policy recommendations for African governments. These include strengthening domestic macroeconomic fundamentals, enhancing export capacity through value-added production, and implementing strategic policies designed to mitigate FX volatility, which has historically imposed substantial economic costs. As Africa's financial landscape continues its dynamic evolution, policymakers face the crucial task of striking a delicate balance between responding to external economic influences and pursuing necessary structural reforms. This strategic approach is paramount to ensuring economic resilience and stability amidst ever-shifting global market dynamics.
Notwithstanding the global uncertainties and inherent structural economic challenges, the CBN maintains a steadfast belief that Nigeria is firmly on a path to steady recovery. The synergy of tighter monetary policy, comprehensive exchange rate reforms, improved reserve management, and strengthened collaboration with fiscal authorities is expected to deepen macroeconomic stability and underpin medium-term growth. Governor Cardoso has unequivocally reiterated the CBN's unwavering commitment to staying the course with these reforms, ensuring that the positive momentum of change is sustained across all sectors of the Nigerian economy.