Nigeria’s foreign exchange market is gaining stronger external buffers as its reserves rise to $54.61 billion, but the International Monetary Fund (IMF) says improved liquidity or financial shocks alone should not determine whether a central bank intervenes in the currency market.
In a new Staff Discussion Note titled Drivers of Exchange Rates in EMDEs: Implications for Foreign Exchange Intervention, the IMF said policymakers need to assess the broader conditions behind exchange rate movements before deciding whether foreign exchange intervention is necessary.
The Fund’s position comes as Nigeria records stronger foreign investor interest and rising external reserves, while the Central Bank of Nigeria (CBN) continues to maintain a tight monetary policy stance aimed at supporting exchange rate and broader macroeconomic stability.
In May, CBN Governor Olayemi Cardoso said the apex bank’s foreign exchange interventions accounted for about 1.2% to 1.3% of total FX turnover, rejecting claims that the bank was aggressively intervening to defend the naira.
Nigeria’s gross foreign exchange reserves rose to $54.61 billion by mid-September 2026, supported by improved external liquidity and portfolio inflows.
The country attracted $10.37 billion in foreign capital in the first quarter of 2026, an 83.8% increase from the $5.64 billion recorded in the corresponding period of 2025.
The banking sector accounted for $7.55 billion, or 72.8% of total capital imported during the quarter, while the financing sector attracted $2.43 billion.
Portfolio inflows were particularly strong in January, when foreign portfolio investment reached $3.37 billion, representing 95.72% of total capital importation for the month.
Against this backdrop, the IMF’s latest framework argues that financial shocks alone are not enough to justify intervention in foreign exchange markets.
The Fund distinguishes between exchange rate movements driven by macroeconomic fundamentals and those caused or amplified by financial shocks. While flexible exchange rates can help economies absorb shocks, financial market frictions can sometimes amplify currency movements and transmit stress to the wider economy.
Using monthly macrofinancial data, theoretical models and evidence from emerging market and developing economies, the IMF found that financial shocks accounted for about one-third of uncovered interest parity (UIP) fluctuations in its analysis of Brazil and Chile.
The Fund said this indicates that exchange rate movements often reflect forces that do not require policy action. However, periods of heightened financial stress were also associated with notable declines in output, making market-functioning indicators important for policymakers.
The IMF stressed that identifying a financial shock may indicate that foreign exchange intervention could be relevant, but it is neither necessary nor sufficient on its own to justify intervention.
The Fund said intervention may also be considered in situations involving currency mismatches or unanchored inflation expectations, even where financial shocks are absent.
Where authorities are considering intervention to stabilise exchange rate risk premiums, the IMF said they should assess factors including the adequacy of foreign exchange reserves and whether intervention would be more effective than alternatives such as macroprudential policies.
Reserve adequacy varies significantly across countries, meaning policymakers need to weigh the potential benefits and costs of using reserves to manage currency pressures.
For countries operating floating exchange rate regimes, the IMF said maintaining exchange rate flexibility remains important for absorbing shocks and supporting macroeconomic stability.
Nigeria’s latest reserve position has already surpassed the CBN’s projected reserve level of about $51.04 billion for the full year 2026, providing a stronger external buffer as the country navigates changes in its foreign exchange market.
Nigeria was also recently included in J.P. Morgan’s Government Bond Index–Emerging Markets Edge (GBI-EM Edge), with a 7.4% weighting in the benchmark tracking local-currency government debt across emerging markets.
The IMF framework therefore places Nigeria’s improving external position within a broader policy question: whether currency movements are being driven by economic fundamentals, financial market shocks or a combination of both, and whether intervention would be the most effective policy response.
