Why Nigeria’s Floating Naira Could Be the Country’s Most Consequential Reform Yet

An IMF study finds that Nigeria’s 2023 shift to a floating exchange-rate regime has strengthened monetary policy transmission, reduced foreign-exchange market distortions, and made exchange-rate movements a more important driver of inflation. While the reforms improve transparency and investor confidence, their long-term success will depend on policy credibility, fiscal discipline, effective liquidity management, and protection against external economic shocks.

A new study by the International Monetary Fund (IMF) finds that Nigeria's shift from a controlled exchange-rate system to a floating currency regime has significantly improved the effectiveness of monetary policy, while also making the economy more sensitive to global shocks.

For years, Nigeria operated a multi-window foreign exchange system in which official exchange rates were tightly managed by the Central Bank of Nigeria (CBN). This created large distortions in the market. Between 2007 and 2023, the gap between official and parallel-market exchange rates averaged about 30 percent and exceeded 70 percent during periods of severe stress. The June 2023 exchange-rate unification reform aimed to eliminate these distortions and restore investor confidence.

The results have been significant. The parallel-market premium has fallen to around 9 percent, while the exchange rate now adjusts more freely to market conditions. Although exchange-rate volatility increased from 2.7 percent before the reform to 11.6 percent afterward, the IMF notes that this reflects a more transparent and market-driven system rather than hidden imbalances building up over time.

Stronger Monetary Policy, But More Work Ahead

The study shows that monetary policy is now reaching financial markets more effectively. Following exchange-rate unification, the CBN raised its Monetary Policy Rate (MPR) to 27.5 percent, one of the highest levels in recent years, to combat inflation and stabilize expectations.

Interest-rate transmission has improved considerably. The interbank market now responds almost one-for-one to policy-rate changes, with a pass-through coefficient of 0.97. Treasury bill rates also respond strongly, with a coefficient of 0.61. However, deposit rates remain weakly linked to policy changes, with a coefficient of only 0.25, meaning households are not fully benefiting from higher interest rates.

The research also finds that banks react faster when rates increase than when they decrease. A 100-basis-point hike in the policy rate raises Treasury bill and lending rates by around 175–180 basis points, while a similar rate cut lowers them by only 25–30 basis points. This indicates that tightening measures are transmitted much faster than easing measures.

For policymakers, the findings suggest that further reforms are needed to strengthen monetary transmission, improve liquidity management, and gradually reduce structural constraints such as the 45 percent Cash Reserve Ratio (CRR).

Inflation Risks Depend on the Source of the Shock

One of the most important findings is that exchange-rate pass-through is highly dependent on the type of economic shock affecting the country.

When global oil supply disruptions push oil prices higher, Nigeria benefits from stronger export earnings and a stronger naira. However, inflation still rises because fuel, transport, and production costs increase throughout the economy. The study estimates that consumer prices rise by about 0.65 percentage points over two years despite the stronger currency.

By contrast, oil-price increases driven by stronger global demand have a much smaller effect on inflation. In these cases, the naira appreciates, but consumer prices remain broadly unchanged because supply shortages are absent.

External financial shocks create a more direct inflationary impact. A U.S. Federal Reserve interest-rate hike leads to capital outflows, causing the naira to depreciate by around 2 percent within 12 months and increasing inflation by approximately 0.6 percentage points over two years. This confirms that Nigeria's inflation is now more exposed to global financial conditions than under the previous exchange-rate regime.

What This Means for Governments, Development Partners and Businesses

The findings carry important lessons for governments across Africa considering exchange-rate reforms. Nigeria's experience shows that a market-determined exchange rate can improve transparency, reduce market distortions, and strengthen monetary-policy effectiveness. However, these benefits require strong institutions, fiscal discipline, and credible policy implementation.

For international development partners such as the World Bank, African Development Bank, and bilateral donors, the study highlights the need to support monetary-policy reforms, strengthen social-protection programs, and help governments manage the short-term inflationary effects of economic transitions.

The private sector faces both opportunities and risks. A more transparent exchange-rate system improves investor confidence, foreign-exchange access, and long-term business planning. Export-oriented industries could benefit from a more competitive and market-driven currency. However, businesses remain exposed to exchange-rate volatility, imported inflation, and global financial shocks, making risk management and currency hedging increasingly important.

The IMF concludes that the long-term success of Nigeria's reforms will depend on maintaining exchange-rate flexibility, limiting deficit monetization, improving policy credibility, and strengthening the transmission of monetary policy. If these reforms continue, Nigeria could build a more resilient macroeconomic framework capable of attracting investment, supporting growth, and reducing inflation over the coming years.