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Introduction
Nigeria's foreign exchange (FX) landscape continues to pose a challenge for businesses operating in the country. Over the years, the value of the Naira against the dollar has been significantly impacted due to FX scarcity. In recent times, relative stability and liquidity seem to have been achieved as a result of the economic reforms including unification of FX market into a single official window. Despite this, limited supply often leaves companies unable to access sufficient foreign currency from the official market. In practice, many businesses resort to sourcing FX from unofficial channels, often at higher rates.
Against this backdrop, several efforts have been made by introducing reforms such as unification of the exchange rate regime, strengthening of the banking sector via increased recapitalization and reformation of the Bureau De Change (BDC) Sector to strengthen the Naira. In addition to this, new tax reforms have also been introduced via the Nigeria Tax Act ('the NTA' or 'the Act') which took effect from January 2026. The tax reforms seek to bring FX transactions under greater regulatory oversight by introducing tax implications for sourcing FX from other sources outside of the official channel. One notable provision of the Act seems to threaten the survival strategy of businesses heavily dependent on FX by restricting tax deductibility of foreign currency expenses to the value of transactions conducted at the official exchange rates. The intent here is clear: to support the Naira and discourage speculative transactions.
This reform, though well-intentioned, may create unintended consequences. By disallowing expenses incurred at non-official rates, it penalizes businesses forced to rely on alternative FX sources, driving up tax burdens, eroding profitability, and discouraging investment. For import-dependent companies, this further compound operational challenges. The expectation of business owners is, rather than penalize businesses for obtaining FX from alternative sources, Government reforms should focus on addressing the root issue of strengthening the Naira, ensuring availability and easy access to FX at the official rate.
This article examines Nigeria's current FX realities, the implications of recent provisions in the Nigerian Tax Act, and practical lessons from other African economies that can be adapted to strengthen FX availability and support sustainable growth.
Nigeria' FX Landscape: Market Conditions and Realities
In the early 2010s, Nigeria FX position appeared relatively strong, with oil prices well above $100 per barrel, reserves averaged $33 billion1 and the Naira traded averagely at NGN 155 per dollar2. At the time, businesses sourced most of their FX through the banks, with the parallel market playing only a minimal role because official supply was largely sufficient.
The world experienced one of the steepest oil price declines in modern history in 2014. Prices fell by about 70%, ranking among the three largest drops since World War II and marking the longest downturn since the supply-driven collapse of 19863. Given Nigeria's heavy reliance on oil exports, the global price crash quickly destabilized the country's FX position and unraveled the FX stability previously enjoyed. Nigeria's reserves fell sharply to about $28billion in 20164. Businesses could no longer access adequate dollars through official channels and had to resort to other channels. The parallel market, once an auxiliary channel, became core and rates began to spiral upward. This moment marked the rise of the parallel market in Nigeria's FX landscape. Each time the government pegged the official FX rate without sufficient supply, businesses were inadvertently pushed into informal channels.
In 2017, the CBN introduced the Investors and Exporters (I&E) window toenhance liquidity and FX transactions, which allowed a more market-reflective rate of about NGN360/$1. Oil prices recovered and reserves improved above $40billion5, but the structural weakness remained i.e., Nigeria's heavy reliance on oil exports as a source of FX. These FX fluctuations persisted over the years, further compounded by the COVID-19 shock in 2020 which depleted Nigeria's reserves below $37 billion6.
In 2023, the new government administration introduced structural fiscal changes, the unification of exchange rate regime and removal of subsidies. At the time, the Naira immediately fell 36% against the dollar on the official market under the I&E window7. Gross reserves stood at $33billion, however, FX liquidity remained poor8. Therefore, businesses continued to rely on parallel market primarily to source for FX, which remained volatile.
Nigeria's FX reserves stood at $40.9 billion as of December 2024, reflecting an increase from the previous year9. While this represents a modest improvement, the reserves remain under pressure from persistent demand-supply imbalances in the foreign exchange market. Moreso, despite recording an annual growth rate of 3.4% in 202410, Nigeria continues to grapple with inflation, Naira depreciation, and high interest rates. This paradox illustrates the disconnect between economic growth and currency stability, reflecting deeper structural challenges in the economy.
In December 2024, the CBN introduced the Electronic Foreign Exchange Matching System (EFEMS), a system aimed at enhancing transparency in foreign exchange transactions. Since its introduction, EFEMS has shown some positive results; the Naira has appreciated against the British pound sterling, euro, and the dollar. The Naira gained ₦157.50 to the dollar, marking 10.48 percent rise compared to ₦1,660/$ quoted on December 2, 2024, the first EFEMS trading day11.
Despite some recent improvements, the fundamental supply demand imbalance continues to influence the foreign exchange market landscape. The improvement in reserves, while positive, has not translated into adequate FX availability for businesses requiring foreign currency for legitimate commercial activities. Recent data shows rates are now below ₦1,500, almost at ₦1,400, which is encouraging12. Despite the introduction of the EFEMS, certain businesses still experience difficulties in securing adequate FX at these rates through official channels. As a result, many companies especially import-dependent companies are compelled to resort to alternative sources at significantly higher rates. This not only raises operational costs but also creates a gap between official and effective business exchange rates, further eroding competitiveness and ability to achieve substantial economic growth.
The impact extends beyond individual businesses. On a larger scale, persistent FX constraints create ripple effects on the economy, distorting market dynamics and causing macroeconomic imbalances. These constraints hinder economic growth and profitability and reduce the country's competitiveness in global markets. Addressing FX limitation is therefore not just critical for business continuity, but essential for restoring economic stability and sustainable development. Prolonged FX constraints have become a drag on Nigeria's development trajectory.
The Nigeria Tax Act Provision: Treatment of FX Transactions
Over the years, the Federal Government of Nigeria (FGN) has implemented various reforms aimed at addressing fiscal policy issues. Most recently, a series of Tax Reforms Acts were introduced as an overhaul to the Nigerian tax system. A key component of this reform is the Nigeria Tax Act, which seeks to consolidate and simplify the extant tax laws, while introducing several amendments to enhance clarity and compliance.
One of the key provisions of the Act, which requires foreign currency expenses to be converted using official CBN exchange rates for tax deduction purpose appears designed to promote transparency and prevent tax base erosion. The logic is straightforward: by mandating the use of official rates, the government seeks to discourage businesses from inflating their expense claims through unfavorable exchange rate conversions.
However, this provision creates a significant disconnect with market realities. In periods of official FX shortages, businesses are often compelled to source FX through parallel market channels, where rates are higher due to demand-supply imbalances, to meet their obligations. When a business pays, for instance, ₦1,600 for a dollar that officially trades at ₦1,400, the ₦200 difference represents the cost of accessing scarce foreign exchange, not a voluntary decision to pay premium rates.
Under the new tax provision, this ₦200 difference per dollar would become a non-deductible expense, creating an additional tax burden on businesses already struggling with higher operational costs. This effectively penalizes businesses for circumstances beyond their control, potentially making foreign currency-dependent operations less viable.
Such businesses would face a cruel choice to either absorb the difference, cascade the difference to the customers, limit FX transactions or compete for limited official FX allocations which may lead to business disruptions.
Bridging the Gap: Lessons from Ghana's FX Stabilization Journey
In a turnaround that has captured global attention, the Ghanaian Cedi has surged nearly 50% against the US dollar in 2025, outperforming other global currencies13. The Ghanaian currency has seen improvements relative to previous performance, emerging as one of the top-performing currencies in Africa. This remarkable transformation is even more extraordinary when viewed against the backdrop of recent history: the Cedi shifted from one of Sub-Saharan Africa's worst-performing currencies in 2024 14alongside the Naira, to the best-performing currency globally in 2025, with a remarkable appreciation against the US dollar.
For Nigeria, grappling with persistent foreign exchange challenges and Naira depreciation, Ghana's success story offers valuable insights and practical lessons. The Cedi's journey demonstrates that with the right policy mix and strategic implementation, even severely distressed currencies can achieve remarkable recoveries. Some of the key drivers fueling the Cedi' appreciation are15;
- Building strategic reserves
A major driver behind the recent appreciation of the Cedi is the continued accumulation of gold reserves by the Bank of Ghana (BoG). In May 2025, the central bank increased its gold holdings by 40.6%. This significant buildup strengthens the intrinsic value backing the Cedi and enhances the country's reserve adequacy. By holding a portion of its reserves in gold - a widely recognized store of value, the Bank of Ghana signals its ability to stabilize the Cedi and manage market fluctuations. This move also reinforces market confidence that the central bank is well-positioned to counter speculative pressures when necessary.
A similar strategy could bolster Nigeria's FX stability. Unlike Ghana, Nigeria's external reserves are heavily concentrated in foreign currencies, particularly the U.S dollars, with limited diversification in gold (about 5%16) and other reserve assets. To build a more credible buffer, Nigeria may expand its reserve composition beyond US dollars to include higher allocations to gold and, other tangible assets such as cocoa, crude oil and gas, precious metals and other internationally recognized assets of value. By strategically accumulating reserves in diverse forms, Nigeria would also signal to markets that the Naira is backed by tangible assets, thereby reducing speculative pressures and narrowing the parallel market gap.
- Policy credibility and fiscal discipline
The Ghanian government has undertaken necessary fiscal reforms to improve its fiscal management and cut down on distortionary levies. Significant expenditure cuts aimed at promoting fiscal discipline and consolidation have reinforced confidence in the economy. These measures have been complemented by the elimination of certain distortionary taxes, including the E-levy, betting tax, and COVID-19 levy, thereby improving the fiscal outlook and easing burdens on businesses and consumers.
Moreover, the government's firm commitment to the IMF-supported reform agenda which recently secured a staff-level agreement anticipated to release $370 million in financial support has bolstered investor confidence. This policy consistency helps curb negative market speculation and alleviates pressure on foreign exchange demand.
For Nigeria, enhancing policy credibility could involve gradually reducing counterproductive government expenditures and implementing transparent debt management, thereby freeing resources for productive, FX-generating investments. Over the years, the Nigerian government has implemented fiscal discipline measures including removal of subsidies, unification of FX markets and improved public expenditure management to reduce recurrent public spending and boost non-oil revenues. While progress has been made with some fiscal reforms introduced by the current administration, the objective should extend beyond mere spending cuts to strategically reallocating funds to high-impact areas.
- Diversifying FX beyond a single commodity
The Cedi's rebound has been fueled in part by higher export earnings from gold and cocoa, Ghana's two major commodities. Rising global prices have driven gold export revenues up sharply from US$7.6 billion in 2023 to US$11.6 billion in 2024, with further gains projected in 2025. Cocoa revenues have also remained strong, adding to the country's foreign exchange inflows. These boosted dollar supplies and has helped ease pressure on the Cedi. In addition, the formalization of small-scale gold mining has increased export volumes, further enhancing FX earnings and supporting currency stability.
Nigeria, by contrast still depends on oil for over 85% of FX inflows17. To ensure diversification, Nigeria must aggressively promote non-oil exports such as agriculture, solid minerals, manufacturing etc. and incentivize value-added industries that can generate sustainable foreign earnings.
Conclusion
Nigeria's FX challenges highlight the need for policies that reflect economic realities rather than compound them. The Tax Reform's intent to safeguard the Naira and discourage speculative behavior is commendable. However, its rigid application risks exacerbating the challenges facing businesses in a foreign exchange-constrained environment.
Ghana's experience demonstrates that currency stability is achievable through a holistic and coordinated strategy that strengthens reserves, enhances fiscal discipline, and promotes diversified sources of export earnings. An important lesson for Nigeria lies in the role of domestic production. Reducing dependence on imported raw materials and incentivizing the use of Made-in-Nigeria inputs can significantly lower FX demand, ease pressure on the Naira, and strengthen the country's industrial base. Policies that encourage local sourcing such as tax incentives, preferential procurement, and support for domestic value chains would complement monetary reforms and help conserve scarce foreign exchange.
For Nigeria, aligning tax policy with FX realities while deliberately promoting local content provides a more sustainable path to stability. Encouraging Nigerians to buy locally made goods and discouraging the importation of products that can be competitively produced domestically will not only support the Naira but also stimulate job creation, expand manufacturing capacity, and improve long-term economic resilience.
Nigeria has the opportunity to learn from these experiences and develop a more integrated approach to FX and tax policy —one that combines prudent fiscal policy, diversified exports, strengthened reserves, and strong support for local production. The goal should be to create an environment where businesses can operate efficiently while contributing to economic growth and government revenue. This requires moving beyond isolated policy decisions toward comprehensive economic governance that aligns regulatory frameworks with market realities and long-term development objectives.
Footnotes
1 Total reserves (includes gold, current US$) - Nigeria | Data
2 USD (US Dollar) NGN (Nigerian Naira) Historical Data Chart 2010
4 Total reserves (includes gold, current US$) - Nigeria | Data
5 Nigeria | Foreign Reserves | CEIC
6 Total reserves (includes gold, current US$) - Nigeria | Data
7 Tinubu begins reforms in Nigeria with nairadevaluation
8 Foreign Reserves Decline by $4.07bn in 11 Months as CBN Clears FX Backlog
9 Nigeria's External Reserves Increased to US$40.9bn in December 2024 - Proshare
11 Naira gains against pound, euro, Canadian dollar since EFEMS - Businessday NG
12 Exchange Rates | Central Bank of Nigeria
14 Naira rated worst performing currency in 2024
16 CBN's gold reserves gain over N1 trillion in 2024 as prices hit record levels - Nairametrics
17 Nigeria sells dollars to support currency after Trump tariffs shock | Reuters
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.
