What’s driving the naira’s rally – and will it last?

The naira broke through a key psychological barrier on Monday, climbing below ₦1,500 to the dollar for the first time in seven months. At ₦1,495.25, the currency is at its strongest since February.

Two forces are behind this rebound: Nigeria’s oil earnings and high interest rates that have drawn foreign investors to local government bonds. Together, they are pumping dollars into the system, helping rebuild reserves and steady the Nigerian currency.

But experts warn the rally may not be built on solid ground. Both drivers – oil and “hot money” chasing yields – are volatile. The real question is whether Nigeria can use this moment to build lasting strength through foreign direct investment (FDI), instead of relying mainly on short-term flows.

Oil and Interest rates

Oil remains Nigeria’s biggest external earner. In the first half of 2025, crude sales made up about 87 percent of export earnings, lifting the current-account surplus to nearly $5 billion. That has pushed reserves to their highest level since 2021.

As Charlie Robertson, head of macro strategy at FIM Partners, told Bloomberg: “A current-account surplus and high nominal rates are two key factors supporting the naira and making it an interesting trade for global portfolio investors.”

The second leg of the rally is Nigeria’s punishingly high interest rates. The Central Bank of Nigeria (CBN) has held rates at 27.5 percent, the highest in Africa, for over a year.

That stance has pulled in foreign portfolio investors (FPIs) hungry for double-digit returns. A Bloomberg index shows local currency bonds are up 26.7 percent this year, a massive gain compared to other emerging markets. Every dollar that flows into these bonds shores up the naira.

But this is where the trade-off lies.

The Tradeoff: FPIs vs. FDI

Yemi Kale, Group Chief Economist at Afreximbank, explained the dilemma in an interview with BusinessDay. “The CBN’s current stance has played a key role in attracting foreign portfolio inflows, which have helped stabilise the FX market and support reserves,” he said.

However, Kale warned, relying too heavily on portfolio flows comes at a cost. High interest rates encourage investors to put money into safe, short-term government debt, instead of riskier, longer-term ventures like infrastructure, factories, or services.

“Cutting rates too early could reignite inflation and undermine FX stability,” Kale said. “But holding rates too high for too long entrenches reliance on volatile FPIs and crowds out both domestic investment and critical FDI needed for industrialisation and job creation.”

This is why Kale and others argue for a cautious approach: rates should only come down gradually, and only after inflation is clearly under control.

Inflation Still Too High

Inflation is easing but remains high. According to the National Bureau of Statistics (NBS), headline inflation slipped to 20.12 percent in August, from 21.88 percent in July. If is the fifth straight month of disinflation.

But for majority of Nigerians, prices are still rising too fast to provide relief for households.

Mark Bohlund, senior analyst at REDD Intelligence, noted that while Nigeria may soon join other central banks in cutting interest rates, it will do so cautiously: “The monetary easing is likely to be more gradual. This will keep yield differentials in favour of Nigerian debt and underpin naira gains.”

Why This Matters

For now, the naira is gaining because oil exports are strong and investors are pouring dollars into Nigerian debt. Both can change quickly. Oil prices are volatile, and portfolio inflows can reverse the moment rates fall.

That is why experts stress the need for structural investment. As Kale put it: “Nigeria must move from stabilising with FPIs to transforming with FDI.”

The upcoming Monetary Policy Committee (MPC) meeting on September 22–23 will test how Nigeria balances short-term currency stability with long-term economic strategy. Whether the naira’s rally becomes lasting strength, or just another brief reprieve, depends on those decisions.