Nigeria’s currency is expected to weaken further in the coming year despite recent signs of stabilization, as the African Development Bank (AfDB) projects that the naira will depreciate by at least 6 percent between 2025 and 2026.

The forecast, published in the African Economic Outlook 2025, reflects growing concerns about heightened global financial market volatility and its spillover effects on African currencies.

The projection comes at a time when Nigeria’s central bank is expressing renewed confidence in the country’s economic direction. Just days before the AfDB report was published, Central Bank of Nigeria (CBN) Governor Olayemi Cardoso announced that volatility in Nigeria’s foreign exchange (FX) market had dropped below 0.5 percent, the lowest level in recent years. According to him, this marked improvement was the result of a mix of fiscal and monetary reforms aimed at restoring macroeconomic stability and investor confidence.

Cardoso made the announcement during a press briefing in Abuja following the 300th meeting of the Monetary Policy Committee (MPC), describing the drop in volatility as a “clear indication that Nigeria is back on a sustainable path.” He cited growing foreign reserves, enhanced market transparency, and a reformed exchange rate regime as factors contributing to the newfound market confidence.

But the AfDB paints a more cautionary picture, warning that Nigeria’s relative calm in FX markets may be short-lived unless structural economic challenges are addressed.

The AfDB report forecasts that at least 21 African countries, including Nigeria, Egypt, Ethiopia, Ghana, Libya, Rwanda, Zambia, and Zimbabwe, will see their currencies depreciate by 6 percent or more over the course of 2025. In Nigeria’s case, the naira is expected to come under pressure from a combination of external market uncertainty, fragile export earnings, and domestic structural weaknesses.

The Bank explained that the projected depreciation is not exclusive to Nigeria but reflects broader continental trends. Across the region, economies dependent on commodity exports are facing growing fiscal and balance of payment pressures, worsened by global market instability, rising interest rates in advanced economies, and fluctuating capital flows.

In contrast, the report identifies Kenya, Morocco, and countries in the CFA franc zone as potential gainers. Their currencies are projected to appreciate by more than 3 percent against the U.S. dollar, buoyed by better fundamentals, diversified exports, and relatively stronger investor confidence.

Looking back at 2023, the AfDB notes that 28 African currencies depreciated, but 17 of them either stabilized or started recovering in 2024. The South African rand, for example, weakened by 11.3 percent in 2023 but appreciated slightly by 0.7 percent year-on-year. Similarly, the Kenyan shilling reversed a 15.4 percent depreciation in 2023 with a 3.1 percent rebound in 2024, aided by investor inflows following a successful Eurobond issue.

Kenya’s recovery was underpinned by a strategic buyback of a $2 billion Eurobond set to mature in June 2024, financed by a new $1.5 billion issuance. That transaction restored investor confidence and triggered a 121 percent increase in portfolio investment inflows, offsetting the previous capital flight.

On the other hand, currencies in Guinea, Mauritania, and Seychelles continued to face downward pressure, weighed down by persistent macroeconomic instability and low investor confidence.

The report also observed that currencies pegged to the euro — such as the CFA franc, Cabo Verdean escudo, São Tomé and Príncipe dobra, and Comoros franc — remained relatively stable, largely benefiting from the euro’s improved performance against the dollar in 2024.

The stark contrast between the CBN’s optimism and the AfDB’s cautionary stance underscores the dual realities of Nigeria’s FX market. On one hand, Nigeria has implemented wide-ranging monetary reforms, including unifying its exchange rates and restricting excess naira liquidity through higher interest rates and open market operations. On the other hand, structural weaknesses — such as weak non-oil export capacity, heavy import dependence, and low dollar inflows — continue to pose risks to exchange rate stability.

Despite the naira showing signs of stabilization in the first half of 2025, the AfDB maintains that external shocks or domestic fiscal slippage could easily trigger another round of pressure on the currency. It warned that overreliance on foreign portfolio flows and fragile commodity earnings could reverse recent gains unless Nigeria deepens structural reforms.

To counter these risks, the AfDB urges African governments, including Nigeria, to strengthen their macroeconomic fundamentals, particularly by curbing inflation and reducing fiscal deficits. It calls for enhanced export diversification, with a focus on value-added production, and recommends the establishment of credible and transparent exchange rate regimes that reflect actual market conditions. It also emphasizes the need to deepen regional trade linkages and adopt platforms like the Pan-African Payment and Settlement System (PAPSS), which can reduce the continent’s heavy reliance on the U.S. dollar in intra-African trade.

The AfDB noted that while Nigeria is already making progress in some of these areas, including its recent directive mandating banks to begin using PAPSS for cross-border transactions under the African Continental Free Trade Area (AfCFTA), the country still lags behind in export competitiveness and policy coordination.

Cardoso has reiterated that the apex bank would stay the course of reforms and push ahead with its agenda of exchange rate transparency, inflation targeting, and strategic reserve management. He also pointed to the growing collaboration between monetary and fiscal authorities, which he says is now more aligned than ever.

The CBN believes that the mix of exchange rate reforms, tighter monetary policy, and improved FX market transparency will eventually support medium-term currency stability and reduce Nigeria’s vulnerability to external shocks.

However, the major challenge is no longer just about short-term FX stability — it’s about sustaining reforms long enough to rebuild economic buffers, boost exports, and insulate the economy from the shocks that have historically battered the naira.

Nigeria has reinforced its position at the forefront of African trade integration, with 22 commercial banks now fully onboarded onto the Pan-African Payment and Settlement System (PAPSS) — the highest of any country on the continent.

The move follows a formal directive from the Central Bank of Nigeria (CBN), mandating all banks operating in the country to begin originating cross-border transactions through PAPSS, a unified platform designed to simplify and de-dollarize intra-African trade.

The CBN’s directive, which became effective through a circular issued on April 28, 2025, marks a significant departure from traditional cross-border payment systems that rely heavily on third-party currencies like the U.S. dollar. With the new policy, Nigeria’s financial system is now structurally positioned to better align with the goals of the African Continental Free Trade Area (AfCFTA) — the African Union-led initiative to boost intra-African trade by eliminating tariffs and creating a single market for goods and services across 54 countries.

According to the circular, referenced TED/FEM/PUB/FPC/001/006, the apex bank emphasized the importance of PAPSS in “deepening intra-African trade, enhancing payment efficiency, and reducing reliance on non-African currencies.” The CBN called on all banks to adopt the framework immediately, streamlining their infrastructure to accommodate PAPSS as a payment channel.

What is PAPSS?

Launched in January 2022 by the African Export-Import Bank (Afreximbank), in collaboration with the African Union and the AfCFTA Secretariat, PAPSS is a centralized payment system that enables instant, secure, and direct settlement of cross-border transactions in local African currencies. The system is aimed at minimizing foreign exchange conversion costs, speeding up payments, and reducing the friction that currently hampers African trade.

Unlike conventional cross-border transactions that pass through multiple intermediaries and foreign correspondent banks, PAPSS allows buyers and sellers in different African countries to pay and receive money in their respective local currencies. This not only removes exchange rate complexities but also enhances monetary sovereignty across the continent.

As of May 2025, over 150 banks across 16 African countries are connected to PAPSS, making Nigeria’s contribution both symbolic and operationally significant.

List of Nigerian Banks Now on PAPSS

The 22 Nigerian banks now integrated with PAPSS include both commercial and merchant banking institutions:

1. First Bank
2. United Bank for Africa (UBA)
3. Access Bank
4. Stanbic IBTC
5. Sterling Bank
6. Wema Bank
7. Keystone Bank
8. Lotus Bank
9. Providus Bank
10. Polaris Bank
11. Union Bank
12. Jaiz Bank
13. Zenith Bank
14. Fidelity Bank
15. Optimus Bank
16. Coronation Merchant Bank
17. Parallex Bank
18. Taj Bank
19. FSDH Merchant Bank
20. Ecobank
21. FBNQuest Merchant Bank
22. Unity Bank

This extensive participation reflects a major banking sector endorsement of the AfCFTA agenda. It also signals Nigeria’s readiness to tap into the broader African market, where demand for faster, cheaper, and transparent payment channels continues to grow.

Lower Barriers for Small Traders and SMEs

One of the most transformative aspects of the CBN’s April directive is the simplification of documentation for low-value cross-border transactions. Under the new framework, individuals transacting up to $2,000 (or its naira equivalent) and corporate entities transacting up to $5,000 are now permitted to conduct such operations using only the Know Your Customer (KYC) and Anti-Money Laundering (AML) documentation already submitted to their authorized dealer banks.

Transactions above those thresholds, however, will still require compliance with the standard documentation procedures outlined in the CBN’s Foreign Exchange Manual and related circulars. According to the CBN’s Acting Director of Corporate Communication, Mrs. Hakama Sidi Ali, this dual-tier approach is designed to widen access to intra-African trade channels without compromising financial integrity or regulatory oversight.

Analysts have long argued that initiatives like PAPSS could help African countries, particularly Nigeria, reduce dependency on foreign currencies in cross-border transactions — a dependency that has long contributed to volatility in the local forex market. With the naira now usable in direct trade settlements through PAPSS, the policy is expected to relieve some of the pressure on Nigeria’s foreign reserves and reduce the demand for hard currency in regional transactions.

Strategic Alignment With AfCFTA Goals

For Nigeria, PAPSS is not just a payment innovation — it’s a strategic move to unlock the benefits of the AfCFTA. By joining the platform and mandating adoption across its banking system, Nigeria is now better placed to take advantage of the $3.4 trillion economic bloc envisioned under AfCFTA.

The move is also timely, coming as Nigerian authorities attempt to diversify the economy and boost non-oil exports. With PAPSS, Nigerian producers and traders — particularly those dealing in textiles, agro-allied products, and manufactured goods — can now seamlessly tap into markets across Africa with minimal cost.

According to a joint report by the AfCFTA Secretariat and Afreximbank, intra-African trade is expected to grow by over 50% by 2030 if payment, logistics, and tariff barriers are removed. PAPSS is seen as the cornerstone to achieving that vision.

Thus, the widespread onboarding of Nigerian banks and the full adoption of PAPSS signals a new phase in Africa’s economic integration — one where Nigeria is not only participating but taking the lead.

However, stakeholders note that payment systems are just one part of the puzzle. To fully benefit from AfCFTA, Nigeria must also address non-tariff barriers, modernize its transport and logistics infrastructure, and streamline customs procedures.