CBN reforms boost resilience against global shocks

As the Middle East crisis continues to unsettle economies and test resilience, SAMI TUNJI examines how the Central Bank of Nigeria’s recent reforms are influencing the country’s capacity to absorb external shocks, how effective those measures have been, and the areas where vulnerabilities persist

Nigeria’s economy is navigating one of its most delicate phases in recent years, as global uncertainty continues to test the resilience of emerging markets. From the ongoing Middle East crisis to tighter global financial conditions and persistent inflationary pressures, external shocks have remained a constant threat to macroeconomic stability. For a country historically vulnerable to oil price swings, capital flow reversals and exchange rate volatility, the key question is no longer whether shocks will occur, but whether the underlying structure of the economy can absorb them without significant disruption.

Recent policy shifts led by the CBN under its Governor, Olayemi Cardoso, have sought to rebuild confidence, restore policy credibility and strengthen macroeconomic buffers. While the outcomes of these reforms remain subjected to scrutiny, emerging data and institutional assessments suggest that Nigeria has begun to reposition itself to better withstand external pressures. However, this resilience remains conditional, as structural constraints and fiscal vulnerabilities continue to shape the economy’s outlook.

Reforms, stability rebuilding

The recent wave of reforms did not emerge in isolation but shaped by a period of sustained macroeconomic imbalance. Prior to the policy shift, Nigeria’s economy was constrained by a fragmented foreign exchange system, persistent CBN financing of fiscal deficits, declining investor confidence and pressure on external reserves. These distortions created uncertainty, discouraged capital inflows and weakened monetary policy effectiveness.

In response, the CBN implemented structural adjustments to restore order. Central to this effort was the liberalisation and unification of the foreign exchange market, which replaced multiple exchange rate windows with a more transparent framework. The clearance of an estimated $7bn FX backlog further reduced uncertainty for investors and improved price discovery in the currency market.

These reforms were designed to rebuild investor confidence and enhance long-term sustainability. Multilateral institutions, including the World Bank, have acknowledged the role of these changes in improving Nigeria’s economic outlook.

The halt of CBN financing of fiscal deficits marked another critical shift. Direct financing had contributed to excess liquidity and inflationary pressure. Its reduction signalled a move toward orthodox monetary policy and reinforced policy discipline.

These measures were complemented by fiscal adjustments, including subsidy reforms and revenue mobilisation efforts. While outside the CBN’s direct control, their interaction with monetary policy has shaped macroeconomic outcomes.

The result has been a gradual rebuilding of macroeconomic buffers. External reserves have improved at intervals, supported by capital inflows and diaspora remittances. Access to foreign exchange through official channels has become more predictable compared to previous years.

Cardoso noted that Nigeria receives about $600m monthly from diaspora remittances, providing a steady source of foreign exchange.

Nigeria’s return to international capital markets and improved sovereign risk perception further reflect renewed investor interest. The narrowing of risk spreads to pre-pandemic levels suggests a reassessment of the country’s risk profile.

In an emailed note to investors, Head of Investment Research at Comercio Partners Limited, Dr Ifeanyi Uba, said investor appetite for Nigerian assets has been supported by ongoing reforms, including fuel subsidy removal and naira devaluation. He noted that while these measures have been economically painful, they have improved fiscal transparency and boosted market confidence.

“With emerging market governments issuing nearly $240bn in debt so far this year, surpassing even pandemic-era levels, Nigeria’s return underscores both the renewed investor hunt for yield and a sign that African frontier economies may once again diversify funding sources amid more favourable global conditions,” Uba said.

Also, at the final briefing of the CBN during the recently concluded Spring Meetings of the World Bank/International Monetary Fund in Washington DC, Cardoso noted that the apex bank has helped cushion the impact of global economic shocks on Nigerians, preventing more severe hardship despite ongoing external pressures.

Yet, these gains remain fragile. External buffers are still tied to oil price movements, while fiscal space remains limited. The reforms have improved the structure of the economy, but they have not eliminated exposure to external volatility.

The CBN boss added, “Despite current challenges, we will maintain this focus because we believe it directly addresses the key concerns of Nigerians, particularly the real impact of macroeconomic developments on everyday life. Encouragingly, stability has begun to take hold, meaning that some of the negative consequences associated with instability can now be put behind us.”

Stronger banks, confidence

A critical pillar of Nigeria’s reform strategy lies in the banking sector, which plays a central role in financial intermediation and economic stability. Weaknesses in this sector have historically amplified shocks, restricting credit and undermining confidence.

To address this, the CBN introduced a recapitalisation programme that raised minimum capital requirements for banks, with a compliance deadline set for March 2026. The aim was to strengthen the sector’s ability to absorb shocks and support a larger economy.

The CBN said 33 banks met new minimum capital requirements under its recapitalisation programme, raising a combined N4.65tn to strengthen the financial system. This has improved capital adequacy and enhanced resilience. Stress tests have also reaffirmed the sector’s strength, suggesting that banks can withstand adverse scenarios.

A stronger banking system has broader implications. It enables increased lending, particularly to small and medium enterprises, which are essential for growth and job creation. Financial stability, in this sense, supports economic expansion.

At the Distinguished Alumni Lecture at St Gregory’s College’s Founders’ Day celebration in Lagos, Cardoso said ongoing financial-sector reforms are strengthening the foundations of Nigeria’s economy, citing progress in banking recapitalisation, inflation management, and foreign exchange market stability.

He said, “Nigeria’s ongoing financial-sector reforms are strengthening the country’s economic foundations,” adding that progress had been recorded in key areas of the banking sector and monetary policy framework.

At the same time, investor sentiment has improved. Foreign portfolio investors, who had reduced exposure during periods of uncertainty, have gradually returned. Improved FX transparency and reduced backlog risks have been key drivers.

The President of the US-Africa Business Centre at the US Chamber of Commerce, Ms Kendra Gaither, recently said global investors are increasingly drawn to markets that demonstrate discipline and credibility.

“What investors are responding to today is clarity, clear rules, credible reforms, and a seriousness of purpose. Nigeria’s message is increasingly one of discipline and opportunity, and that matters in a global economy actively seeking stability and predictability,” Gaither said.

Nigeria’s sovereign risk spread has fallen to the lowest level since January 2020, erasing the premium accumulated during the pandemic and subsequent strain on its economy. The decline in sovereign risk spreads reinforces the indication of reduced perceived risk.

However, these gains remain sensitive to global conditions. Higher interest rates in advanced economies continue to attract capital away from emerging markets. Nigeria’s reliance on portfolio flows exposes it to sudden reversals.

Domestically, challenges persist. Lending rates remain high, reflecting tight monetary policy, and credit to the private sector remains limited relative to economic size. Banks remain cautious, particularly in sectors exposed to volatility.

External shocks test

The effectiveness of Nigeria’s reforms is ultimately measured by how the economy responds to external shocks. Recent global developments provide a clear test.

The Middle East conflict has disrupted oil and gas markets, creating uncertainty for energy-exporting countries. For Nigeria, this presents both opportunities and risks. Higher output can support revenue growth, but price volatility and a global slowdown can offset gains.

The International Monetary Fund has noted that the impact of such shocks depends on economic structure and policy space. Managing Director Kristalina Georgieva said the global economy is being tested by the conflict.

For Nigeria, projections remain cautiously positive. The World Bank has upgraded growth forecasts to 4.4 per cent for 2026 and 2027, citing reform momentum and sectoral recovery.

The CBN projects slightly higher growth at 4.49 per cent, anchored on structural reforms and easing monetary conditions.

However, regional risks remain. Growth in Sub-Saharan Africa is projected at 4.1 per cent, with downside risks from inflation, debt and financial tightening.

Inflation continues to pose a challenge. Global price pressures, particularly in food and energy, can quickly transmit into domestic markets. While Nigeria has recorded some disinflation, risks remain.

Fiscal constraints further limit policy response. High debt servicing costs reduce the government’s ability to invest and cushion shocks.

At a recent Monetary Policy Forum, themed ‘Managing the Disinflation Process’, Cardoso argued for greater alignment between fiscal and monetary authorities.

“Managing disinflation amidst persistent shocks requires not only robust policies but also coordination between fiscal and monetary authorities to anchor expectations and maintain investor confidence,” he said.

Monetary policy remains a balancing act. Tight conditions support stability but constrain growth. The recent rate cut reflects an attempt to balance both.

Nigeria’s resilience, therefore, is evolving. The economy is better positioned to absorb shocks than in previous years, supported by improved policy credibility, stronger financial systems and renewed investor confidence.

Yet, these gains remain conditional. Structural weaknesses, fiscal limitations and global volatility continue to shape outcomes.

The Chairman of the Nigeria Economic Summit Group, Niyi Yusuf, recently said progress has been steady, but more work is needed.

“This is steady progress in the right direction, and we need to stay the course, maintain momentum, and drive for broad-based growth across all sectors of the economy. We need more pro-growth regulations and regulators, a predictable justice system, more private sector investments in critical sectors and security of lives and assets to fully unlock the potential of the economy,” he said.