A central feature of Nigeria’s economic overhaul in 2023 was the liberalisation of its foreign exchange regime and sharp devaluation of the naira. In June 2023, soon after the new administration took office, the Central Bank of Nigeria (CBN) moved decisively to scrap the country’s maze of multiple exchange-rate windows.

The CBN allowed the official naira rate to fall freely, closing the gap with the parallel market. Within one day, the naira plunged 36% on the official market – from roughly NGN 460/$1 to about NGN 750/$1. This was a historic move: for the first time since 2016, the naira officially “devalued” on an open market basis. In effect, the multiple-fixed system was abandoned in favour of a unified, market-driven rate.
Reasons and aims: Prior to 2023, Nigeria’s currency was managed under artificial controls that left the official rate overvalued. Multiple rates and heavy restrictions had led to chronic dollar shortages and discouraged foreign capital.

President Tinubu’s team argued that a free-floating naira was necessary to correct distortions and revive investment. Observers noted that foreign investors had long complained that opaque forex policies were “the biggest impediments” to investing in Nigeria. By liberalising FX, Nigeria signalled openness and aimed to clear backlogs of unmet foreign demand. A top economist commented that devaluation would bring the naira from “50% overvalued to about 5-10%” undervalued, ultimately improving the current account and investment climate. Indeed, immediate market reactions were positive: Nigerian sovereign bonds rallied and the stock market (especially bank stocks) soared on the news of reform.

Exchange rate path: After the initial 36% drop, the naira continued to slide as market forces took hold. FocusEconomics reports show the currency trading between roughly NGN 590 and NGN 1,013 per dollar during H2 2023. By late October 2023, the official rate had reached nearly NGN 1,000/$1 – a record low. This reflects that the underlying market-clearing rate was discovered: a combination of dollar scarcity (Nigeria’s oil exports and foreign inflows were constrained) and heightened demand. (At times, the parallel market rate briefly exceeded the official rate, though CBN interventions capped volatility.) In percentage terms, the naira ended 2023 about 40–50% weaker than before the reforms.

Impact on inflation and prices: The currency reforms have had immediate inflationary impacts. Economists warned that a weaker naira would push up import costs and add to domestic price pressures. Empirically, food and commodity prices (which rely on imports of fertiliser, wheat, etc.) did jump as the naira fell. For example, food inflation was already near 27% by mid-2023. Overall consumer inflation reached 24.1% in July 2023, its highest in nearly two decades. The CBN responded with tighter monetary policy: it raised its policy rate (by 25bp in July to 18.75%, and more in subsequent meetings) to lean against the pass-through. In the interim, higher import prices and general cost-of-living increases were an inevitable side-effect of the sharp depreciation.

Effects on trade and current account: A weaker naira should, in theory, help Nigeria’s trade balance. By making exports (primarily oil) cheaper in dollar terms and imports costlier in naira, the devaluation can shrink the import bill and improve the current account. One analyst predicted just this: a more realistic naira was expected to “improve the current account” by cutting out imports and boosting competitiveness. In practice, oil export revenues have risen (on account of higher global oil prices), giving a buffer to foreign reserves.

However, import-dependent industries (manufacturing, pharmaceuticals, rice milling) faced steeper input costs. Ultimately, the net trade effect depends on structural factors: unless non-oil exports can expand, a weaker naira may mainly stoke inflation without fully balancing the books.

Foreign investment and market confidence: The exchange rate liberalisation sent mixed signals to investors. On one hand, it removed a major hurdle: foreign firms could now repatriate earnings at market rates, and entry barriers were lowered. The initial market rally (bond yields falling, stocks up) showed positive sentiment. Even rating agencies cited the reforms as credit-enhancing. In the words of a market analyst, the removal of “distortions created by inefficient pricing of foreign exchange” was expected to let the naira find its true level. On the other hand, the dramatic swings introduced volatility. The naira’s collapse made Nigeria’s macroeconomic policy seem more unpredictable, at least in the short run. Some foreign investors remain cautious, awaiting signs of stability. Indeed, Nigeria had accumulated a backlog of over $7 billion in unfilled forex forwards, indicating that market liberalisation would take time to normalise supply and demand.

Monetary policy implications: The currency changes significantly influenced CBN policy. As mentioned, the central bank accelerated rate hikes to counteract imported inflation. It also took steps to stabilise the FX market: limiting speculative positions (capping money-transfer operators’ daily trades to ±2.5%), and eventually providing limited interventions. By late 2023, the newly appointed CBN governor began clearing some of the forex backlog and lifting bans on dollar use for certain imports. These measures were intended to ease shortages without reintroducing rigid controls. The new policy regime signalled a shift away from administered rates toward a managed float, which CBN aimed to guide carefully.

Assessment of policy effectiveness: In the short term, the devaluation delivered what was promised: a more realistic price of the naira and an end to multiple-exchange-rate distortions. It garnered international approval and provided fiscal breathing room. However, it also exacerbated inflation and hardship for consumers (especially as it coincided with subsidy removal). The medium-term effectiveness depends on policy consistency: if fiscal deficits remain under control and reserves rebuild, the reforms can restore stability. If not, the naira could remain volatile. Early indications (late 2023) were mixed: the naira had stabilised slightly around ₦850/$1 by December, suggesting that the worst volatility might pass.

In conclusion, Nigeria’s 2023 currency reforms – a steep devaluation and FX liberalisation – represented a turning point. By officially abandoning rigid controls, the government aimed to correct long-standing imbalances. These moves initially “cheered the markets” and laid a foundation for fiscal sustainability. Yet they also ushered in acute inflationary pressures and adjustment pains. Analysts note that while the short-term shock was severe, the intended medium-term gain is a more competitive exchange rate and a healthier macro environment.

The success of these reforms will ultimately depend on prudent macro policy (curbing inflation, building reserves) and continued structural changes to deepen forex markets and boost non-oil exports.