Zero Equilibrium Policy Commentary and Propositions for Mitigating FX Concentration Risks as Nigerian Foreign Reserves hit $49 billion.

By Chinedu Okoye

Summary:

• Nigeria’s economy used to be dependent on Oil receipts for foreign-exchange (FX) inflows.

• Over the past decade, diaspora remittances have become the single largest FX source outside oil, accounting for roughly 10%-12% of GDP.

• We recognize the benefits and risks associated with this development, and profer possible fiscal and monetary policy solutions to help mitigate these risks, as Nigeria's foreign reserves hit a high. 

Improvements in FX Inflows from Diasporan Remittances:

 

Official figures show Nigeria received about US$19.5 billion in remittances in 2023 and this was a 2.9% decline from 2022. By mid-2024 and early 2025, remittances rose to record highs, hitting $553 million in July 2024 and $5.3 billion in Q2 2025, after the Cardoso led CBN's liberalization FX markets.

A vast majority of these flows originate from Europe and North America, and mostly  from three countries, the US, UK, Canada. Switzerland and Italy are other sources, but not as significant.

Per IMF/World Bank analyses, strong US labour markets and formalisation measures have been instrumental to the steady flow of remittances, as Nigerian immigrant income increases, so does their capacity to send more money home, and a weaker Naira has drawn a lot of diasporans into the Nigerian stock market.

However risks exist as gobal headwinds (slower growth in these economies, high interest rates) could temper future inflows. In 2024 Nigeria’s FX reserves reached, $40 billion sufficient to fund 9–10 months of imports, thanks to Cardoso's policies which have improved the capturing of these inflows via official channels, who h have led to robust portfolio and remittance inflows, but external volatility remains a concern.

The Concentration and External Volatility Risks:

The concentration of remittances on the three countries mentioned above makes Nigeria vulnerable to shocks and policy shifts in these countries. Immigration crackdowns, and more stringent work visa requirements could reduce diasporan income. Studies show U.S. enforcement led to a -6% drop in remittances to Mexico in early 2025.

This high reliance on remittances has been a major source of strength to the Naira, when flows surge, or cause FX shortages with a sudden drop. This makes it imperatittjat Nigeria improves all other FX sources to dampem the volatility risks.

Below we present suggested monetary and fiscal policy tools that could be used to maximize the use of these inflows.

Monetary Policy Tools

Maintain Adequate FX Buffers and Smoothing Rules: 

The Central Bank of Nigeria (CBN) should continue to build foreign reserves when remittances surge (as it did in 2024) and then use interventions to smooth swings. With import cover at ~9–10 months, Nigeria is relatively well-positioned but must guard against over-appreciation. IMF guidance emphasizes transparent and rules-based interventions to avoid multiple exchange rates and to strengthen credibility. For instance, the CBN’s recent unification of FX windows and liberalization (willing-buyer/seller model) has increased liquidity and helped stabilise the naira. Going forward, CBN could refine an intervention framework (e.g. intervene only beyond a volatility threshold) and publish criteria to anchor market expectations.

Promote Efficient FX Market and Liquidity: Nigeria can deepen its FX market (e.g. more market makers, electronic trading platforms) so remittance flows can be absorbed without excessive rate jumps. The new FX code and onshore trading platforms should improve price transparency and order execution.

The CBN can encourage more money-transfer operators (IMTOs) to enter the official channel; lifting administrative limits on IMTO licencing, as it has begun to do, channels previously informal flows into the onshore market.

Facilitate Digital Remittance Channels:

Nigeria can leverage fintech to diversify remittance corridors. The CBN’s eNaira (retail CBDC) initiative is one example: IMTOs can disburse inbound remittances directly into recipients’ eNaira wallets.

This reduces dependence on physical cash couriers and formalises flows. Expanding such digital rails, such as mobile money interoperability (e.g. leveraging the Pan-African Payment and Settlement System), can smooth the cost and timing of remittances.

Basically, a continual improvement of FX market infrastructure and technology will make remittance-driven FX more reliable and less prone to bottlenecks.

Currency and Interest Rate Hedging Instruments:

The CBN should encourage the development of hedging markets that diasporans or remittance-receiving businesses can use. For example, allowing banks to offer futures or options contracts on naira could let senders lock in rates for future remittance.

A continuous issuance of USD denominated bonds, would readily absorb large inflows as they arrive, putting the money in the hands of the government, with the purchases of these debts.

Fiscal Policy Tools

Diaspora Bonds and Investment Funds:

Issuing diaspora bonds remains a proven fiscal measure. Nigeria’s 2017 naira-diaspora bond (USD 300 million) was oversubscribed by about 30%, showing strong interest. The new USD denominated domestic bond issued in 2024 and also saw a large oversubscription, through these measures, the FG could continue to tap savings of Nigerians abroad, offering them a secure asset and hedging against cash and equities. 

Importantly, the bond should be backed by explicit FX liquidity guarantees or swap lines to reassure diaspora investors of convertibility. Since over $900 million was raised in the 2024 USD domestic bond offering, the recent plan to establish a $10 billion Nigeria Diaspora Fund is a related innovation as it pools diaspora capital for infrastructure, health, and education projects. Instead of just funding FX demand.

Tax Incentives:

The ISS Africa analysis recommends linkages of remittances to productive investments with “clear incentives” while avoiding overdependence. Offering tax breaks or exemptions could help channel some of these Diasporan Remittances into funding for infrastructure, interest earned on diaspora bond or savings accounts could be tax-exempt. 

Dedicated Diaspora Savings and Investment Accounts: 

Nigeria could launch a government-backed diaspora bank or savings program similar to Philippines’ Pag-IBIG or Pakistan’s National Savings Certificates, which mobilize diaspora funds at rates more competitive than the western alternatives. 

To reduce FX volatility risk, part of these funds could be held in a stabilization account, and part invested in development projects. Nigeria’s Pensions Fund Administrators could also be encouraged to structure diaspora-focused products (e.g. diaspora pension saving plans or diaspora green bonds), this not only attracts FX but offers these PFAs exposed to Naira risks an effective hedge.

Strengthening Public Debt Management:

Higher remittance inflows allow more room to retire foreign debt or add to reserves. However, if flows decline, the government should avoid unplanned deficits. This can be done by maintaining a balanced fiscal policy stance that places equal significance on expenditures and revenuee.

Fiscal discipline (as IMF Staff notes) is critical to prevent remittances from financing recurrent spending. The federal government could channel surplus FX into priority capital expenditures or savings funds, this could mean smoothing oil and remittance revenue windfalls into a stabilization fund, seen as there is now another “major” FX source 

Reducing Costs and Formalizing Flows:

The ISS analysis emphasize lowering transfer costs (AFI target <3%) as crucial. The should press correspondents and money-transfer operators to cut fees (perhaps via bulk negotiations or subsidies).

Policy consistency to consolidate formalization efforts (from informal cash couriers to regulated IMTOs) not only increase recorded FX but also improve AML/CFT compliance.

Macroeconomic Resilience Measures:

Nigeria might similarly expand the role of its Diaspora Commission and engage diaspora in policy dialogues and project planning, thereby creating soft support that mitigates pushback when flows wobble

This has been implemented in other countries. Philippines built one of the worlds largest pension funds from Oversees Filipino Workers (OFW) contributions, the Morrocan diaspora investment fund have helped mobilize capital for SMEs, while in Mexico, the Red Global MX (a diasporan skilled network) uis used to enforce skill transfers by engagements between dispram skilled workers and local talent.

These aren't direct fiscal tools, but these diaspora-engagement mechanisms can diversify how diasporas remittances support the economy.

Final Remarks:

In sum, Nigeria can strengthen resilience to remittance shocks by diversifying and channeling diaspora flows through innovative monetary and fiscal policies.

On the monetary side, that means maintaining robust reserves, improving FX-market liquidity, and carefully using interventions to smooth volatility.

On the fiscal side, it means converting some of the diaspora savings into productive finance (via bonds, funds, incentives) rather than consumption.

The steps taken so far have been effective and efficient, showing a policy framework moving in the right direction. But the above additional.measures could build on these and make remittances a stable pillar supporting not just FX but development and businesses.

Sources:

• IMF and CBN reports

• World Bank migration briefs

• Reuters and MPI analyses on diaspora finance

• ISS African Futures

• Nigeria macro-economic reports.