The International Monetary Fund (IMF) says the Naira is still undervalued by
25.6 percent despite the ongoing reforms in the Nigeria’s foreign exchange (FX)
reforms.
In its latest Article IV consultation report on Nigeria, the Washington-based
institution said its Real Effective Exchange Rate (REER) model showed the
local currency was still trading below levels justified by the country’s economic
fundamentals.
The REER measures the value of a currency against those of major trading
partners after adjusting for inflation.
The IMF said Nigeria’s REER appreciated by 32 percent in 2025, even though
the nominal effective exchange rate (NEER) depreciated by 5.2 percent during
the period.
“Despite the REER appreciation that has already taken place in 2025, the EBA-
lite REER model indicates a REER gap of -25.6 percent,” the IMF said.
According to the report, the official exchange rate appreciated from N1,535/$ at
the end of 2024 to N1,435/$ at the end of 2025, representing a gain of about 6.5
percent.
However, on an annual average basis, the Naira weakened from N1,479/$ in
2024 to N1,520/$ in 2025, translating to a depreciation of 2.8 percent.
This means the IMF believes the Naira should be trading against the dollar at
N1,142.04/$ based on the foreign exchange (FX) rate at the end of 2025 or
N1,130.88/$ based on the average rate for last year. However, the official FX
rate was N1,356.27 kobo/$ as of Monday.
The IMF assessment comes about three years after the Bola Tinubu
administration initiated foreign exchange reforms, allowing the local currency
to move more freely and collapsing the multiple exchange-rate system.
The reforms triggered a sharp depreciation of the currency but were aimed at
attracting foreign capital and improving liquidity in the FX market.
The IMF, however, said maintaining exchange rate flexibility would be
important in addressing the naira’s undervaluation and improving external
balance over time.
The institution advised the Central Bank of Nigeria (CBN) to slow the pace of
foreign reserve accumulation while continuing to allow two-way movement in
the foreign exchange market.
“Given the assessed REER undervaluation, slowing the pace of reserve
accumulation and continuing to allow 2-way movement of the naira exchange
rate combined with strengthening FX market functioning and advancing and
supporting fiscal and structural reforms, particularly those that can improve
non-oil/gas imports, would help close the gap,” the fund said.
The IMF added that continued reforms aimed at improving market functioning,
strengthening fiscal management and supporting non-oil sectors would help
narrow the exchange rate misalignment and strengthen Nigeria’s external
position.