IMF says Naira is 25% undervalued despite FX reforms

The International Monetary Fund (IMF) has said the Nigerian naira remains undervalued by 25.6 percent despite recent gains against the United States dollar following the country’s foreign exchange reforms.

In its latest Article IV Consultation Report on Nigeria, the Washington-based institution said its Real Effective Exchange Rate (REER) model indicates that the naira is still trading below the level justified by Nigeria’s economic fundamentals. The REER measures the value of a country’s currency against those of its major trading partners after adjusting for inflation.

According to the IMF, Nigeria’s REER appreciated by 32 percent in 2025, even though the Nominal Effective Exchange Rate (NEER) depreciated by 5.2 percent during the same 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 stated.

The report noted that the official exchange rate strengthened from N1,535 per dollar at the end of 2024 to N1,435 per dollar at the end of 2025, representing an appreciation of approximately 6.5 percent. However, on an annual average basis, the naira weakened from N1,479 per dollar in 2024 to N1,520 per dollar in 2025, amounting to a depreciation of 2.8 percent.

Based on the IMF’s assessment, the naira should have traded at around N1,142.04 per dollar using the end-of-2025 exchange rate or N1,130.88 per dollar based on the average exchange rate for the year. The IMF’s assessment comes nearly three years after President Bola Tinubu’s administration introduced major foreign exchange reforms in June 2023, including the removal of multiple exchange-rate windows and allowing the naira to trade more freely.

While the reforms initially triggered a sharp depreciation of the currency, they were designed to improve liquidity in the foreign exchange market and attract foreign investment. The IMF advised Nigeria to maintain exchange-rate flexibility as part of efforts to correct the currency’s undervaluation and improve the country’s external position.

“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 also stressed the need for continued reforms aimed at improving foreign exchange market efficiency, strengthening fiscal management, and supporting growth in non-oil sectors. According to the institution, such measures would help reduce the exchange-rate misalignment over time and strengthen Nigeria’s external economic position.