•Tinubu and IMF logo
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, reports Daily Trust.
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.
Free-floating exchange rate not optimal for Nigeria’s economy – Uwaleke
Reacting to the IMF’s Article, the Director, Institute for Capital Markets Studies at the Nasarawa State University, Keffi, Prof. Uche Uwaleke, said the IMF’s recommendation that the CBN should maintain a tight monetary policy stance until disinflation becomes firmly entrenched deserves a more nuanced assessment.
“There is little disagreement with the principle that monetary policy should remain data-driven and responsive to evolving economic conditions. However, Nigeria’s inflation challenge is fundamentally different from the classic demand-pull inflation often addressed through aggressive monetary tightening.
“It goes without saying that much of the inflationary pressure confronting Nigeria today is structural and cost-push in nature. Food inflation is heavily influenced by insecurity, climate-related disruptions, logistics bottlenecks, inadequate storage facilities, and low agricultural productivity.
“Energy costs are affected by fuel prices, exchange rate movements, infrastructure deficits, and global commodity market developments. Transportation costs are driven by poor infrastructure and rising fuel prices.
“These factors lie largely outside the direct control of the central bank,” he said.
On the Bretton Woods Institution’s on a two-way flow of the foreign exchange market, he said: “Consequently, while monetary tightening may help moderate inflation expectations and stabilize financial markets, excessively restrictive monetary policy risks suppressing investment, increasing borrowing costs, slowing private sector expansion, and constraining economic growth without adequately addressing the root causes of inflation.
“A more balanced policy mix that combines prudent monetary management with aggressive structural reforms would likely produce better outcomes.
“Equally important is the IMF’s endorsement of a flexible exchange rate regime. While exchange rate flexibility offers advantages in terms of external adjustment and reserve preservation, a completely free-floating exchange rate may not be optimal for an economy such as Nigeria’s, where foreign exchange earnings remain heavily dependent on volatile oil revenues.
“Sharp fluctuations in global oil prices can generate significant exchange rate volatility, with adverse consequences for inflation, business planning, investment decisions, and overall economic stability
“Under such circumstances, a managed float system may represent a more appropriate framework. Such an approach would allow market forces to determine the broad direction of the exchange rate while permitting measured central bank interventions to smooth excessive volatility and prevent disorderly market conditions. This middle-ground approach recognizes both the benefits of market-based price discovery and the realities of Nigeria’s structural vulnerabilities.”
