FOREIGN EXCHANGE REFORMS: Naira Still Undervalued by 25.6%, Says IMF
The International Monetary Fund (IMF) has revealed that the Nigerian naira remains undervalued by 25.6 percent, despite the aggressive foreign exchange (FX) reforms implemented by the federal government.
In its latest Article IV consultation report on Nigeria, the Washington-based lender noted that its Real Effective Exchange Rate (REER) model indicates the local currency is still trading below levels justified by the nation’s economic fundamentals.
The REER measures the value of a currency against those of major trading partners after adjusting for inflation. According to the IMF, while Nigeria’s REER appreciated by 32 percent in 2025—even as the nominal effective exchange rate (NEER) depreciated by 5.2 percent—a significant valuation gap remains.
The numbers behind the valuation
Data from the report highlights a mixed performance for the local currency over the past year.
The official exchange rate appreciated by about 6.5 percent, moving from N1,535/$ at the end of 2024 to N1,435/$ at the end of 2025, but on an annual average basis, the naira actually weakened by 2.8 percent, dropping from N1,479/$ in 2024 to N1,520/$ in 2025.
Based on economic fundamentals, the IMF believes the naira should ideally be trading against the dollar at N1,142.04/$ (using the 2025 year-end rate) or N1,130.88/$ (based on last year’s average). However, the official FX rate stood at N1,356.27/$ as of Monday.
READ ALSO: Naira devaluation era is over, says CBN Governor Cardoso
The IMF’s assessment comes roughly three years after President Bola Tinubu’s administration initiated sweeping FX reforms, collapsing the multiple exchange-rate windows to allow the currency to float more freely. While the move initially triggered a sharp depreciation, it was designed to boost market liquidity and attract foreign capital.
To bridge the current valuation gap, the IMF urged the Central Bank of Nigeria (CBN) to slow down its aggressive accumulation of foreign reserves and maintain a flexible, two-way movement in the FX market.
Free-floating exchange rate not optimal for Nigeria — Uwaleke
Reacting to the IMF report, Professor Uche Uwaleke, Director of the Institute for Capital Market Studies at Nasarawa State University, Keffi, called for a more nuanced approach to the IMF’s recommendations.
Uwaleke cautioned against the IMF’s push for prolonged aggressive monetary tightening, arguing that Nigeria’s inflation is fundamentally structural rather than demand-driven.
According to Uwaleke, the drivers of Nigeria’s inflation lie largely outside the direct control of the CBN. He said food inflation is heavily impacted by insecurity, climate disruptions, logistics bottlenecks, poor storage, and low agricultural productivity.
Meanwhile, energy and transport were driven by fluctuating fuel prices, infrastructure deficits, and global commodity shocks.
“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,” Uwaleke warned.
The capital market expert also pushed back against the idea of a completely free-floating exchange rate for Nigeria, citing the economy’s heavy reliance on volatile oil revenues.
Instead, Uwaleke advocated for a managed float system as the most viable middle ground.
“Sharp fluctuations in global oil prices can generate significant exchange rate volatility, with adverse consequences for inflation, business planning, and overall economic stability. A managed float allows market forces to determine the broad direction of the exchange rate while permitting measured central bank interventions to smooth excessive volatility.”
