IMF estimates naira’s fair value at N1,142/$, says currency 25.6% undervalued

By Abubakar Yunusa

The International Monetary Fund (IMF) says the naira remains undervalued by 25.6 percent despite recovering some ground against the US dollar following Nigeria’s foreign exchange (FX) reforms.

An undervalued currency means the exchange rate is weaker than what economic fundamentals would ordinarily support.

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.

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 fund 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.

IMF assessment comes about three years after the Bola Tinubu administration initiated foreign exchange reforms in June 2023, allowing the naira to trade 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.