The International Monetary Fund (IMF) has stated that the naira remains undervalued by 25.6 per cent despite ongoing foreign exchange reforms implemented by the Nigerian government.
In its latest Article IV Consultation Report on Nigeria, the IMF said its Real Effective Exchange Rate (REER) model shows that the local currency is still trading below the level supported by the country’s economic fundamentals.
The REER measures the value of a currency against those of its major trading partners after adjusting for inflation.
According to the report, Nigeria’s REER appreciated by 32 per cent in 2025, while the Nominal Effective Exchange Rate (NEER) depreciated by 5.2 per cent 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 said.
The Fund noted that the official exchange rate improved from ₦1,535/$ at the end of 2024 to ₦1,435/$ by the end of 2025, representing an appreciation of approximately 6.5 per cent.
However, on an annual average basis, the naira weakened from ₦1,479/$ in 2024 to ₦1,520/$ in 2025, reflecting a depreciation of 2.8 per cent.
Based on the IMF’s assessment, the naira should have traded at about ₦1,142.04/$ using the end-of-2025 exchange rate benchmark, or ₦1,130.88/$ when measured against the average exchange rate for the year.
The report comes nearly three years after President Bola Tinubu introduced major foreign exchange reforms, including the unification of multiple exchange-rate windows and the transition to a more market-driven currency regime.
Although the reforms initially triggered a sharp depreciation of the naira, they were aimed at improving liquidity in the foreign exchange market and attracting foreign investment.
The IMF stressed that maintaining exchange-rate flexibility remains essential to correcting the currency’s undervaluation and strengthening Nigeria’s external position. It advised the Central Bank of Nigeria (CBN) to moderate the pace of foreign reserve accumulation while allowing greater 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 IMF stated.
The Fund added that reforms focused on improving market efficiency, strengthening fiscal management, and boosting non-oil sectors would help reduce exchange-rate misalignment and enhance Nigeria’s external balance.
Reacting to the report, Professor Uche Uwaleke, Director of the Institute for Capital Market Studies at Nasarawa State University, Keffi, said the IMF’s recommendation for continued tight monetary policy should be approached with caution.
According to him, inflation in Nigeria is largely driven by structural and cost-related factors rather than excessive consumer demand.
He identified insecurity, climate-related disruptions, logistics bottlenecks, inadequate storage facilities, low agricultural productivity, rising energy costs, and infrastructure deficits as major contributors to inflationary pressures.
Uwaleke warned that excessive monetary tightening could increase borrowing costs, discourage investment, weaken private-sector activity, and slow economic growth without addressing the underlying causes of inflation.
He advocated a combination of prudent monetary policies and aggressive structural reforms as a more effective strategy for tackling inflation.
On exchange-rate management, the economist argued that a fully free-floating exchange-rate system may not be ideal for Nigeria due to the country’s heavy reliance on oil revenues and exposure to global commodity price fluctuations.
He said a managed float regime would offer a more balanced approach by allowing market forces to influence exchange rates while giving the central bank room to intervene when necessary to reduce excessive volatility and maintain market stability.
