IMF Says Naira Undervalued by 25 Percent
Nigeria’s sweeping foreign exchange reforms have yet to align the local currency with economic reality. The International Monetary Fund states that the naira trades roughly 25.6 percent below its fair value. According to the Washington-based lender, its Real Effective Exchange Rate model shows that the currency remains heavily undervalued despite recent gains. This persistent gap highlights a deep disconnect between market sentiment and fundamental economic metrics. Central bank interventions and structural blockages continue to distort price discovery in Abuja.
The local currency has experienced a volatile journey since the reforms began. The official rate strengthened slightly to N1,435 against the United States dollar by the end of 2025. This minor recovery followed a dismal performance throughout 2024 when the naira averaged a weaker N1,479 per dollar. On an annual average basis, the currency actually depreciated by 2.8 percent over the last year. The central bank hopes that current tightening measures will anchor investor expectations. True stability, however, still eludes the domestic foreign exchange market.
The global lender insists that the currency should trade at a much stronger level. Based on economic fundamentals, the fund calculates the true value at N1,142 per dollar. This structural projection stands in sharp contrast to the current market rate of N1,356. The gap reveals that international investors still demand a steep risk premium to hold Nigerian assets. High local inflation and security anxieties continue to undermine confidence in the domestic economy. Policymakers must address these core issues to close the valuation discount.
President Bola Tinubu initiated these aggressive economic changes three years ago. His administration removed multiple exchange rate windows to introduce a market-driven system. The initial policy shift triggered a severe devaluation that pushed millions of citizens into poverty. Government officials argued that the temporary economic pain would eventually attract foreign capital. Increased liquidity was supposed to stabilize the volatile financial centre. The promised flood of offshore investment has largely remained a trickle.
To remedy the misalignment, global economists advise a change in strategy. The central bank must slow its current pace of foreign reserve accumulation. Allowing a true two-way movement of the exchange rate will help clear market backlogs. Artificially defending the currency only burns through scarce cash reserves without fixing underlying structural flaws. A more flexible regime would encourage autonomous supply to return to the market. Relying on state intervention cannot substitute for genuine structural reform.
Long-term stability requires deeper interventions beyond mere monetary engineering. The federal government must aggressively boost non-oil exports to diversify public revenue sources. Bureaucratic bottlenecks and poor infrastructure currently hinder local manufacturers from competing globally. Improving the broader business climate will naturally support the value of the naira. Without these changes, the central bank will keep fighting a losing battle against market forces. True currency strength flows from economic productivity, not administrative decrees.