Mounting fiscal and external risks are raising fresh concerns about the sustainability of Nigeria’s currency gains.
As Nigeria’s import appetite rebounds and macroeconomic uncertainties linger, fresh doubts are surfacing over the sustainability of the naira’s current strength. Despite recent policy reforms and relative exchange rate stability, analysts are increasingly warning that the currency may be significantly overvalued—posing challenges for economic planning beyond 2025.
A new report by Renaissance Capital Africa (RenCap) suggests that the naira is overvalued by as much as 26 percent compared to its 25-year average real effective exchange rate (REER), even after adjusting for inflation and recent GDP rebasing.
“The naira is now the most expensive currency in Africa on a REER basis,” the report states, cautioning that such levels may not hold if global oil prices remain subdued and Nigeria’s import bill rises in tandem with post-reform recovery.
Temporary Gains or Fundamental Strength?
The relative stability of the naira since the Central Bank of Nigeria (CBN) implemented sweeping reforms in 2023–24—chiefly the shift toward a more market-reflective exchange rate—was initially met with optimism from investors. However, RenCap analysts now argue that recent gains are not rooted in long-term fundamentals.
Instead, they credit the naira’s resilience to a temporary spike in the current account surplus and modest foreign inflows seeking high returns on local bonds. These factors, they say, are transitory and susceptible to reversal, especially as interest rates start to decline and Nigeria’s demand for imports strengthens.
The disconnect is also evident in the nation’s foreign reserves. Despite projections of a $14.1 billion current account surplus in 2025, Nigeria’s FX reserves are forecasted to decline from $40 billion to $36 billion, according to International Monetary Fund (IMF) estimates. That divergence undermines the narrative of a fundamentally strong currency.
“Currency stability in the second half of 2025 may push overvaluation to 30%,” RenCap warned, noting that the picture becomes far murkier heading into 2026.
Contrasting Views: Is the Naira Actually Undervalued?
Not everyone agrees with the overvaluation thesis.
Bismarck Rewane, CEO of Financial Derivatives Company (FDC), maintains that the naira is in fact undervalued—by roughly the same margin cited by RenCap, but in the opposite direction. During a June 2025 presentation at Lagos Business School, Rewane argued that the naira’s average purchasing power parity (PPP) rate should be closer to ₦1,158.50/$, especially given the 8.7 percent year-to-date weakening of the US dollar against global currencies.
Adding to this view is Murtala Sagagi, a member of the Central Bank’s Monetary Policy Committee (MPC), who described the naira as “still undervalued” in remarks published after the MPC’s May 2025 meeting. Sagagi projected that the currency would appreciate further to around ₦1,450/$ by year-end, citing recent gains in FX inflows and continued monetary tightening.
Political and Fiscal Risks Loom Ahead of 2027
While short-term sentiment around the naira remains cautiously optimistic, RenCap flags significant medium-term risks, particularly as Nigeria moves closer to the 2027 general elections. Rising public spending and a potentially widening fiscal deficit could create new external imbalances.
“If oil exports underperform—especially below the 2 million barrels per day threshold—then pressure on the naira could accelerate,” the report notes.
The fear is that pre-election spending may fuel deficits, just as external buffers are being tested, particularly if oil prices falter or production remains inconsistent.
High-Yield Debt Still Attractive—For Now
Despite currency valuation concerns, Nigeria’s fixed-income market continues to draw interest. With bond yields remaining elevated and inflation slowing, RenCap maintains a positive short-term outlook for Nigerian local bonds through the second half of 2025.
Still, the analysts caution that investor confidence could weaken as fiscal and currency pressures converge.
“The case for owning Nigerian assets becomes much more uncertain heading into 2026,” the report concluded.
Looking Ahead
The debate over the true value of the naira is far from settled. While recent reforms have improved transparency and boosted investor sentiment, structural challenges—from oil dependency to fiscal discipline—remain unresolved.
Whether the naira is overvalued or undervalued may ultimately depend on Nigeria’s ability to navigate a delicate balance: sustaining reforms, managing external shocks, and maintaining fiscal credibility—all while heading into a politically sensitive election cycle.