Nigeria’s foreign exchange reforms have begun to reshape market dynamics, but the International Monetary Fund (IMF) still believes the naira is trading significantly below its “fair value,” even after recent periods of stability and partial recovery.
In its latest Article IV consultation on Nigeria, the IMF assessed that the local currency remains undervalued by 25.6 percent, based on its Real Effective Exchange Rate (REER) model — a framework that compares a currency’s value against major trading partners after adjusting for inflation.
The institution noted that while the naira has strengthened in some respects, the broader valuation gap has not yet closed.
“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.
Mixed Signals From Exchange Rate Movements
Recent data in the report shows that Nigeria’s currency performance has been uneven when viewed across different indicators. The IMF reported that the REER appreciated by 32 percent in 2025, suggesting improved relative strength against trading partners when inflation differences are considered.
However, the nominal effective exchange rate (NEER) — which does not adjust for inflation — actually depreciated by 5.2 percent over the same period, highlighting continued pressure on the currency in pure market terms.
At the official market level, the naira improved slightly during the year, moving from N1,535/$ at the end of 2024 to N1,435/$ by the end of 2025, a gain of about 6.5 percent.
Yet, on an average annual basis, the currency weakened, slipping from N1,479/$ in 2024 to N1,520/$ in 2025, representing a 2.8 percent depreciation.
Despite these fluctuations, the IMF’s model suggests a much stronger theoretical value for the naira than what is currently observed in the market. According to its estimates, the currency should be trading at around N1,142.04/$ based on end-2025 data, or N1,130.88/$ using annual averages. In contrast, the official exchange rate stood at N1,356.27/$ as of Monday.
Reform Era Under Tinubu and Market Liberalisation
The IMF’s assessment comes nearly three years after the Bola Tinubu administration began sweeping foreign exchange reforms in June 2023. These reforms dismantled Nigeria’s long-standing multiple exchange-rate system and allowed the naira to float more freely in the official market.
While the policy shift initially triggered a sharp depreciation of the currency, it was designed to improve transparency, attract foreign investment, and restore liquidity to the FX market over time.
The reforms also marked one of the most significant structural changes to Nigeria’s currency management in decades, reshaping how demand and supply pressures are reflected in exchange rates.
IMF’s Policy Advice on the Naira
Beyond valuation estimates, the IMF emphasized that greater flexibility in the exchange rate regime remains essential for correcting misalignment and strengthening Nigeria’s external position.
It advised the Central Bank of Nigeria to moderate the pace of foreign reserve accumulation and maintain two-way movements in the FX market rather than defending rigid levels.
“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.
Structural Reforms Seen as Key to Closing the Gap
The IMF further argued that exchange rate alignment will depend not only on FX policy but also on broader economic reforms. Strengthening fiscal discipline, improving market efficiency, and boosting non-oil export capacity were highlighted as critical steps toward narrowing the currency gap.
According to the institution, sustained progress in these areas would gradually reduce pressure on the naira and improve Nigeria’s external balance, helping to bring the exchange rate closer to levels justified by underlying economic fundamentals.