IMF says naira 25% undervalued, advises CBN to slow FX reserve build-up
By Aboki Forex —
The International Monetary Fund says the naira remains undervalued by 25.6 percent. This is despite some recovery against the US dollar after Nigeria's foreign exchange reforms.
An undervalued currency means the exchange rate is weaker than what economic fundamentals would support. The IMF stated this in its latest Article IV consultation report on Nigeria.
The fund's Real Effective Exchange Rate model showed the naira still trading below levels justified by the country's economic fundamentals. The REER measures a currency's value against major trading partners after adjusting for inflation.
IMF said Nigeria's REER appreciated by 32 percent in 2025. However, the nominal effective exchange rate depreciated by 5.2 percent during the same period.
According to the report, the official exchange rate appreciated from N1,535 per dollar at the end of 2024 to N1,435 per dollar at the end of 2025. This is a gain of about 6.5 percent.
But on an annual average basis, the naira weakened from N1,479 per dollar in 2024 to N1,520 per dollar in 2025. That is a depreciation of 2.8 percent.
The official FX rate stood at N1,356.27 per dollar as of Monday.
This assessment comes about three years after President Bola Tinubu's administration started foreign exchange reforms in June 2023. The reforms allowed the naira to trade more freely and ended the multiple exchange rate system.
The reforms triggered a sharp depreciation of the currency. But the aim was to attract foreign capital and improve liquidity in the FX market.
IMF says FX rate flexibility important for addressing undervaluation
IMF said maintaining exchange rate flexibility would be important in addressing the naira's undervaluation. It would also help improve external balance over time.
The institution advised the Central Bank of Nigeria to slow the pace of foreign reserve accumulation. It also told the CBN to continue allowing two-way movement in the foreign exchange market.
IMF said slowing reserve accumulation and allowing two-way movement would help close the gap. This should be combined with strengthening FX market functioning and advancing fiscal and structural reforms.