IMF Says Naira is Undervalued, Experts Differ on Optimal Rate

The single sharpest fact you need to know today is that the International Monetary Fund (IMF) has declared Nigeria's naira undervalued according to its latest Article IV report. This is a clear indication that the economy is better-managed, and the country is saving for the rainy day. But the good news is not without its complexities, with some experts disagreeing on the optimal rate for the naira.

The IMF, in its report, stated that the naira should not exchange for more than ₦1,142 to the US Dollar. Professor Uche Uwaleke, a finance expert, has even suggested that the naira should be stronger, trading somewhere below ₦1,000 to the US dollar. This is according to the REER (Real Effective Exchange Rate) formula, which compares the nominal value of a currency to a selection of other major currencies. A rising REER means that a country's currency is strengthening, while a falling REER means it is weakening.

But what does this mean for Nigeria? The fact that the naira is undervalued gladdens the heart because it shows that the economy is on the right path. Nigeria has departed from the era when it thought it could spend any amount of money anyhow after all 'we were Nigeria', we had oil in the ground and could flex as we liked. That exceptionalism is why we became very import-dependent, and for a country of over 200 million people, we were in a cul-de-sac. But with the reforms championed by President Tinubu, it seems obvious we have stopped digging ourselves further into a burrow.

Governor Godwin Emefiele's successor, Mr. Olaopa, has maintained the central bank's balance, ensuring the naira does not float away into oblivion, but that there exists a remarkable level of transparency in that market for all players to express themselves and such that the naira achieves price discovery. At the current ₦1,350 – ₦1,380 the market oscillates very gently (no longer violently) and even the parallel market has taken a cue, sometimes trading even lower than the official market. The FX premium that used to be as high as 60 per cent has largely disappeared.

But how did we get here? Nigeria became the world's biggest importer of French Champagne. We became the world's largest importer of Toyota Landcruisers and Prado. Lekki area became the global headquarters of Mercedes Benz G-Wagons. And we imported everything 'importable', including sand to build exotic mansions, eggs, water, toothpicks, pizzas, anything at all.

We also came third in terms of foreign students, behind rich countries with huge population – China and India, just as we trooped out en masse on medical tourism, while condemning our own facilities. These are some of the quirks I point towards when people say Nigeria is defined by poverty. I say we are all complicit in the destruction of our own economy.

The IMF report also highlighted the fact that the naira has achieved a remarkable level of stability in recent times, thanks to the prudent management of the Central Bank of Nigeria (CBN). The CBN has maintained a tight ship, ensuring that the naira does not float away into oblivion, but that there exists a remarkable level of transparency in that market for all players to express themselves and such that the naira achieves price discovery. And the market has responded positively, with the FX premium that used to be as high as 60 per cent having largely disappeared.

So what happens next? The fact that the naira is undervalued gives us a clear indication that the economy is on the right path. Nigeria has departed from the era when it thought it could spend any amount of money anyhow after all 'we were Nigeria', we had oil in the ground and could flex as we liked. That exceptionalism is why we became very import-dependent, and for a country of over 200 million people, we were in a cul-de-sac. But with the reforms championed by President Tinubu, it seems obvious we have stopped digging ourselves further into a burrow.