The Naira’s Value and the Complexities of Its Position
The Naira, Nigeria’s official currency, is often compared to the U.S. dollar due to its global dominance in trade and as a reserve currency. However, the dollar has experienced a significant decline in value over recent years, with a reported 11% drop against major currencies in 2025. This marks one of the largest declines since the 1970s, though experts predict a recovery. The question remains: what will happen to the Naira when this occurs?
Understanding the current value of the Naira is crucial for evaluating its position. Over the past year, the Naira has appreciated by about 11% against the dollar, which is a rare development given the currency’s history of devaluation. This shift has sparked debates among economists and analysts, with some arguing that the Naira is now overvalued, while others believe it is still undervalued.
Defining Overvaluation and Undervaluation
To determine whether the Naira is overvalued or undervalued, it’s important to understand these terms. When a currency is overvalued, it trades stronger than its true worth. For example, if the Naira is priced at N500 per USD but its fair value is N1,000, this would make exports more expensive and imports cheaper. On the other hand, an undervalued currency trades weaker than its fair value. If the Naira is priced at N1,500 per USD when the fair value is N500, exports become cheaper, but imports grow costly, leading to inflation.
As of late September, the official exchange rate is approximately N1,500 to the dollar, with the parallel market slightly higher at N1,515. While this appears stable compared to previous years, it masks underlying economic challenges.
Economic Fundamentals and Inflation
Nigeria’s economy remains fragile, with headline inflation running at over 21%, significantly higher than the 15% estimated in the 2025 budget. External debt service alone amounts to $5.4 billion, and foreign reserves are recovering but remain vulnerable. Oil continues to account for over 50% of export earnings, highlighting the country’s reliance on a single commodity.
Measuring the Naira’s Value
One way to assess the Naira’s value is through the Big Mac Index, which compares the price of a standardized product globally. If a Big Mac costs $5.79 in the U.S. and N3,900 in Abuja, the implied exchange rate would be around N1,029 to the dollar. Compared to the current rate of N1,500, the Naira is roughly 31% weaker, indicating undervaluation.
The World Bank’s Purchasing Power Parity (PPP) index also supports this view. In 2023, when the dollar was around N950, the Naira was undervalued by about 35%. With rising inflation and multiple devaluations since then, the gap today may be closer to 200%, suggesting Nigerian goods and services are three times cheaper than their global value.
The Trade-Off of Undervaluation
While undervaluation can benefit exporters by making goods cheaper abroad, it poses challenges for import-dependent economies like Nigeria. Imported goods such as fuel, pharmaceuticals, and machinery become significantly more expensive, driving up inflation and reducing purchasing power for consumers.
This creates a difficult balance: what helps exporters hurts consumers. A weak Naira may look favorable on paper, but in practice, it leads to hardship and a cost-of-living crisis. These issues have been exacerbated by policies imposed by international institutions, including the World Bank and IMF.
Future Outlook and Challenges
The Central Bank of Nigeria (CBN) plays a critical role in stabilizing the Naira. Foreign reserves have increased from $33 billion in 2023 to $42 billion in 2025, offering some breathing room. If monetary policy is managed effectively, the Naira could appreciate toward N750 per dollar, easing import costs and providing relief to consumers.
However, risks remain. A shift in U.S. monetary policy could strengthen the dollar, increasing demand and causing the Naira to fall further. With heavy debt obligations, the CBN may lack the resources to defend the currency during periods of pressure.
Addressing Structural Issues
To stabilize the Naira, Nigeria must address long-term structural issues. These include reducing reliance on oil, improving investor confidence, and avoiding blind adherence to external loan conditions. Without these changes, the Naira will continue to face volatility and uncertainty.
Conclusion
For Nigerians, the currency debate is not just theoretical—it affects daily life, business operations, and government policy. Until structural reforms are implemented, the Naira will remain a symbol of economic contradictions, reflecting both the challenges and potential of Nigeria’s financial landscape.
