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Nigeria’s naira may be significantly overvalued, raising questions about its sustainability beyond 2025 as import demand recovers and fiscal risks mount.

A new report by Renaissance Capital Africa estimates the naira is overvalued by about 26 percent compared to its 25-year real effective exchange rate (REER) average. That figure jumps out even after adjusting for inflation and GDP rebasing, both of which have improved official optics but may be masking deeper structural imbalances.

“The naira is now the most expensive currency in Africa on a REER basis,” the report said, warning that current levels are unlikely to hold if oil prices stay subdued and imports rise.

While the floating of the naira in 2023–24 helped reset investor confidence and allowed the currency to be more determined by market fundamentals, the analysts argue that the currency’s current strength is no longer justified purely by reforms.

Instead, they attribute the support to a temporary surge in Nigeria’s current account surplus and modest portfolio inflows chasing high bond yields.

The report also flags a discrepancy: FX reserves are falling, despite a projected $14.1 billion current account surplus in 2025, undermining the case for continued naira strength. IMF figures suggest reserves will drop from $40 billion to $36 billion this year.

Analysts at RenCap Africa caution that as interest rates decline later this year, a move widely expected by markets, credit growth will pick up, fueling import demand and exposing the currency to pressure.

“Currency stability in the second half of 2025 may push overvaluation to 30%,” the report noted. “The outlook becomes trickier from 2026 onward.”

But some economists like Bismarck Rewane, the CEO of Financial Derivative Company (FDC) argue that the naira remained undervalued by as much as 26.82 percent.

Rewane said in a presentation in June at the Lagos Business School breakfast club that the average PPP rate of the naira should be N1,158.50 especially with the US dollar weakening against global currencies 8.7 percent year to date.

This is as Murtala Sagagi, a member of the central bank’s Monetary Policy Committee (MPC) considered the currency “undervalued”, projecting the naira to maintain its rally till the end of the year.

“The value of the naira has been relatively stable even though it is still considered undervalued. It is projected that the naira would appreciate to N1, 450 per US dollar by the end of 2025,” Sagagi said after a May 20 committee meeting, the central bank said in a statement published on its website.

Renaissance Capital Africa also warned of political risks ahead of the 2027 elections. A widening fiscal deficit, driven by pre-election spending, could accelerate external pressures on the naira, especially if oil exports stall below the 2 million bpd threshold.

Despite this, Nigeria’s high-yield debt remains attractive for now, with the analysts maintaining a positive view on local bonds through H2 2025. But the case for owning Nigerian assets, they say, becomes “much more uncertain” heading into 2026.