Chatham House, a UK-based international affairs think tank, warned the Nigerian government not to take efforts to strengthen the Naira and asserted that the country’s economy has become more competitive due to the depreciation of its currency.
Chatham House in an article titled “Nigerian economy needs Naira to remain competitive”, for sustainable, long-term growth, the government must “resist the temptation” to combat inflation in order to allow Naira to appreciate the dollar.
The report stressed that although inflation has surged under President Bra Tinub’s reforms, these reforms offer the greatest hope for future economic development.
“At the center of reform, Tinubu’s decision was to allow substantial devaluation of the Naira, which has fallen to the U.S. dollar from around the 2023 election and is now below N1,500. Nigeria’s currency adjustment is one of the biggest currency adjustments in years: Only Ethiopian’s Birr has taken a bigger move recently.”
“With Naira’s fall, Nigeria is now arguably more competitive than at any time in the past 25 years.”
The think tank explains that the most critical price in any developing economy is the price of one dollar. “If the dollar is too cheap, imports rise dramatically. This could make a country financially vulnerable.”
“More imports increase a country’s trade deficit, and if global creditors lose interest in risk, the deficit can be difficult for funds (which often happens and is unpredictable). When they do so, the pain of financial instability will follow.”
“At the same time, the over-cheap dollar encourages companies and individuals to find ways to make money from the country, to park wealth in a safer haven at a low cost. In short, it is impossible to build a growth base when capital has the motivation to leave the country.”
Chatham House further stressed that Naira’s depreciation has led to two major positive outcomes – Nigeria’s payment balance has improved, now surplus, and capital has returned to the country.
As a result, the think tank pointed out that the Central Bank of Nigeria (CBN) has increased its foreign exchange reserves, now exceeding US$40 billion, ensuring sufficient levels of reserves are crucial to financial stability in developing countries.
“Another positive impact is that the depreciation of Naira provides a lot of support for Nigeria’s budget. The World Bank argues that in recent years, the budget for exchange rates that are not aligned with Nigeria is more serious than the government’s fuel subsidies,” the think tank said.
“This is because when the official exchange rate allows the Naira to sell at a Naira less than its value, the government pays a lot of local currency to pay more than it should.”
“Due to the fall of Naira – Nigeria’s fiscal deficit narrowed from 6.4% of gross domestic product (GDP) at the beginning of 2023 to 4.4% in early 2024.”
Chatham House acknowledged that controlling inflation remains an urgent challenge for Nigerian policymakers, especially as urban poor people are hit hardest.
While the stronger naira could reduce inflation by importing cheaply on local currencies, the think tank warns that this strategy could eliminate the competitive advantage that the depreciation of the naira has.
Instead of relying on a stronger Naira, Chatham House suggests that the rate of inflation is more effective through two key strategies: enhancing the mechanisms of currency transmission and increasing public income.
