Chatham House reports that Nigeria’s economy is at its most competitive in 25 years, attributed to President Tinubu’s reforms, particularly the naira’s devaluation from N460 to N1,500. While this has resulted in positive balance of payments and foreign reserves, inflation remains a major concern, calling for careful monetary strategies to foster sustainable growth.
Chatham House, a notable UK-based international affairs think tank, reported that Nigeria is experiencing its most competitive economic climate in the past quarter-century, primarily due to significant reforms initiated under President Bola Tinubu’s administration. Key among these reforms is the devaluation of the naira, which has decreased from N460 to approximately N1,500 against the dollar. In the article titled, “Nigeria’s Economy Needs the Naira to Stay Competitive,” Chatham House emphasizes that maintaining competitiveness requires resisting the urge to strengthen the naira against the dollar to combat inflation.
While acknowledging that two years into Tinubu’s presidency, dissatisfaction among voters has arisen due to the naira’s drastic fall, soaring petrol prices, and heightened food costs, Chatham House remained optimistic. The think tank believes that Tinubu’s economic policies provide the best prospect for sustainable growth in Nigeria’s future, pointing to the necessity of careful navigation in the ongoing reform process.
The article highlights that the large depreciation of the naira is unprecedented, with Nigeria’s currency change being among the most substantial worldwide in recent years. With this adjustment, Nigeria is reportedly now more competitive than it has been in the last 25 years. In developing economies, exchange rates significantly affect financial stability; hence, the current worth of the naira is critical for managing trade deficits and attracting foreign investment.
Positive outcomes from the naira’s decline include a surplus balance of payments and increased capital inflow into Nigeria, leading to a rise in foreign exchange reserves at the Central Bank of Nigeria (CBN). Currently, the CBN manages reserves exceeding $40 billion, which aligns with the level of external debt, ensuring essential financial stability.
Chatham House also noted that the naira’s depreciation has beneficially impacted Nigeria’s public finances. Reforms have contributed to a narrowing fiscal deficit from 6.4% of GDP in early 2023 to 4.4% in early 2024, with substantial support from higher revenue streams due to oil and gas royalties, customs duties, and VAT. However, they cautioned that high inflation rates, peaking at 35% in late 2024, remain a significant threat to the populace.
The think tank explained that although the inflation rate saw a reduction to 24.5% in January, this was largely attributed to methodological changes in calculating the Consumer Price Index. Continuing to combat inflation is paramount, given its disproportionate impact on the urban poor. As such, a strategy to strengthen the naira could prove detrimental to the hard-earned economic competitiveness Nigeria has achieved.
Chatham House advocated for maintaining a competitive naira to attract foreign direct investment essential for enhancing economic capacity. The report further highlighted Nigeria’s struggle with attracting substantial FDI, calling for improvements in the business environment, including energy reliability and reducing bureaucratic obstacles. Moreover, an increase in deposit interest rates would enhance economic stability and encourage savings.
To bolster economic growth without relinquishing naira competitiveness, the think tank urged the Nigerian government to enhance public revenue frameworks and fiscal policies to elevate government revenues from under 10% of GDP, well below the sub-Saharan average of 14%. This focus on raising revenues is crucial for combating inflation without degrading the naira’s value.
In conclusion, Chatham House emphasized the necessity for Nigeria’s policymakers to learn from past experiences of failed exchange rate strategies. They called for a commitment to keeping the exchange rate competitive as Nigeria endeavors to cultivate a more robust economy moving forward.
Chatham House asserts that Nigeria’s current economic competitiveness is largely due to President Bola Tinubu’s significant reforms, particularly the devaluation of the naira. While the policy changes have led to positive economic indicators such as a surplus balance of payments and narrowed fiscal deficit, challenges such as high inflation persist. The think tank cautions against premature naira strengthening, arguing that maintaining the currency’s competitive position is critical for attracting foreign investments and ensuring sustainable economic growth.
Original Source: www.arise.tv
