Chatham House reports that the naira’s depreciation has made Nigeria’s economy more competitive than it has been in 25 years, with significant boosts to trade surplus and foreign capital inflows. However, the economic reforms are creating hardships for ordinary citizens. The call for maintaining a competitive naira is vital for attracting foreign investment and supporting fiscal health amidst soaring inflation rates.
According to a report by Chatham House, the naira’s significant depreciation has made Nigeria’s economy the most competitive it has been in 25 years. The naira has experienced a decline of over 70 percent, plunging from 460 to nearly 1,500 in value against the dollar. This has been recognized as one of the most substantial currency adjustments globally in recent times, with few exceptions.
The report emphasizes that the naira’s fall facilitates economic competitiveness, suggesting the creation of a more capital-rich and diverse economy is contingent upon maintaining a competitive naira. Notably, despite its depreciation, Nigeria’s balance of payments has improved, evidenced by a record trade surplus of N16 trillion in 2024, as per the National Bureau of Statistics.
Moreover, the inflow of foreign capital is noteworthy, as Nigeria’s reserves have surged above $40 billion, aligning closely with the nation’s external debt. The naira’s devaluation has positively influenced governmental fiscal policy, decreasing the fiscal deficit from 6.4 percent to 4.4 percent of GDP between early 2023 and early 2024.
Nonetheless, the report warns that excessively cheap dollars can lead to increased imports, resulting in trade deficits and stunting economic growth. Furthermore, the reforms introduced by President Bola Tinubu aimed at stabilizing the economy have faced backlash as they adversely affect the spending power of ordinary Nigerians, plunging many into poverty.
Chatham House underscores the significance of foreign direct investment (FDI) to Nigeria’s economic recovery. It points out that attracting substantial FDI is critical for enhancing productivity, creating jobs, and fostering growth despite the country’s historical challenges in securing such investments.
Calls for strengthening the naira could reverse recent progress. Transitioning to a stronger naira may lead to inflationary pressures returning, undermining the economic reforms currently underway. Maintaining a competitive currency is essential, coupled with a stable business environment to invite productive capital into the country.
Lastly, the rise in inflation, which peaked at a three-decade high in 2024, has prompted the Central Bank of Nigeria to raise its key interest rate significantly. To combat inflation effectively, higher deposit rates should be introduced to incentivize savings and allocate increased government revenues towards crucial infrastructure and social programs.
Overall, while the depreciation of the naira presents challenges and opportunities for Nigeria’s economy, thoughtful policy measures and sustained efforts towards maintaining competitive economic conditions remain crucial.
In conclusion, Nigeria’s economic landscape has been reshaped by the naira’s depreciation, enhancing its competitiveness. The report from Chatham House speaks to the need for sustainable foreign direct investment and the importance of maintaining a competitive currency. With the government increasing interest rates to combat inflation, the country stands at a pivotal moment where targeted economic reforms can lead to long-term growth and stability.
Original Source: businessday.ng
