A Chatham House report indicates that Nigeria is currently more competitive than in the last 25 years due to significant naira devaluation under President Tinubu. While this development has improved the balance of payments and fiscal status, it has also led to rising inflation. The report emphasizes the need for strategies to maintain currency competitiveness while effectively managing inflation, particularly to attract foreign investment.
A report from Chatham House, authored by David Lubin, claims that Nigeria is currently more competitive than it has been in the last 25 years. The study titled “Nigeria’s Economy Requires a Competitive Naira” reflects on the impact of recent currency devaluation under President Bola Tinubu’s administration. It suggests that the depreciation of the naira has positively influenced Nigeria’s balance of payments and bolstered the national budget.
Since President Tinubu took office in 2023, the naira has significantly depreciated, losing over 70% of its value amidst the unification of the exchange rate and the removal of fuel subsidies. This decline has implications for the economy, with the naira’s value falling from ₦461.6/$1 to ₦1,500/$1. The report highlights that this devaluation has led to a reduced fiscal deficit, which decreased from 6.4% of GDP in early 2023 to 4.4% in early 2024.
Moreover, the current account of Nigeria is now in surplus, with capital re-entering the country, albeit mainly in speculative forms. Consequently, the Central Bank of Nigeria has increased its foreign exchange reserves to exceed $40 billion, which is seen as crucial for maintaining financial stability. However, the report stresses the importance of having reserves surpassing the current levels, equating to the country’s external debt.
Despite the positive macroeconomic indicators, Nigeria continues to grapple with rising inflation, which ended 2024 at a high rate of 35%. The National Bureau of Statistics reported a slight decrease in annual inflation to 24.48% in January 2024, but tackling inflation remains a significant challenge for policymakers, particularly affecting urban poverty.
The report posits that maintaining a competitive naira is vital for attracting foreign direct investment (FDI), which has remained low at under $2 billion in recent years. It emphasizes that an appropriate exchange rate is essential to encourage capital influx into Nigeria’s economy and enhance productivity.
To combat inflation effectively, the report recommends fostering monetary transmission mechanisms and increasing public revenues as alternatives to relying solely on a stronger naira. It advocates higher deposit rates to manage both inflation and broaden financial inclusion, thereby helping Nigeria mobilize domestic savings. The government’s focus on revenue generation is deemed crucial in addressing inflation without compromising the naira’s competitiveness, establishing a stronger foundation for future economic growth.
The report from Chatham House illustrates a nuanced view of Nigeria’s economic landscape, highlighting the potential benefits of a depreciated naira alongside the challenges of rising inflation. It underscores the significance of maintaining a competitive exchange rate to attract foreign investment while advocating for strategies to manage inflation through increased public revenues and monetary policies. Overall, Nigeria’s economic future appears contingent upon balancing currency competitiveness with inflation control.
Original Source: www.premiumtimesng.com
