Chatham House reports that Nigeria’s economy is experiencing unprecedented competitiveness due to President Bola Tinubu’s reforms, particularly the naira’s devaluation. Despite improvements in balance of payments and fiscal deficit, inflation remains a concerned issue. The think tank suggests strategies for further financial stability while warning against excessive strengthening of the naira that could undermine competitive gains.
Chatham House, a UK-based think tank, asserts that Nigeria’s economy is currently experiencing its highest level of competitiveness in 25 years, attributed to reforms under President Bola Tinubu’s administration. A critical reform includes the significant devaluation of the naira, which has dropped from N460 to approximately N1,500 per dollar. Such measures are aimed at fostering long-term growth.
The report, authored by David Lubin, a Senior Research Fellow at Chatham House, acknowledges that while there are reasons for dissatisfaction with Tinubu’s presidency, his economic reforms are positioned as crucial for Nigeria’s sustainable growth. The report emphasizes that the path taken by these reforms will be vital for the country’s future.
One of the main assertions is that Nigeria’s substantial currency devaluation enhances competitiveness, making it arguably more favorable than it has been in the past quarter-century. It highlights that allowing an excessive strengthening of the naira could undermine this competitiveness and lead to detrimental financial vulnerabilities.
The devaluation of the naira has led to improvements in Nigeria’s balance of payments, which is currently surplus. Additionally, the Central Bank of Nigeria (CBN) has increased its foreign exchange reserves, now exceeding $40 billion, contributing to overall financial stability.
Moreover, the devaluation supports the Nigerian budget by increasing revenues from oil, gas, and taxes paid in dollars. Consequently, Nigeria’s fiscal deficit has decreased from 6.4% of GDP in early 2023 to 4.4% in early 2024. However, inflation remains a significant challenge, ending 2024 at a stark 35%. Recent adjustments to the Consumer Price Index have also impacted reported inflation figures.
Amid the ongoing inflation challenges, Chatham House stresses the necessity of maintaining a competitive naira. A stronger naira could initially reduce inflation but could also negate gains in competitiveness vital for attracting Foreign Direct Investment (FDI), which is crucial for economic growth.
The think tank outlines two strategies to better manage inflation while maintaining competitiveness: improving the monetary transmission mechanism by raising deposit rates, and increasing public revenues, which are currently below the international average. Enhancing these areas could mitigate inflation without jeopardizing the naira’s competitive stance.
Chatham House concludes by urging Nigerian policymakers to commit to maintaining the naira’s competitiveness to foster a more robust and diverse economy. The historic reluctance to keep exchange rates competitive must change to support sustainable economic growth.
Chatham House’s analysis highlights that Nigeria is at a pivotal moment in its economic reform journey, driven by President Tinubu’s substantial devaluation of the naira. While competitiveness has improved, the persistence of high inflation poses a significant challenge. To ensure sustainable growth, Nigeria must maintain a competitive currency while also improving monetary transmission and boosting public revenues. Maintaining these intricacies is essential for Nigeria to attract foreign investment and galvanize its economy effectively.
Original Source: www.arise.tv
