The devaluation of the naira has positioned Nigeria’s economy as more competitive than in the past 25 years, according to Chatham House. The naira’s value dropped from 460 to under 1,500 naira per dollar, improving trade balances and foreign reserves. However, rising inflation and poverty concerns challenge these gains, necessitating further reforms and foreign investment to ensure sustainable growth.
According to a report by Chatham House, the depreciation of the naira has made the Nigerian economy more competitive than it has been in the last 25 years. The naira’s devaluation exceeds 70%, falling dramatically from 460 to under 1,500 naira per dollar. This adjustment is among the largest observed globally, surpassed only by the Ethiopian birr.
The report asserts that Nigeria’s competitiveness is now notably improved, stating, “With the naira’s fall, Nigeria is arguably now more competitive than at any time in the past 25 years.” Additionally, it highlights the necessity of a competitive naira for fostering a capital-rich and diverse economy.
Although the naira has weakened, it has led to a favorable balance of payments, resulting in a notable trade surplus of N16 trillion recorded in 2024. Consequently, foreign capital influx increased Nigeria’s reserves to over $40 billion, aligning closely with the nation’s external debt levels.
The devaluation of the naira, complemented by the elimination of fuel subsidies, has positively affected the Nigerian fiscal landscape, shrinking the fiscal deficit from 6.4% of GDP in early 2023 to 4.4% in early 2024. Nonetheless, a cheaper dollar could exacerbate import costs, widen trade deficits, and impede economic growth.
Chatham House highlighted that excessively cheap dollars might encourage capital flight, as individuals seek safer investment avenues abroad. President Bola Tinubu’s economic reforms have sparked debate as they aim for sustainable growth, despite increasing hardships for many Nigerians and the rising poverty affecting over 129 million individuals.
The report emphasizes that Nigeria’s economic recovery hinges on attracting foreign direct investment (FDI), which could enhance productivity and job creation. Despite having a population of 230 million, Nigeria has struggled to exceed annual net FDI inflows of $2 billion in recent years.
Calls for a strengthened naira to control inflation, which soared to 34% by the end of 2024, raise concerns about the potential loss of the stability achieved through reforms. It warns that such a move would undermine the competitive advantages recently gained.
Furthermore, the Central Bank of Nigeria’s (CBN) recent measures, including a hike in the key interest rate to 27.5%, are aimed at curbing inflation. However, the CBN needs to refine its monetary transmission, as current borrowing costs near 30% contrast sharply with deposit account interest rates near 10%. Higher deposit rates are necessary to stimulate domestic savings, promote financial inclusion, and stabilize inflation, thereby allowing for increased governmental revenue for infrastructural and social investments.
In summary, the significant depreciation of the naira has enhanced Nigeria’s economic competitiveness to levels not seen in 25 years. While the naira’s drop has positively impacted trade surpluses and foreign reserves, concerns over inflation and its effect on the populace remain critical. The need for continued reforms, coupled with effective monetary policies and the attraction of foreign investment, is crucial for Nigeria’s sustainable economic growth.
Original Source: businessday.ng
