The devaluation of the naira has positioned Nigeria as its most competitive economy in 25 years, despite causing inflation and poverty increases. A report by Chatham House emphasizes the need for ongoing economic reforms and foreign direct investment for sustainable growth. The Central Bank’s strategies to combat inflation and enhance stability are crucial amid these dynamics.
The decline of the naira has positioned the Nigerian economy at its most competitive level in 25 years, according to a report by Chatham House. The naira has depreciated over 70 percent, plummeting from 460 to the dollar in early 2023 to just below 1,500 now, marking one of the largest currency adjustments in recent history. The report underscores that a competitive naira is essential for fostering a more capital-rich and diverse economy.
Despite the naira’s depreciation, improvements are reflected in Nigeria’s balance of payments, with the National Bureau of Statistics reporting a trade surplus of N16 trillion in 2024, one of the highest ever recorded. Furthermore, foreign capital inflows have increased Nigeria’s reserves to over $40 billion. The naira’s devaluation, in conjunction with the removal of fuel subsidies, has effectively reduced Nigeria’s fiscal deficit from 6.4 percent of GDP in early 2023 to 4.4 percent in early 2024.
However, the devaluation has led to increases in import prices and widened trade deficits. The report cautions that excessively cheap dollars incentivize capital flight, prompting companies and individuals to seek refuge in more stable economies. It highlights the complex interplay of economic reforms introduced by President Bola Tinubu, which while beneficial for long-term growth, have negatively impacted the purchasing power of Nigerians and increased poverty levels affecting approximately 129 million people.
Foreign Direct Investment (FDI) is critical for Nigeria’s economic resurgence and long-term productivity. Yet, the country has faced challenges attracting substantial FDI, often securing less than $2 billion annually despite its population of 230 million. The pursuit of a stronger naira to combat inflation, which ended 2024 at 34 percent, risks reversing recent progress and restoring prior economic difficulties.
The Central Bank of Nigeria (CBN) has responded to rising inflation—reaching a 30-year high—by increasing the key interest rate to a historic 27.5 percent. For effective inflation management, the CBN must enhance its monetary transmission and adjust the disparity between borrowing costs and deposit interest rates. Increased government revenues would also facilitate capital investments and broader social programs, further helping to mitigate the effects of economic reforms.
In conclusion, the devaluation of the naira has both reinforced Nigeria’s competitive standing and exposed the underlying economic challenges facing the nation. While the naira’s weakness has improved trade balances and attracted foreign capital, it has also resulted in rising inflation and heightened poverty levels, necessitating comprehensive reforms. Promoting stable FDI and a competitive currency alongside enhancing the business environment are essential steps for sustainable economic growth in Nigeria.
Original Source: businessday.ng
