Depreciation of Naira Enhances Nigeria’s Economic Competitiveness to Record High
The depreciation of the naira has boosted Nigeria’s economic competitiveness to a 25-year high. According to Chatham House, the naira’s significant devaluation is helping improve trade balances and attract foreign capital, with reserves rising to over $40 billion. However, rising import costs and inflation remain pressing concerns that could undermine these gains, calling for a focus on sustaining foreign investment and improving economic policies.
According to a report by Chatham House, the fall of the naira has rendered the Nigerian economy more competitive than at any time in the last 25 years. The naira has depreciated by over 70%, plummeting from 460 to almost 1,500 naira to the dollar. This significant devaluation is among the largest currency adjustments globally, trailing only the Ethiopian birr in recent history.
Chatham House asserts, “With the naira’s fall, Nigeria is arguably now more competitive than at any time in the past 25 years,” highlighting the necessity of a competitive naira for fostering a diverse and capital-rich economy. Furthermore, the weaker naira has positively impacted Nigeria’s balance of payments, with a recorded trade surplus of N16 trillion in 2024, reaching unprecedented levels.
The influx of foreign capital has increased the nation’s reserves to over $40 billion, aligning closely with Nigeria’s external debt. Additionally, the naira’s devaluation and the removal of fuel subsidies have significantly narrowed the fiscal deficit from 6.4% of GDP in early 2023 to 4.4% in early 2024. However, a weaker naira also leads to higher import costs, exacerbating trade deficits and potentially hindering economic growth.
Chatham House notes, “Excessively cheap dollars encourage companies and individuals to find ways of getting money out of the country, to park wealth in safer havens at low cost.” While recent economic reforms by President Bola Tinubu have shown promise, the consequences of these changes have adversely affected the purchasing power of ordinary Nigerians, with at least 129 million people living in poverty.
Chatham House also emphasizes the urgency of attracting foreign direct investment (FDI) to ensure that Nigeria remains a productive economy. Despite its vast population, Nigeria has struggled to secure more than $2 billion in net FDI annually. A stronger naira could undermine the gains made through recent reforms, posing a risk to the stability achieved thus far.
A push for a stronger naira in response to inflation could nullify these hard-won achievements. Chatham House cautions against abandoning the current competitive currency status as it is critical to encouraging productive capital inflow. To further mitigate inflation, the Central Bank of Nigeria (CBN) has increased the key interest rate to 27.5%.
However, the CBN must enhance its monetary transmission mechanism as current deposit interest rates remain considerably lower than borrowing rates. Raising deposit rates could play a pivotal role in reducing inflation while promoting financial inclusion, allowing Nigeria to mobilize more domestic savings into its financial system. Expansion of government revenue could also enable further capital infrastructure and social investment, cushioning the effects of current reforms.
In conclusion, the depreciation of the naira has unexpectedly enhanced Nigeria’s economic competitiveness, as noted by Chatham House’s report. Though the naira’s fall has attracted foreign capital and improved trade balances, it presents challenges such as rising import costs and inflation. To solidify these gains, Nigeria must focus on attracting foreign direct investment and maintaining currency competitiveness, alongside improving its monetary policies to stabilize and grow the economy effectively.
Original Source: businessday.ng
