Chatham House, a UK international affairs policy think tank, has reported that the Nigerian economy is currently experiencing its most competitive phase in the past 25 years, largely due to the economic reforms implemented by President Bola Tinubu’s administration.
A significant aspect of these reforms includes the devaluation of the naira, which has seen a dramatic drop from N460 to approximately N1,500 per dollar.
David Lubin, a Michael Klein Senior Research Fellow at Chatham House and former Managing Director of Emerging Markets Economics at Citi, in an article titled “Nigeria’s Economy Needs the Naira to Stay Competitive,” emphasises that for Nigeria to achieve long-term economic growth, the government should avoid the temptation of strengthening the naira against the dollar as a means to combat inflation.
Despite the optimism surrounding these reforms, the report acknowledges the discontent among Nigerian voters two years into Tinubu’s presidency. The article points out that during this period, the value of the naira has significantly diminished, fuel prices have increased fourfold, and food prices have surged by over 80%, all contributing to a rise in poverty levels.
Chatham House asserts that the economic reforms initiated by Tinubu represent Nigeria’s strongest hope for sustainable growth in decades. The future trajectory of these reform efforts will be critical for the country’s economic stability and development.
It stated, “At the centre of the reforms has been Tinubu’s decision to allow a very substantial devaluation of the naira, which has fallen from N460 to the dollar around the 2023 election, to just below N1,500 now. Nigeria’s currency adjustment is one of the largest anywhere for years: only the Ethiopian birr has seen a bigger move recently.”
The organisation said, “With the naira’s fall, Nigeria is arguably now more competitive than at any time in the past 25 years.”
It added, “In any developing economy, the most important price is the price of a dollar. If dollars are too cheap, then imports rise sharply. This can make a country financially vulnerable. More imports boost a country’s trade deficit, and deficits can become difficult to finance if global creditors lose their appetite for risk (which happens often and unpredictably). And when they do, painful bouts of financial instability can follow.
“At the same time, 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. All in all, it is impossible to establish a basis for growth when capital has an incentive to leave the country.
“With the naira’s fall, however, Nigeria is arguably now more competitive than at any time in the past 25 years.”
The think tank added that the depreciation of the naira had had two hugely positive consequences, namely, improvement in Nigeria’s balance of payments, now in surplus, as well as re-entering capital into the country.
As a result, the Central Bank of Nigeria (CBN), according to the article, had added to its foreign exchange reserves, which now exceeded $40 billion as well as having an adequate stock of reserves, the sine qua non for financial stability in developing countries.
It added that the progress CBN had made should be congratulated, with gross reserves at a prudent level currently, more or less equal to Nigeria’s stock of external debt, but which could also be higher.
Chatham House stated, “The other positive effect is that the naira’s devaluation has given substantial support to the Nigerian budget. The World Bank argues that a misaligned exchange rate hit Nigeria’s budget harder in recent years than the cost of the government’s fuel subsidies.
“That is because when the official exchange rate allows dollars to be sold for fewer naira than they are worth, the government’s revenues from oil and gas royalties, customs and excise duties, and the large part of Value Added Tax (VAT) and corporate income tax that is paid in dollars, are all much lower in local-currency terms than they should be.
“Because of the naira’s fall – alongside the removal of petrol subsidies – Nigeria’s fiscal deficit narrowed from 6.4 per cent of Gross Domestic Product (GDP) in early 2023 to 4.4 per cent in early 2024.”
However, Chatham House stated that the uglier consequence of the currency’s slide had been its effect on inflation, which ended 2024 at 35 per cent, painfully high by any standard.
Although reported inflation fell sharply in January to 24.5 per cent, it recalled that this was thanks to last month’s introduction of a new set of weights and a new base year for the Consumer Price Index (CPI).
The group said defeating inflation remained a huge immediate challenge for Nigerian policymakers – not least because the urban poor suffered the most from it, which raised the central question of how to bring inflation down.”
Now strengthening from its late-2024 peak of just below 1,700 to the dollar, the group pointed out that a stronger naira was tempting because since its collapse pushed inflation up, a naira that gained in value would push inflation back down, as imports became cheaper in local-currency terms.
The article said, “The problem with this approach is that it would accelerate the disappearance of all the gains in competitiveness that have been won through the currency’s decline. Nigeria desperately needs to attract Foreign Direct Investment (FDI), long-term capital that helps add to the economy’s productive capacity.
“It is something of a tragedy that this country of 230 million people has failed to attract more than $2 billion worth of net FDI inflows annually in recent years.
“A currency that stays competitive is a necessary – although by no means sufficient – condition to encourage more productive capital to enter the country. Also essential is a stable commitment to improve the business climate – everything from improving electricity supply to tackling corruption, reducing red tape and enhancing the sanctity of contract.”
Instead of relying on a stronger naira, the policy think tank argued that a more rapid decline in inflation would be better supported by two other strategies.
It stressed, “The first would be to improve what economists call the monetary transmission mechanism. The CBN’s policy interest rate is now at 27.5 per cent, which is appropriately high. Yet deposit accounts in Nigerian banks pay an interest rate closer to 10 per cent.
“That is great for banks that earn large profits from this difference, but not for short-changed depositors. Higher deposit rates would help to kill inflation, promote financial inclusion and help Nigeria to mobilise domestic savings into the financial system.
“The path to a more capital-rich, more diverse Nigerian economy can only be built on a competitive naira.
“The second is to raise public revenues. IMF data suggest that Nigeria’s total government revenues are less than 10 per cent of GDP. That is extraordinarily low by international standards – lower even than the 14 per cent average for sub-Saharan Africa.
“The government is firmly focused on raising revenues, but its importance cannot be overstated, not least since it offers a way of helping bring inflation down without sacrificing the naira’s competitiveness.”
According to the UK group, underlying Nigeria’s history of failed exchange rate devaluations is its policymakers’ consistent unwillingness to keep the exchange rate competitive in the period after each devaluation.
“Time now (it is) to end that pattern and resist the temptation to let the currency strengthen excessively. The path to a more capital-rich, more diverse Nigerian economy can only be built on a competitive naira,” the group maintained.
