A report from Chatham House asserts that Nigeria is more competitive than it has been in 25 years, primarily due to the naira’s significant depreciation which has positively impacted fiscal deficit and trade balance. The Central Bank has increased its foreign reserves, yet inflation remains a concern. The report suggests focusing on maintaining a competitive naira to attract Foreign Direct Investment and enhance economic growth.
According to a report by David Lubin, a Senior Research Fellow at Chatham House, Nigeria has reached its highest level of competitiveness in 25 years. This report, titled “Nigeria’s Economy Requires a Competitive Naira,” explores the effects of recent devaluation on the fiscal policies of President Bola Tinubu’s administration. The report indicates that Nigeria has become more competitive due to the depreciation of the naira, which has notably improved the nation’s balance of payments and provided substantial support to governmental budgets.
Since President Tinubu assumed office in 2023, the naira has depreciated significantly, losing over 70% of its value. This depreciation is attributed to efforts to unify the exchange rate and eliminate costly fuel subsidies. The naira’s value has plummeted against the dollar, leading to far-reaching consequences across various sectors. However, as a result of the naira’s decline and subsidy removal, Nigeria’s fiscal deficit has decreased from 6.4% of GDP to 4.4%.
In light of these adjustments, Nigeria’s current account is now in surplus, with capital inflows reentering the country, primarily in speculative forms. The Central Bank of Nigeria has successfully increased its foreign exchange reserves, exceeding $40 billion, which is essential for financial stability. However, while these reserves are adequate, they would benefit from further increases to provide more security against external debts.
Despite ongoing inflation challenges, recent adjustments have seen the inflation rate drop to 24.48% in January from a high of 34.80% in December 2024, as reported by the National Bureau of Statistics. Although the introduction of a new weighted Consumer Price Index influenced this reduction, inflation remains high at 35%. Addressing inflation is critical for policymakers, particularly as the urban poor are disproportionately affected by rising prices.
The report indicates that a competitively valued naira is crucial for attracting Foreign Direct Investment (FDI) necessary for economic growth, stating that Nigeria has historically struggled to bring in more than $2 billion in net FDI annually. Consequently, maintaining a competitive currency is vital, although not solely sufficient, to foster the influx of productive capital.
Instead of striving for an inflated naira, the report suggests focusing on reducing inflation rapidly through efficient monetary policies to enhance public revenue. Increasing deposit rates can mitigate inflation, bolster financial inclusion, and mobilize domestic savings. The report emphasizes that the success of Nigeria’s economy depends on fostering a competitive naira alongside efforts to enhance revenue streams without compromising competitiveness.
In conclusion, the report underscores that Nigeria has attained notable competitiveness thanks to the devaluation of the naira, which has resulted in improved fiscal conditions and a positive trade balance. The Central Bank’s actions in boosting reserves are commendable, yet inflation remains a significant challenge. Ultimately, attracting Foreign Direct Investment is essential for sustaining economic growth, necessitating a focus on maintaining a competitive currency while addressing inflation through effective monetary policies. Policymakers must prioritize strategies that will fortify Nigeria’s economic structure.
Original Source: www.premiumtimesng.com
