Chatham House warns FG against strengthening naira, says Nigeria now more competitive with depreciation

 Chatham House, a United Kingdom (UK) international affairs policy think tank, has warned the Nigerian government against strengthening the naira, saying the country’s economy has become more competitive due to its depreciation.

In an article, titled, ‘Nigeria’s Economy Needs the Naira to Stay Competitive’, Chatham House said for sustainable, long-term growth, the government “must resist the temptation” to combat inflation by allowing the naira to appreciate against the dollar.

The report said while inflation has surged under President Bola Tinubu’s reforms, they offer the best hope for sustained economic development in the future.

“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 report said.

“With the naira’s fall, Nigeria is arguably now more competitive than at any time in the past 25 years.

“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.”

‘NAIRA DEPRECIATION HAS IMPROVED NIGERIA’S BALANCE OF PAYMENT, SUPPORT BUDGET’

The think tank noted that the naira’s depreciation had led to two major positive outcomes — including an improvement in Nigeria’s balance of payments, now in surplus, and the return of capital to the country.

As a result, Chatham House said the Central Bank of Nigeria (CBN) had increased its foreign exchange reserves, which now exceed $40 billion, ensuring a sufficient level of reserves crucial for financial stability in developing countries.

The institution commended the CBN’s progress, saying its gross reserves are currently “at a prudent level”, roughly equal to Nigeria’s external debt, which could still be higher.

“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,” the think tank said.

“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.”

The think tank stressed that controlling inflation remains a pressing challenge for Nigerian policymakers, especially since the urban poor are hit hardest.

According to Chatham House, a more valuable naira would help reduce inflation by making imports cheaper in local currency.

However, the article cautioned that this strategy could undo the competitive advantages gained from the naira’s depreciation.

Rather than depending on a stronger naira, the organisation argued that a faster reduction in inflation would be more effectively achieved through two key strategies: enhancing the monetary transmission mechanism and increasing public revenues.

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