Naira Devaluation Enhances Nigeria’s Competitiveness to 25-Year Peak

Nigeria’s naira devaluation has enhanced competitiveness to a 25-year high, improving trade surpluses and drawing foreign investments. However, economic reforms have strained public welfare, prompting concerns over inflation and calls for a stable currency to sustain growth.

The Nigerian economy has reached a competitive edge not seen in 25 years, as reported by Chatham House. With the naira devalued by over 70 percent, it has plummeted from 460 to just below 1,500 naira to the dollar, marking one of the most substantial currency adjustments globally. Chatham House asserts that this devaluation has prompted a more competitive economic environment in Nigeria.

The devaluation of the naira has contributed positively to Nigeria’s balance of payments, resulting in a trade surplus of N16 trillion in 2024, one of the highest in the country’s history. Additionally, this shift has attracted foreign capital inflows, boosting reserves to over $40 billion, signaling a prudent financial standing relative to external debt.

Following the naira’s depreciation and the removal of fuel subsidies, Nigeria’s fiscal deficit has improved, decreasing from 6.4 percent of GDP in 2023 to 4.4 percent in 2024. However, the availability of less expensive dollars has stimulated increased imports, potentially exacerbating trade deficits and stymieing economic growth.

Despite the adjustments yielding economic advantages, the reforms under President Bola Tinubu have strained the financial conditions of many Nigerians, exacerbating poverty for an estimated 129 million people. Chatham House notes that the president’s reforms present the best opportunity for sustainable growth in decades, emphasizing the importance of their ongoing trajectory.

To bolster recovery, Nigeria must attract foreign direct investment (FDI), a necessity for enhancing productivity and job creation. Despite having a population of 230 million, Nigeria has struggled to secure more than $2 billion in net FDI annually in recent years, underscoring a tragic economic shortfall.

Calls for a stronger naira risk eroding recent reforms, as inflation pressures have prompted suggestions for currency strengthening. However, such moves could reverse stability and regress fiscal progress. A competitive currency is crucial for attracting productive capital, alongside enhancements to the nation’s business environment.

As inflation rates surged to 34 percent, the Central Bank of Nigeria responded by increasing the key interest rate to a historic 27.5 percent. An improved monetary transmission mechanism is necessary, as current borrowing costs remain near 30 percent, while deposit rates lag significantly behind. Addressing this imbalance and expanding revenue sources will support infrastructure and social programs, aiding in mitigating reform impacts.

In summary, the recent decline of the naira has positioned Nigeria’s economy for heightened competitiveness, although it has simultaneously introduced significant challenges for the populace. The necessity for foreign direct investment has never been more prominent, as economic recovery hinges on increased capital influx. Stability in the currency alongside legislative support for a favorable business climate is essential for fostering sustainable growth and alleviating the burdens caused by ongoing reforms.

Original Source: businessday.ng