Nigeria’s Naira Devaluation Enhances Competitiveness and Trade Surplus

Nigeria’s naira devaluation has driven its competitiveness to a 25-year high, resulting in a trade surplus of N16.9 trillion in 2024. Analysts predict continued growth in exports; however, currency stability and attracting foreign investment are paramount for the nation’s sustainable economic future.

Nigeria’s recent naira devaluation has propelled the nation’s competitiveness to a 25-year high, with a corresponding trade surplus reaching its peak in over a decade. The naira’s value has plummeted by more than 70%, falling from 460 to just below 1,500 naira per dollar. According to a report by Chatham House, the current economic environment positions Nigeria as more competitive than it has been historically.

Nigeria’s trade surplus has surged, marked by a net surplus of N16.9 trillion in 2024, reflecting double the surplus from the previous year. This positive balance of trade is attributed to the naira’s devaluation, which has rendered exports significantly more competitive. Analysts project that this trend could extend into 2025, contingent upon sustained export growth, particularly in crude oil production.

Despite the naira’s depreciation, which has benefited Nigeria’s balance of payments, there remains a concern regarding the stability of the naira. A potential reduction in naira volatility could diminish the advantages gained from currency devaluation on trade surpluses. Analysts from FBNQuest Merchant Bank anticipate an ongoing rise in trade surplus alongside improved foreign exchange liquidity.

The naira’s devaluation has also enabled the country to attract foreign capital, boosting its reserves to over $40 billion. Removal of fuel subsidies has aided in narrowing Nigeria’s fiscal deficit, decreasing from 6.4% of GDP in early 2023 to 4.4% in early 2024. However, economist views suggest that excessively cheap dollar rates may encourage capital flight, exacerbating trade deficits and negatively impacting economic growth.

Chatham House emphasizes the importance of foreign direct investment (FDI) for Nigeria’s economic recovery and productivity improvement. Despite having a sizable population, Nigeria has struggled to attract adequate net FDI inflows annually, signaling the need for a business-friendly environment to foster growth.

Although prevalent calls urge a strengthening of the naira to mitigate inflation—which was at 34% in late 2024—experts caution that such a move could undermine currency stability and negate the benefits of the recent reforms. Sustainable economic growth will depend on ongoing commitment to reform and the maintenance of a competitive currency to enhance productivity and investment.

In conclusion, Nigeria’s naira devaluation has significantly increased its competitiveness and trade surplus. While this situation has led to promising developments, the country must navigate potential risks associated with currency stability and inflation pressures. Attracting foreign direct investment and fostering a stable business environment remain crucial for sustained economic growth, ultimately benefiting the nation and its citizens.

Original Source: businessday.ng