Nigeria Shows Increased Competitiveness Amid Naira Depreciation Says Chatham House Report

A recent report from Chatham House highlights that Nigeria is experiencing greater competitiveness than in the last 25 years, largely due to the naira’s depreciation. It emphasizes improvements in the country’s fiscal situation and balance of payments. The challenges of inflation remain significant, prompting recommendations for monetary strategies to enhance revenue and financial inclusion without compromising the naira’s competitiveness.

A recent research report by Chatham House indicates that Nigeria is currently more competitive than it has been in the past 25 years. Authored by David Lubin, a Senior Research Fellow at the Global Economy and Finance Programme, the report titled “Nigeria’s Economy Requires a Competitive Naira” examines the recent devaluation’s impact on the nation’s monetary and fiscal policies under President Bola Tinubu’s administration.

The report notes that the depreciation of the naira has yielded two significant advantages: an improvement in Nigeria’s balance of payments and substantial support for the national budget. According to the analysis, the World Bank stated that prior misalignments in the exchange rate adversely affected Nigeria’s budget more so than the governmental fuel subsidies.

Since President Tinubu’s ascendancy in 2023, the naira has depreciated over 70 percent. The decline follows the unification of the exchange rate and the elimination of expensive fuel subsidies, decreasing from ₦461.6/$1 to ₦1,500/$1 or more in just 18 months. The consequences of this devaluation now affect the government, businesses, and households significantly.

Notably, the report reveals that the fiscal deficit has narrowed from 6.4 percent of GDP in early 2023 to 4.4 percent by early 2024 due to the naira’s depreciation and the removal of fuel subsidies. Furthermore, Nigeria’s current account, which measures the trade balance, is now in surplus, with capital beginning to cautiously re-enter the country, leading to an increase in foreign exchange reserves exceeding $40 billion.

The report underscores that maintaining adequate reserves is pivotal for financial stability in developing nations. It emphasizes that while the gross reserves are now at a prudent level reflecting Nigeria’s external debt, there is room for further enhancement.

The document discusses the inflationary challenges following the naira’s depreciation, which rose significantly. However, recent data from the National Bureau of Statistics indicated that the annual inflation rate decreased to 24.48 percent in January 2024 from 34.80 percent in December 2024 due to rebasing of the Consumer Price Index (CPI). The report states, however, that inflation ultimately ended 2024 at 35 percent, which remains exceptionally high.

Although the recent CPI adjustments resulted in a drop in reported inflation, the report warns that combating inflation remains a critical challenge for policymakers, particularly as urban impoverished groups bear the brunt of its effects. Strengthening the naira could help reduce inflation, but this measure risks reversing competitiveness gains achieved through the currency’s recent decline.

To attract Foreign Direct Investment (FDI) and bolster economic productivity, the report advocates maintaining a competitive naira rather than solely pursuing its strengthening. It points out the unfortunate reality that Nigeria’s potential productivity is compromised by inadequate net FDI inflows.

In its recommendations, the report advises that pursuing a more rapid decline in inflation should be prioritized over strengthening the naira. It suggests enhancements to monetary transmission mechanisms and raising public revenues. By increasing deposit rates, Nigeria could suppress inflation while promoting financial inclusion, thereby mobilizing domestic savings effectively. The report concludes that a competitive naira is essential for building a more diversified and capital-rich economy.

In summary, Nigeria has become notably more competitive due to the depreciation of the naira, as indicated by the Chatham House report. While the decline has led to a narrowing fiscal deficit and a current account surplus, inflation remains a significant challenge. The report suggests prioritizing monetary strategies that promote revenue generation and financial inclusion rather than focusing solely on strengthening the naira, thus continuing to attract necessary foreign investments for sustainable economic growth.

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