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“Chatham House Warns FG Against Strengthening The Naira, Says Nigeria Is Now More Competitive”

                                                                        With the Naira’s fall, Nigeria is arguably now more competitive - Chatham House warns FG against strengthening Naira

Chatham House, a UK-based international affairs think tank, has advised the Nigerian government against efforts to strengthen the naira, emphasizing that the currency’s depreciation has made Nigeria’s economy more competitive. In an article titled “Nigeria’s Economy Needs the Naira to Stay Competitive,” the think tank argued that for long-term growth, the government should resist the temptation to fight inflation by allowing the naira to appreciate against the dollar.

The report acknowledged that inflation has risen under President Bola Tinubu’s reforms but suggested that these reforms offer the best hope for sustainable economic development. Central to the reforms, according to Chatham House, is Tinubu’s decision to allow a significant devaluation of the naira, which has dropped from N460 to the dollar around the 2023 elections to just under N1,500 today. This devaluation is one of the largest in recent years, with only the Ethiopian birr seeing a bigger move. The think tank argued that this has made Nigeria more competitive than it has been in the past 25 years.

Chatham House further explained that in any developing economy, the price of the dollar is crucial. If the dollar is too cheap, imports increase, leading to financial vulnerability. An influx of imports can worsen a country’s trade deficit, and deficits become harder to finance if global creditors lose confidence. This can lead to financial instability and cause capital flight as people seek to protect their wealth in safer, low-cost havens.

Despite these challenges, the think tank highlighted two key benefits of the naira’s depreciation: an improved balance of payments, now in surplus, and the return of capital to the country. This has contributed to the Central Bank of Nigeria (CBN) increasing its foreign exchange reserves, which now exceed $40 billion, ensuring financial stability.

Chatham House also noted that the naira’s devaluation has supported Nigeria’s budget. The World Bank found that a misaligned exchange rate had hurt Nigeria’s budget more than the cost of fuel subsidies. With the naira’s fall, alongside the removal of subsidies, Nigeria’s fiscal deficit has decreased from 6.4% of GDP in early 2023 to 4.4% in early 2024.

While inflation remains a significant challenge, especially for the urban poor, Chatham House warned that strengthening the naira could undermine the competitive advantages gained from its depreciation. Instead of focusing on a stronger naira, the think tank recommended that reducing inflation more quickly could be better achieved by improving the monetary transmission mechanism and increasing public revenues.

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