Nigeria is more competitive than it has been at any point in the last 25 years, a research report by a fellow at Chatham House, an independent policy institute headquartered in the United Kingdom, has claimed.
The report, entitled “Nigeria’s Economy Requires a Competitive Naira,” was authored by David Lubin, Michael Klein Senior Research Fellow, Global Economy and Finance Programme.
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It examined the implications of the devaluation exercise on the monetary and fiscal policies and reforms of President Bola Tinubu’s administration.
“With the naira’s fall, Nigeria is arguably now more competitive than at any time in the past 25 years,” the report said.
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It said the depreciation of the naira has had two “hugely positive consequences”—improvement in Nigeria’s balance of payments and substantial support to the Nigerian budget.
The report said the World Bank argued that a misaligned exchange rate hit Nigeria’s budget harder in recent years than the cost of the government’s fuel subsidies.
Naira’s depreciation
Nigeria’s naira has depreciated significantly since Mr Tinubu took over office in 2023. Over the past 18 months since his assumption, the country’s local currency, the naira, has shed over 70 per cent of its value.
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The fall in the value of the currency began following the move to unify the exchange rate and remove costly fuel subsidies. Within this period, the value of the local currency against the dollar depreciated from ₦461.6/$1 to ₦1,5 00/$1 and above.
The aftermath of the devaluation has had far-reaching consequences for the government, businesses, and households.
However, the report explained that 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 current account – the broadest measure of a country’s trade balance – is now firmly in surplus. Capital, albeit mostly in speculative form for the time being, is re-entering the country,” the report, published last Tuesday, noted.
As a result, it said the Central Bank of Nigeria (CBN) has added to its foreign exchange reserves, which now exceed $40 billion.
“Having an adequate stock of reserves is the sine qua non for financial stability in developing countries. So the progress the CBN has made is to be congratulated,” the report noted.
It said gross reserves are at a prudent level now, more or less equal to Nigeria’s stock of external debt, but that they could usefully go higher than this.
According to the report, 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 VAT and corporate income tax that is paid in dollars, are all much lower in local-currency terms than they should be.
Inflation
In recent months, Nigeria’s inflation rate has been on a constant rise. However, last month, the National Bureau of Statistics, NBS, said the country’s annual inflation rate dropped to 24.48 per cent in January from 34.80 per cent in December 2024, after it rebased the Consumer Price Index (CPI).
It noted that the rebased CPI reflects an updated price reference period (base year) of 2024 and a weight reference period of 2023.
The report said the uglier consequence of Nigeria’s currency’s slide has been its effect on inflation, which ended 2024 at 35 per cent, painfully high by any standards.
“Although reported inflation fell sharply in January to 24.5 per cent, this was thanks to last month’s introduction of a new set of weights and a new base year for the Consumer Price Index,” the report said.
It noted that defeating inflation remains a huge immediate challenge for Nigerian policymakers – not least because the urban poor suffer the most from it.
“A stronger naira is tempting because as surely as its collapse pushes inflation up, a naira that gains in value would push inflation back down, as imports become cheaper in local-currency terms,” the report said.
However, it said the problem with this approach is that it would accelerate the disappearance of all the gains in competitiveness that have been won through the currency’s decline.
The report said Nigeria desperately needs to attract Foreign Direct Investment (FDI), and long-term capital that will help add to the economy’s productive capacity.
“It is something of a tragedy that this country of 230 million people has failed to attract more than $2 billion worth of net FDI inflows annually in recent years,” the report stated.
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It says a currency that stays competitive is a necessary – although by no means sufficient – condition to encourage more productive capital to enter the country.
Recommendation
Instead of relying on a stronger naira, the report recommended that a more rapid decline in inflation would be better supported by monetary transmission mechanisms and to raise public revenues.
“Higher deposit rates would help to kill inflation, promote financial inclusion and help Nigeria to mobilize domestic savings into the financial system,” the report noted.
It said the path to a more capital-rich, more diverse Nigerian economy can only be built on a competitive naira.
It explained that the Tinubu-led government is firmly focused on raising revenues, but its importance cannot be overstated, not least since it offers a way of helping bring inflation down without sacrificing the naira’s competitiveness.
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