Weak naira boosts Nigeria’s competitiveness to 25-yr high

The naira’s fall has seen the Nigerian economy more competitive than at any time in the past 25 years, according to a report by British think tank, Chatham House.

The naira, which has been devalued by more than 70 percent, fell from 460 to the dollar around 2023, to just below 1,500 now — one of the largest currency adjustments anywhere in the world for years: only the Ethiopian birr has seen a bigger move recently.

“With the naira’s fall, Nigeria is arguably now more competitive than at any time in the past 25 years,” the Chatham House said in its report titled ‘Nigeria’s economy needs the naira to stay.”

“The path to a more capital-rich, more diverse Nigerian economy can only be built on a competitive naira,” it added.

Read also: 5 Ways Nigeria can strengthen the naira through glocalisation

A weaker naira is better than a cheaper dollar

While the naira has depreciated compared to what it was two years ago, it has improved Nigeria’s balance of payments as data from National Bureau of Statistics show that the country recorded over N16 trillion trade surplus in 2024, one of the highest on record.

It has brought in foreign capital which has seen the country’s reserves balloon to more than $40 billion dollars which “are at a prudent level now, more or less equal to Nigeria’s stock of external debt, but they could usefully go to higher than this.“

The naira’s devaluation alongside the removal of fuel subsidies have also offered some breather for the Nigerian budget with the nation’s fiscal deficit narrowed from 6.4 percent of GDP in early 2023 to 4.4 per cent in early 2024.

But a cheaper dollar makes imports rise while widening trade deficits and hampering economic growth.

“Excessively cheap dollars encourage companies and individuals to find ways of getting money out of the country, to park wealth in safer havens at low cost,” the report stated.

While the naira devaluation and removal of subsidies have seen the economy turning the corner, the reforms birthed by President Bola Tinubu have had far-reaching consequences on ordinary Nigerians whose spending power has been hammered and poverty blighting the lives of at least 129 million citizens.

“President Tinubu’s economic reforms give Nigeria the best hope for sustainable growth that it has had for decades. The path the reform process takes next will be crucial for the country’s future,” Chattaham House added.

Read also: Why naira stability is the cornerstone of Nigeria’s economic future

Nigeria ‘desperately’ needs FDI to remain a productive economy

Nigeria’s economic recovery lies in luring in capital in the form of foreign direct investment (FDI) as long standing investments will not only ensure improved productivity but also allow for job creation and growth.

“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.”

A push for a stronger naira will wipe out gains of reforms

There’s been a push for the country to allow the naira to strengthen against the dollar to abate inflationary pressures that ended 2024 at 34 percent and crashed to 24 percent in January as a result of the inflation data overhaul.

But this will erase the hard-won currency stability and bring the country back to its status quo as gains of reforms diminish.

“A currency that stays competitive is a necessary – although by no means sufficient – condition to encourage more productive capital to enter the country. Also essential is a stable commitment to improve the business climate – everything from improving electricity supply to tackling corruption, reducing red tape and enhancing the sanctity of contracts,” the report indicated.

Higher deposit rates, improved revenues will ‘kill’ inflation

One of the consequences of the government’s policies is the sky-high inflation which climbed to a three-decade high in 2024 with the Central Bank of Nigeria (CBN) punching high prices by raising the key interest rate to a record 27.5 percent.

But the CBN will need to improve its monetary transmission mechanism. While borrowing costs are at near 30 percent, deposit accounts in Nigerian banks pay an interest rate closer to 10 percent.

“Higher deposit rates would help to kill inflation, promote financial inclusion and help Nigeria to mobilize domestic savings into the financial system.”

The country needs to expand its revenue base to anchor inflation as more government earnings means it would have more to allocate for capital infrastructure and social investments programs to cushion the impact of reforms.