Chatham House reports that Nigeria’s economy is experiencing unprecedented competitiveness due to reforms by President Bola Tinubu, highlighted by a drastic devaluation of the naira. Despite improvements in Nigeria’s balance of payments and fiscal conditions, inflation remains a pressing issue. The think tank advises against strengthening the naira too quickly and calls for better monetary policies and increased public revenues to control inflation while maintaining competitiveness.
Chatham House, a prominent UK think tank, has highlighted that the Nigerian economy is currently experiencing its highest level of competitiveness in 25 years, attributed to the economic reforms instituted by President Bola Tinubu. Notably, these reforms include a significant devaluation of the naira, which has dropped from approximately N460 to an alarming N1,500 to the dollar.
In a recent article titled “Nigeria’s Economy Needs the Naira to Stay Competitive,” author David Lubin admitted that many citizens may feel disillusioned with their decision to elect Tinubu due to the dramatic economic hardships faced in the past two years. Key issues include a drastic increase in petrol prices and a surge in food costs, alongside rising poverty levels.
Despite these challenges, Chatham House posits that Tinubu’s reforms could offer the best opportunity for sustainable economic growth in the coming decades. The think tank emphasized the importance of the naira’s devaluation, noting that this adjustment—one of the largest in recent years—renders Nigeria more competitive than it has been since 1998.
Chatham House elaborated that a vital consequence of the naira’s depreciation has been a favorable shift in Nigeria’s balance of payments, which is now in surplus, allowing the Central Bank of Nigeria (CBN) to bolster its foreign exchange reserves to over $40 billion. Furthermore, Nigeria’s fiscal deficit has also been positively impacted, decreasing from 6.4 percent of GDP to 4.4 percent.
Nevertheless, the article acknowledged that the naira’s decline has exerted upward pressure on inflation, which concluded 2024 at a troubling 35 percent. While there was a nominal decrease to 24.5 percent in January due to statistical recalibrations, inflation management remains an immediate challenge for policymakers.
Chatham House cautioned against the temptation to strengthen the naira, suggesting that such actions could undermine the gains in competitiveness achieved through its decline. To enhance Foreign Direct Investment (FDI), a stable and competitive currency is essential, alongside efforts to improve the business environment.
The think tank recommended two primary strategies to curb inflation without jeopardizing the naira’s competitiveness: enhancing monetary transmission mechanisms to improve deposit interest rates, and increasing public revenues, which currently stand at less than 10 percent of GDP—significantly lower than the regional average.
Finally, Chatham House emphasized the need to break the cycle of past failures in maintaining a competitive exchange rate while suggesting that a more diverse and capital-rich Nigerian economy hinges on a continued commitment to keep the naira competitive.
In summary, Chatham House’s analysis underscores the complexities facing Nigeria’s economy under President Tinubu’s reforms. While the significant devaluation of the naira has increased competitiveness and improved fiscal conditions, it has also led to higher inflation. The think tank advocates for maintaining a competitive naira as essential for fostering economic growth and attracting foreign investment, while also emphasizing the need for improved monetary policies and increased public revenue generation to address inflation without compromising economic gains.
Original Source: www.arise.tv
