The naira’s significant depreciation has enhanced Nigeria’s economic competitiveness to a 25-year high, as reported by Chatham House. While there are positive indicators such as trade surpluses and increased foreign reserves, challenges like high inflation and reduced purchasing power persist. Attracting foreign direct investment is critical for sustainable recovery, alongside necessary reforms in the business environment.
According to a report by Chatham House, the depreciation of the naira has rendered the Nigerian economy more competitive than it has been in the last 25 years. From 2023, the naira’s value fell significantly from 460 naira per dollar to near 1,500, marking one of the most substantial currency devaluations globally, surpassed only by the Ethiopian birr. The report emphasizes that a competitive naira is necessary for building a capital-rich and diverse economy.
Despite the negative impact of naira depreciation, there have been some positive economic indicators. The National Bureau of Statistics reported a N16 trillion trade surplus for Nigeria in 2024, one of the highest figures in history. Furthermore, the influx of foreign capital has increased Nigeria’s reserves to over $40 billion, approximately aligning with the country’s external debt.
The devaluation of the naira, along with the elimination of fuel subsidies, has alleviated budgetary pressures, reducing the fiscal deficit from 6.4 percent of GDP in early 2023 to 4.4 percent in early 2024. However, a rising dollar is contributing to increased import costs and growing trade deficits, which could hinder economic progress. Chatham House warned that significantly reduced dollar prices facilitate capital flight as companies seek safer investments abroad.
President Bola Tinubu’s economic reforms are crucial for Nigeria’s long-term growth; nevertheless, these changes have profoundly affected the purchasing power of ordinary citizens, with poverty affecting approximately 129 million individuals. The report expresses that despite these challenges, the reforms provide Nigeria with hope for ongoing economic development.
To sustain economic recovery, Nigeria must attract foreign direct investment (FDI), as this will enhance productivity and foster job creation. The report notes the low net FDI inflows, which have not exceeded $2 billion annually in recent years—a concerning trend for a population of 230 million.
There is pressure for the naira to appreciate against the dollar to mitigate inflation, which stood at 34 percent at the end of 2024 before decreasing to 24 percent in January. However, any move to strengthen the naira may jeopardize the currency stability achieved through recent reforms. A competitive currency is vital for attracting productive capital and is complemented by improvements in the business environment.
The government’s policies have resulted in soaring inflation, with rates reaching three-decade highs in 2024. The Central Bank of Nigeria raised key interest rates to 27.5 percent to combat rising prices, but improved monetary transmission mechanisms are necessary. Currently, borrowing costs remain near 30 percent while deposit accounts yield only around 10 percent interest. Increasing deposit rates would help combat inflation effectively and mobilize domestic savings for development initiatives.
The significant depreciation of the naira has positioned Nigeria’s economy at a competitive advantage unseen in 25 years, as outlined by Chatham House. While the falling currency offers certain economic benefits, including trade surplus and increased foreign reserves, it has also led to challenges such as inflation and reduced purchasing power for citizens. Attracting foreign direct investment (FDI) remains critical for sustainable economic growth, alongside necessary reforms to enhance the business climate. The emerging economic environment underscores the need for policy coherence and strategic investment to foster recovery and stability in Nigeria.
Original Source: businessday.ng
