Chatham House, a UK-based think tank, has advised the Nigerian government not to strengthen the naira. The organization believes that the naira’s decline has made Nigeria’s economy more competitive and warns that reversing this trend could do more harm than good.
According to Chatham House, President Bola Tinubu’s economic reforms have led to a sharp drop in the naira’s value.
Before the 2023 election, the naira was exchanged at N460 per dollar, but it has now fallen to nearly N1,500 per dollar. This is one of the biggest currency adjustments in the world in recent years, with only Ethiopia experiencing a larger change.
Despite the rising cost of goods and services, Chatham House argues that the weaker naira has made Nigeria’s economy more competitive than it has been in the past 25 years.
The think tank explained that the price of the dollar is crucial for any developing country. If the dollar is too cheap in Nigeria, people will import more goods, which could lead to financial problems.
A high level of imports increases the trade deficit, making it harder for the country to pay its debts. In addition, cheap dollars encourage wealthy individuals and businesses to move their money abroad, slowing down economic growth.
However, the fall of the naira has had two major benefits:
Nigeria’s trade balance is now in surplus, meaning the country is earning more from exports than it spends on imports. This has helped the Central Bank of Nigeria (CBN) boost its foreign exchange reserves, which now exceed $40 billion.The government now earns more from oil and gas royalties, taxes, and customs duties, which are mostly paid in dollars. This has helped reduce Nigeria’s budget deficit from 6.4% of GDP in early 2023 to 4.4% in early 2024.
Chatham House acknowledged that inflation remains a big problem, especially for low-income people in cities. A stronger naira could reduce inflation by making imported goods cheaper. However, the think tank warned that this could undo the economic benefits gained from the weaker naira.
Instead of strengthening the currency, Chatham House suggests that the government should focus on:
- Improving how monetary policies control inflation
- Increasing government revenues to support the economy
