The United Kingdom (UK) international affairs policy think tank, Chatham House, has issued a cautionary note to the Nigerian government regarding efforts to strengthen the naira. According to Chatham House, a stronger naira may not necessarily benefit the country’s economy, and instead, a weaker currency could offer more advantages in the long run.
In a newly released report titled “Nigeria’s Economy Needs the Naira to Stay Competitive,” the organization analyzed the impact of exchange rate fluctuations on the country’s economic health. It acknowledged that inflation has risen significantly under President Bola Tinubu’s administration but argued that allowing the naira to appreciate as a countermeasure to inflation could be counterproductive.
The report emphasized that Nigeria’s current economic standing is more competitive than it has been in the past 25 years due to the depreciation of the naira. It warned that artificially boosting the value of the currency could reverse some of these economic gains.
Chatham House advised the Nigerian government to resist the urge to fight inflation by strengthening the naira, noting that a lower exchange rate enhances the country’s trade balance and improves the inflow of capital. This, in turn, has helped the Central Bank of Nigeria (CBN) rebuild its foreign reserves, a crucial factor for financial stability.
The report further explained that when a developing nation like Nigeria makes dollars too cheap by artificially inflating its currency, the demand for imports rises sharply. This creates financial vulnerabilities, making the economy more susceptible to external shocks.
Several key benefits of a weaker naira were highlighted in the report. It pointed out that:
- Nigeria has experienced improved trade balances due to reduced demand for expensive imports.
- Higher revenues from Value-Added Tax (VAT) and corporate income tax, particularly from transactions conducted in foreign currencies, have been converted into greater earnings in naira.
- The phase-out of fuel subsidies and the removal of an artificially controlled exchange rate have contributed to a reduction in the nation’s fiscal deficit, which dropped from 6.4% of Gross Domestic Product (GDP) in early 2023 to 4.4% in early 2024.
Despite these advantages, Chatham House warned that strengthening the naira artificially could result in capital flight. Businesses and individuals might prefer to hold assets in foreign currencies, which could hurt local industries and weaken Nigeria’s economic position.
While acknowledging that a stronger naira could lower the cost of imported goods and ease inflation, the think tank maintained that such a move might undo the progress Nigeria has made with its current monetary policies. Instead of intervening directly in the foreign exchange market, Chatham House recommended alternative measures to manage inflation, such as improving liquidity and enhancing government revenue generation strategies.
Despite the warnings from Chatham House, the CBN, under Governor Olayemi Cardoso, has implemented several measures to stabilize the naira. These include:
- Strengthening regulations for Bureau de Change (BDC) operators to curb speculative trading.
- Introducing an Electronic Foreign Exchange Matching System to improve market transparency.
- Implementing stricter monetary policies aimed at reducing inflationary pressures.
- Clearing forex backlogs to restore confidence in the currency market.
- Cracking down on speculative activities that contribute to exchange rate volatility.
However, challenges persist as high inflation, strong demand for the U.S. dollar, and dwindling foreign reserves continue to put pressure on the naira. The government and financial authorities face the difficult task of balancing exchange rate policies with economic stability while ensuring that the benefits of a competitive naira are not lost.