‘Resist Temptation’ to Strengthen Naira, Chatham House warns FG
A United Kingdom (UK) international affairs policy think tank, Chatham House, has warned the federal government to “resist the temptation” to combat inflation by allowing the naira to appreciate against the dollar.
The article authored by Chatham House’s David Lubin, a Michael Klein Senior Research Fellow, Global Economy and Finance Programme, and former Managing Director and Head of Emerging Markets Economics at Citi, an American Bank, is titled ‘Nigeria’s Economy Needs the Naira to Stay Competitive.’
The Chatham House said Nigeria’s economy has become more competitive due to its depreciation.
The think tank submitted that for sustainable, long-term growth, the government “must resist the temptation” to combat inflation by allowing the naira to appreciate against the dollar.
The Chatham House said the Nigerian economy was witnessing its most competitive season in 25 years, on the back of President Bola Tinubu administration’s reforms, including devaluation of the naira from N460/$ to about N1,500/$ currently.
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“At the centre of the reforms has been Tinubu’s decision to allow a very substantial devaluation of the naira, which has fallen from N460 to the dollar around the 2023 election, to just below N1,500 now. Nigeria’s currency adjustment is one of the largest anywhere 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.
“In any developing economy, the most important price is the price of a dollar. If dollars are too cheap, then imports rise sharply. This can make a country financially vulnerable.
“More imports boost a country’s trade deficit, and deficits can become difficult to finance if global creditors lose their appetite for risk (which happens often and unpredictably). And when they do, painful bouts of financial instability can follow.
“At the same time, 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. All in all, it is impossible to establish a basis for growth when capital has an incentive to leave the country,” the article said.
The think tank noted that the naira’s depreciation had led to two major positive outcomes — including an improvement in Nigeria’s balance of payments, now in surplus, and the return of capital to the country.
