Chatham House, a United Kingdom (UK) international affairs policy think tank, has warned that strengthening the naira is not in Nigeria’s interest.
The warning came amid several Central Bank of Nigeria (CBN) interventions to stabilise the foreign exchange market and help the naira appreciate.
Chatham House noted that after its depreciation, the naira is better positioned to help the Nigerian economy progress.
In an article titled ‘Nigeria’s Economy Needs the Naira to Stay Competitive’, the think tank noted that while inflation has surged under President Bola Tinubu, strengthening the naira was not the best way to improve the situation.
Chatham House lists benefits of naira depreciation
In the article, Chatham House noted that while it is tempting to strengthen the naira to make imports cheaper and lower inflation levels, the federal government should not take that route.
It said; “The government must resist the temptation to combat inflation by allowing the naira to appreciate against the dollar. 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.”
Chatham House further argued in the article that the naira depreciation has improved Nigeria’s Balance of Payments and return of capital into the country, helping the CBN to increase its foreign exchange reserves to prudent levels where it is roughly around the same level as the foreign debts.
It noted that naira depreciation now allows the government to get the best out of Value Added Tax (VAT) and corporate income tax that are paid in dollars, since they convert into more funds in the local currency.
Why FG must not strengthen the naira
Chatham House also argued that Nigeria was worse hit by an artificial exchange rate supported by the government, than it was by the fuel subsidies, and with both out of the way, the country’s fiscal deficit narrowed from 6.4% of Gross Domestic Product (GDP) in early 2023 to 4.4% in early 2024.
Chatham House recommended that the government could instead tackle inflation by increasing public revenues and enhancing monetary mechanisms.
