Chatham House Warns Nigeria Against Strengthening the Naira

A leading global think tank, Chatham House, has cautioned the Nigerian government against artificially strengthening the naira, arguing that the currency’s depreciation has made the country’s economy more competitive.

In a report titled “Nigeria’s Economy Needs the Naira to Stay Competitive”, the UK-based policy institute warned that while inflation remains a challenge, resisting the urge to push for naira appreciation is crucial for long-term economic stability.

According to the report, President Bola Tinubu’s sweeping economic reforms—particularly his decision to allow the naira to devalue significantly—are setting the stage for sustainable growth. Since the 2023 elections, the naira has plunged from ₦460 per dollar to just below ₦1,500, marking one of the most dramatic currency adjustments globally in recent years, second only to the Ethiopian birr.

“With the naira’s fall, Nigeria is arguably now more competitive than at any time in the past 25 years,” the report stated.

Chatham House explained that in developing economies, the exchange rate plays a critical role. When a currency is overvalued, cheap imports flood the market, widening trade deficits and making the country financially vulnerable. This can lead to capital flight, where businesses and individuals move money abroad, fearing economic instability.

Despite concerns about inflation, the depreciation of the naira has led to two key benefits:

Improved Balance of Payments: Nigeria’s trade balance has shifted into a surplus, a major win for economic stability. Increased Foreign Reserves: The Central Bank of Nigeria (CBN) now holds over $40 billion in foreign reserves, ensuring financial security.

Chatham House also highlighted the fiscal advantages of a weaker naira, noting that it has boosted government revenue by increasing the local currency value of oil and gas royalties, VAT, and corporate income tax. These gains, alongside the removal of petrol subsidies, have helped reduce Nigeria’s fiscal deficit from 6.4% of GDP in early 2023 to 4.4% in early 2024.

The think tank acknowledged the challenges posed by inflation, particularly for urban poor communities. A stronger naira would make imports cheaper, helping to curb rising prices.

However, the report warned that this strategy could reverse the competitive advantages Nigeria has gained from the naira’s depreciation. Instead, Chatham House recommended enhancing monetary policies and increasing public revenues as more effective ways to control inflation without undermining the economy’s newfound competitiveness.

As Nigeria navigates these economic shifts, policymakers face a critical decision: stick with the long-term benefits of a weaker naira or attempt to ease inflation through currency appreciation—at the risk of sacrificing hard-won economic progress.