Chatham House warns FG against strengthening Naira, says it could backfire

United Kingdom (UK) international affairs policy think tank, Chatham House, has advised the Nigerian government against strengthening the naira, arguing that a weaker currency presents more advantages for the nation’s economy.

In a recent report titled “Nigeria’s Economy Needs the Naira to Stay Competitive,” the organization stated that while inflation has surged under President Bola Tinubu’s administration, allowing the naira to appreciate would not be the best approach to addressing the economic situation.

“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.” it said.

Chatham House outlined several reasons why maintaining a weaker naira could be beneficial.

According to the report, depreciation has improved Nigeria’s trade balance and increased the inflow of capital, helping the Central Bank of Nigeria (CBN) to rebuild its foreign reserves.

The think tank emphasized that when the naira was artificially strong, imports surged, making the country financially vulnerable.

However, with the recent devaluation, Nigeria has become more competitive than in the past 25 years.

The weaker currency also ensures that revenues from Value-Added Tax (VAT) and corporate income tax, especially those paid in foreign currencies, convert into higher earnings in naira.

Furthermore, Chatham House highlighted that Nigeria suffered more from an artificially controlled exchange rate than it did from fuel subsidies.

With both policies now phased out, the nation’s fiscal deficit reportedly reduced from 6.4% of Gross Domestic Product (GDP) in early 2023 to 4.4% in early 2024.

The report warned that artificially boosting the naira’s value could encourage capital flight, as individuals and businesses may prefer to hold assets in stronger foreign currencies. This, in turn, could negatively impact local industries.

Additionally, while a stronger naira could reduce the cost of imported goods and ease inflation, Chatham House cautioned that it might also eliminate the economic gains Nigeria has recorded from its depreciated currency.

Instead of direct intervention in the forex market, the think tank recommended alternative measures to manage inflation, such as improving liquidity and enhancing government revenue generation.

Despite Chatham House’s stance, the CBN under Governor Olayemi Cardoso has implemented several strategies to stabilize the naira.

These include tightening regulations for Bureau de Change (BDC) operators, introducing an Electronic Foreign Exchange Matching System to enhance market transparency, and implementing stricter monetary policies.

Other measures include clearing forex backlogs and cracking down on speculative activities in the currency market.

However, challenges such as high inflation, strong dollar demand, and dwindling foreign reserves continue to exert pressure on the naira.