Amid several Central Bank of Nigeria (CBN) interventions to stabilise the foreign exchange market and help the naira appreciate, Chatham House, a United Kingdom (UK) international affairs policy think tank, has warned that strengthening the naira is not in Nigeria’s interest.

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.

It argued that the weaker naira has made Nigeria more competitive, compared to previous years when the naira exchanged around N460/$.

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.

Chatham house even 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.

Why FG must not strengthen the naira – Chatham House

Chatham House argued in its article that cheaper dollars would incentivize individuals and institutions to move capital out of the country to store in other currencies, and this could affect local industry.

Chatham House recommended that the government could instead tackle inflation by increasing public revenues and enhancing monetary mechanisms.

Naira reverses gains as USD gets stronger

In related news, the naira has suffered a losing week after being hit by investor activities in the FX market. Data shows that the naira weakened last week, both on the parallel market and the official market.

Analysts say the Central Bank of Nigeria must continue its intervention plans to sustain the earlier naira gains and strengthen the naira.