The Central Bank of Nigeria (CBN) took decisive action by allowing the Naira to devalue by approximately 35% against the US dollar. This bold policy adjustment aims to unify the official and parallel exchange rates, halt persistent capital flight, and preserve dwindling foreign currency reserves. Following the adjustment, the official rate shifted from around 460 Naira to over 700 Naira per dollar.
While international financial institutions welcomed the liberalization of the foreign exchange market, local economists warned that currency devaluation alone cannot fix Nigeria’s deep-seated structural challenges. Inflation has soared past 22%, driven largely by high food and transport costs, which the government has previously tried to control using ineffective price ceilings.
Nigeria has a high marginal propensity to import, meaning that a weaker Naira is highly likely to import inflation, worsening the cost-of-living crisis. In response, major public sector trade unions have threatened national strike action unless the national minimum wage is substantially increased to match rising prices.
Compounding these issues, weak domestic oil production has limited Nigeria's ability to benefit from global energy export revenues, narrowing the trade surplus. Meanwhile, the fiscal deficit continues to expand as the government relies on central bank financing ('Ways and Means' advances) to cover recurrent expenditures.
With reference to the information provided and your own economic knowledge, evaluate the likely microeconomic and macroeconomic effects of the 35% devaluation of the Nigerian Naira.
