A study published by the Central Bank of Nigeria (CBN) has revealed that the country's escalating budget deficits are a significant factor contributing to the depreciation of the naira. The research, conducted by Ndubuisi E. Uguru, analyzed data from 1981 to 2024 and found that these fiscal imbalances not only destabilize the exchange rate but also exert upward pressure on interest rates, complicating monetary policy.
The implications of these findings are profound. As Nigeria grapples with a budget deficit projected at N23.85 trillion for 2026, the study suggests that persistent fiscal deficits can lead to a self-reinforcing cycle of currency depreciation and reduced investment. While the research found no direct link between budget deficits and inflation, it highlighted that exchange rate fluctuations are primarily driven by fiscal policies, which can undermine economic stability. This situation poses risks not only to Nigeria's economy but also to investor confidence in the broader African market, as the naira's instability may ripple through regional currencies.
Looking ahead, the study recommends implementing a binding fiscal rule to limit budget deficits relative to GDP, which could help stabilize the economy. Investors and policymakers will need to monitor Nigeria's borrowing plans closely, especially as the government increases its borrowing to N29.20 trillion. Additionally, the CBN's recent decision to cut the Monetary Policy Rate by 350 basis points indicates a shift in monetary strategy that could influence interest rates and investment dynamics in the region.