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Thursday, 21 January 2016

Understanding The Devaluation Of Naira And Its Surprising Benefits To Nigeria




This present government surprised the citizens of Nigeria and her investors by the sudden drop in the value of the nation’s currency, that is, the Naira. 

Devaluation of Naira involves official downward adjustment of the value of Naira within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate for Naira with respect to a foreign reference currency. This implies that Naira is considered to be devalued because it has lost its value relative to other currencies in the foreign exchange market. This is the outcome of the nation’s monetary policy. Devaluation of Naira does not occur naturally, it is the Central Bank of Nigeria that determines its valuation.

The Nigeria’s economy was driven by the growth in agriculture before the discovery of crude oil. The economy of the nation would have been in its stability state supposing that the export of crude oil and the prices had remained strong. It is not strange that the devaluation of Naira could be as a result of the decrease in price per barrel of crude oil in the global oil market.

The developed countries of the world would have been pressurizing the Nigerian government to devalue the Naira due to the unfair advantages in international trade, as well as, the prices for capital and labour being low.

The adoption by world currencies to allow their exchange rates to float freely against each other results in many currency devaluation occurrences that have hurt not only the citizens of the country involved, but have also been a disturbance across the world.

What are the benefits of devaluation of Naira?

Reduces Sovereign Debt Burdens on the Nation

The Nigerian government may be persuaded to encourage a feeble currency policy if she has a lot of government issued sovereign debt to service on a regular basis. If debt payments are fixed, a weaker currency makes these payments effectively less expensive over time.

According to the Nigerian Debt Management Office, Nigeria’s total debt stock stood at $63.5 billion or N12.06 trillion as at the end of March, 2015. The exchange rate of Naira to Dollar as at then was $1 equal to N190.

Take for instance the Nigerian government want to pay the N12.06 trillion outstanding debts. But if that same N12.06 trillion of reference payments becomes less valuable, it will be easier to pay the debts. In this example, if the Naira to Dollar exchange rate for today is $1 equal to N250. It means that the Naira is devalued within this period. Therefore, the N12.06 trillion debts payment will only be worth N15.30 trillion which is equivalent to $38.25 billion now. 

There is a reduction in the nation’s debt from $63.5 billion to $38.25 billion. Nigeria should utilize this opportunity and pay up debts incurred.

Reduces Net Export (Trade Deficits)

Net export is an economic condition that occurs when a country is importing more goods than she is exporting. Devaluation of Naira discourages importations. Exports will increase and imports will decrease due to exports becoming cheaper and imports more expensive. This favours an improved balance of payments as exports increase and imports decrease, reducing trade deficits. Economic theory, however, states that ongoing deficits are unsustainable in the long run and can lead to dangerous levels of debt which can cripple an economy. Devaluing the home currency can help correct balance of payments and reduce these deficits.

On the other hand, there should be some measures taken in the demand for the country’s exported goods to avoid the rise in price thereby normalizing the initial effect of devaluation.

In summary, the devaluation of Naira can be used to achieve economic policy. Having a devalued currency relative to the rest of the world can help boost exports and reduce the cost of debts incurred. However, there are some disadvantages of devaluation of Naira and these include the uncertainty it has caused in global market, etcetera.

Would you support the idea of devaluation of Naira? Let’s have your views via comment-form below.
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