Devaluation of Nigeria currency or naira have caused serious economic crisis in Nigeria economy than the solution it promises. I will explain this in details. It should be noted that devaluation works better for an economy that is more driven by commodity (processed products) export.
What is Devaluation of currency? Devaluation of currency is a deliberate act by the central bank of a country to reduce the value of its currency in relation to other countries currency. Please, note the word deliberate, it is different from depreciation of currency.
Depreciation of currency is the fall in the value of a country currency in relation to other countries currencies resulting from the forces and demand and supply of the currency. If the demand for the country currency is far below its citizens demand for other countries’ currencies then depreciation will take place.
Before I move further to explain the negative consequences of devaluation of Nigeria currency to the economy, let me point out some advantages and disadvantages of devaluation for clarity purpose.
Advantages of Currency Devaluation
The usual advantages advocated by economist and policy makers in favour of devaluation of currency include:
- Increased demand of a country product at the international market as result of cheap export products and services.
- The increased demand at the international market will leads to boost in local demand leading to job creation.
- Increase demand for a country product will leads to increase in the demand of the country currency to execute the transaction.
- Increase in the demand of the products will leads to improvement in the country current account deficit.
- Naira devaluation will makes it competitive and leads to increase in capital flow.
- Above all, increase demand at both international and local market will leads to economic growth.
That is all the argument of Pro Naira devaluation, but there some errors inherent in this argument being the chief source of Nigeria current economic crisis or recession. Let look at the disadvantages of Devaluation of currency.
Disadvantages of Currency Devaluation
The Problem of Inflation: The first thing currency devaluation do to any economy is that it causes inflation in such economy. Inflation can be caused through:
- High cost of imported goods resulting from low value of the country currency. It should be noted that Nigeria is import depended country. It imports almost all her raw materials, thereby leading to inflationary pressure.
- The increased demand of the local market often leads to demand pull inflation, especially if the country mainly export raw products like the case of Nigeria.
- High cost of exported goods often leads the country to substitute for local goods. This only work perfectly for an economy who has substitute goods produced locally.
- Often local producers maybe discouraged because of the low price of their products resulting from devaluation. Most of the firms especially small and medium size firm rarely meet up with cost of production.
Foreign Investor may be discouraged: Foreign investor who want to invest in the country stock or bond are mostly discouraged. This happen since during devaluation:
- The value of the government debt reduce drastically.
- Investment fluctuate often leading to loss of confidence in the capital and money market.
Other disadvantages may include:
- Reduction in the purchasing power of citizens abroad. High cost of international airlines.
- Increase cost of service from abroad discouraging the citizens from getting the service of other countries experts.
- Increase the difficulties to pay Nigeria external debt and servicing on the government.
- Interest rate are likely to rise because of inflationary pressure.
- Foreigners in the country are discouraged since after converting the money to their own currency will drastically reduce in value.
Having pointed out the general problems with devaluation of currency. Let look at the imminent negative effects of currency devaluation in Nigeria.
It should be noted that devaluation works better for country that is export driven. A country which has wide variety of manufactured product with international competition.
For instance, China devaluation of her currency is a welcomed development because it has wide array of competitive products in the international market. China dominates majority of the international market in the area of Android phone, games, gadgets, electronics and many others products.
Devaluing their currency makes their products very competitive in the international market and also increase their local demands considering their population.
- This is not the case of Nigeria. Nigeria major export product is crude oil. In fact, crude oil account for 80% of her export earnings.
- With the fall in the supply of the products resulting from the fight of corruption and militant insurgency in Niger Delta it becomes more than difficulty to reap the benefits of devaluation rather causing more havoc on the economy.
- The devaluation of the currency and high tax rate further led to the collapse of many small and medium scale businesses. The SME are no longer able to secure their raw materials at a relatively cheap price because of devaluation.
- The high cost of imported raw materials increases the operating cost reducing the profit margin of the SME firms. Some of the SMEs eventually collapsed because of high operating cost.
- Devaluation of Nigeria currency is making the rich richer and the poor, poorer, if nothing is done about it, it will further widen the gap of the rich and the poor.
Nigerians are crying and lamenting today because of the sudden increase in almost the price of all goods and services in the country.
The current masses of unemployment rate in the country and economics recession can be attributed largely to the error of currency devaluation in Nigeria.
Ensure you read my post on Causes and Solution to Economics recession in Nigeria. There you will get full details of how Nigeria got into recession and solutions offered by experts.
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