This post contained the meaning of currency devaluation, effects of currency devaluation on economy and the causes of naira devaluation and effects on Nigerian economy.
INTRODUCTION
From time immemorial and since the emergence of nation states governments and policy makers have been seriously concerned with economic growth and development of their geo – political territories. As civilization unfold and political sovereignty defines the boundaries of each nation or country, the guest for national development as an index of total emancipation and economic sovereignty becomes the focal point of all nationals. With the advents of economics as a separate fixed of study and the subsequent industrial revolution in western Europe, countries are developing national economic development objectives and this has became the target of every nation to acheive.
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These board economic development objectives whenever in contempary times define the direction of economic policy objectives of every country, Nigeria inclusive are: Stable price level, High level employment. Favourable balance of payment, High and sustainable rate of economic development. Nigeria all along was Agriculture based until when petroleum was discovered in Nigeria. With the discovery of petroleum, drilling and mining became a prominent of sector the economy. The sector has since then been accounting for a significant proportion of the country’s export earnings Agriculture on the other hand, though seriously declining in terms of export earning, it still provides employment for high proportion of the population.
Apart from the discovery of out of all, the attempt to develop the modern sector seriously affected the Agricultural in Nigeria. The modern sector is the target of young school leavers. The curricula of the school provide skills needed in the modern sector alienating the school leavers from the Agriculture Sector. The result was a decline in Agriculture output both inform of food items and raw material that should have fed the modern sector. The modern sector predominantly concerned with processing pf raw materials and production of a few consumer goods for domestic markets depending sector arose from the devaluation of the naira. Such problems include, capacity utilization, fall in domestic demand and smuggling.
What Is Currency Devaluation?
Currency Devaluation refers to the process of reducing the value of a currency in terms of other currencies. The prime objective of devaluation in an economy operation within the existing international economy order is the sustainment of the exchange rate of the local currency at a rate which keeps the balance of payments at equilibrium. As devaluation has to do with sustainment of the exchange rate of local currency at a rate which keeps the balance of payments at equilibrium. As devaluation has to do with sustaining desirable exchange rate, it is therefore patients to examine the Nigeria experience in devaluation if we are to look at the exchange rate polities in Nigeria.
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The currency devaluation had tremendous negative effects in several sectors of the economy. Devaluation is the deliberate downward adjustment of the value of a country’s money relative to another currency, group of currencies, or currency standard. Countries that have a fixed exchange rate or semi-fixed exchange rate use this monetary policy tool. It is often confused with depreciation and is the opposite of revaluation, which refers to the readjustment of a currency’s exchange rate.
Effects Of Currency Devaluation on The Economy
Devaluation reduces the cost of a country’s exports, rendering them more competitive in the global market, which, in turn, increases the cost of imports. If imports are more expensive, domestic consumers are less likely to purchase them, further strengthening domestic businesses. A balance of payment deficit is when the total of payments and transfers to foreign countries exceed total receipts from foreign countries. The balance of payment deficit therefore had led to the following problems in Nigeria.
- Poor Performance of non-oil exports: – Over the past 20yrs the share of non-oil sector made essentially of the agricultural and manufacturing sectors, has been very low, less than 10percent on the average. This unimpressive performance was due majorly to neglect of the agricultural sectors of the economy in favour of non –existing white collar urban jobs. Moreover, most of the Nigeria industries have not been able to penetrate foreign market because they are high – cost producers using crude methods and techniques of production as compared with cost saving highly developed mass production technology of the developed countries. The division of Nigeria balance of payment into out and non-oil sector underscores the relative importance of crude petroleum in the Nigeria economy.
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- High debt service payment: – The oil glut of 1978 caused a considerable fall of the prices in international oil market and a sharp decline in government revenue, especially foreign exchange earnings. Inability to settle imports bills and the desire to increase the productive base of the Nigeria economy made it expedient for the government to borrow for balance of payments support and project financing this in turn led to the promulgation of Decree No 30 of 1978, authorizing the federal Government to raise external loans up to a maximum of N5 billon. But contracts of external debt require that a proportion of export earnings set aside to meet debt obligations. This obviously constitute a major “conduct pipe” for the outflow of scare foreign exchange, and hence, a principal source of balance of payments deficit.
- Low Level of Foreign Direct Investment: Direct investment has remained very low in Nigeria. This may be largely due to frequent change of industrial polices, instability in foreign exchange rates and interest rates, rising inflation, and long drawn crisis – ridden programme of transition of democratic governance – all combining to render the country’s investment climate hostile to inflow of foreign investment capital. In relation to the above, the following are also contributing factors:
1. The technology progress in the developed countries - Low level of receipts from the provision of international services and income
- Import substitution and industrialization and
- Expansionary fiscal and monetary policies.
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Causes Of Naira Devaluation
Devaluation occurs when governments want to increase their trade balance. In doing so, the government adjusts its currency’s exchange rate with another countries. The government can increase exports by making its currency cheap. Or it could be a forced act where the currency balance is disturbed because of the pegged currency experiencing an upswing. Nonetheless, the result is that after devaluation, the country would find foreign products more expensive and therefore unaffordable, leading to a fall in its imports.
- Policy failure: In a bid to manage the value of the naira, the Central Bank of Nigeria (CBN) introduced a number of policies such as stopping 41 items from accessing forex at the official market, offering N5 for every $1 of funds remitted to Nigeria through Internal Money Transfer Organisations, banning the supply of forex to Bureau de Change, among others. However, these policies have not been able to guarantee naira stability.
- Supply, demand factors: While depreciation is driven by demand and supply, devaluation is often a policy measure employed by the central bank to achieve certain economic outcomes. Certain demand and supply factors were triggering the devaluation. On the issue of supply, he said that the country was not exporting enough and foreign investments into the country were dropping.
- Low export: The devaluation is caused by both political and economic issues. The economic issue is that we continue to import goods, and we are not exporting much beyond oil. Also, the non-oil sector is not doing very well, and we are still importing more. “There is also the issue of illicit capital flow. That is, people taking foreign currency without caution. The coronavirus has also affected output.”
- Productive economy: When you devalue, you are hoping that the goods you export will be cheaper. You can export more and earn more revenue. However, our major export is crude petroleum, and we don’t control the price or output. So, we don’t get anything from the government’s outright devaluation.
CONCLUTION
Key issues that shaped value of Naira in 2022.
The parallel market, the local currency plunged further against the rate it traded in January last year as the dollar crisis worsened amid galloping inflation. This was largely exacerbated by scarcity in the inflow of dollars due to depleting foreign reserves and the sudden surge in demand for foreign currency by Nigerians seeking to settle import bills, school fees and other demands by households and corporate entities.
- Rate adjustment by the CBN
- CBN threat to arrest, prosecute Nigerians buying dollars with Naira
- Hike in interest rates
- Campaign flag-off
- Replacement of Naira notes
- EFCC raids on BDC