Dr. Mustapha Muktar
Department of Economics
Bayero University, Kano
28/2/2011
28/2/2011
The IMF had in its 2010 article IV constitution with Nigeria released last week noted that the Naira was currently overvalued and advised the CBN to devalue it. Devaluation of currency is the decision of a government to reduce the value of its own currency vis a vis other currencies. Devaluation occurs exclusively in fixed currencies, when the currency in question is pegged to another currency.
Governments devalue their own currencies to make their exports less expensive in foreign markets. For example if a company exports its products for the same price in the local (devalued) currency, it is cheaper for consumers to buy those products in their own currency. However Countries devalue their currencies only when they have no other way to correct their economic problems.
The ills of devaluation are in most cases more than its advantages. Crictically, devaluation does encourage exports and discourage imports to some extents and for a limited period of time. Devaluation is mostly manifested in a higher inflation, promotion of importation of finished goods, including substandard products, leading to the unfortunate winding up of local/indigenous industries country-wide, rise in energy costs, increased cost of fund and a reduction in welfare especially in an import dependent country like Nigeria.
It could be recalled that Since the 1980s, the devaluation of the Nigerian currency has never augured well with the country and its people. One of IMFs conditionalties is usually the devaluation of a loan applicant country’s currency in order for them to be granted such loan.
If the Naira is devalued, Nigerians will lose their international buying power. Their ability to purchase goods or services from other countries will also diminish. The overall implication is that, government will be forced to purchase the Naira with foreign reserves, and hence undermining our country’s ability to service debts. This occurred in Russia after its 1998 currency crises. Currently the exchange rate is about N157 to US1. Based on current development in some of the Nigeria’s macroeconomic indicators where by the oil price is moving up and the rate of growth of real gross domestic product is encouraging the central Bank of Nigeria is supposed to REVALUE the Naira so as to lower inflation, and at the same time attract foreign Direct Investment, investors and trading partners. There is also the need for strengthening an effective monetary tightening to further suppress inflation pressures. The government should also improve the the enabling environment by making sure that the basic socio-economic infrastructures, especially energy, water, roads and security are guaranteed in thecountry
