Currency devaluation refers to the strategic measures taken to reduce the purchasing power of a country’s local currency. This is often done to reduce debt burdens and also gain a competitive advantage in global trade.
Devaluation of a country’s currency often makes export cheaper while making the importation of goods from other countries more expensive, thereby stimulating local production and demand as well as enabling indigenous industries to sell more goods to other countries. In other words, citizens will likely patronise local products since they are cheaper compared with foreign products thereby enabling manufacturers to produce more output.
As a result of the fall in global oil prices in the year 1986, the administration of General Ibrahim Babangida opted to finance the economy by seeking financial assistance from the World Bank and the International Monetary Fund. While this may appear to be a good move, the terms and conditions being attached to the loans were unfavorable to most developing economies, as these countries continue to find themselves in the enslavement of vicious debt servicing.
These conditional ties include devaluation of the naira, privatization of major sectors, trade liberalization, and reduction of obstructions to foreign capital. The loans were granted but not without gross economic repercussions which still persist up till today. For instance one of the conditions given to the Nigerian government was to devalue the naira in relation to international currencies. It should be noted that prior to the period of devaluation, 1 dollar was exchanged for 77 kobo. Year in year out, the value of the Nigerian currency continues to depreciate in the foreign exchange market as a dollar is currently exchange for over N400.
Also, earlier this year, the International Monetary Fund, advised developing countries with the inclusion of Nigeria to further depreciate their currencies as a result of the decisions of the Federal Reserve of the United States to tighten its funding conditions. The IMF in their recommendations stated that “Countries with policy creditability can tighten monetary policy more gradually while others with stronger inflationary pressure or weaker institutions must act swiftly and comprehensively. In either case, responses should include letting currencies depreciate and raising benchmark interest rates.”
The recommendation of naira devaluation has continued to be met with stiff opposition from Nigerians who are of the opinion that there’s more to macro-economic stability beyond currency devaluation especially since there’s no statistical evidence that suggests that Nigeria will be better off when it devalues its currency. For instance, in the third quarter of 2021, the National Bureau of Statistics (NBS) revealed that Nigeria’s foreign trade deficit rose to 62 percent in the third quarter of 2021. Its value in naira amounted to N3.03 trillion comprising of N8.2 trillion imports and N5.1 trillion exports.
It is also interesting to note that crude oil export accounted for 78.47 percent of the total export in the third quarter of 2021 while natural gas accounted for 9.50 percent. Despite the fact that Nigeria still depends on its agricultural sector, it is shocking to know that between 2020 and 2021, agricultural import value increased by 140.47 percent.
According to a revelation by “The Cable”, Nigeria only managed to export a meager N127.2 billion while its import stood at N630.2 billion. The wide level of disparity between Nigeria’s total import and export implies that Nigeria is still highly import-driven as its trade deficit continues to put heavy pressure on its foreign exchange. Also, Food inflation which has accounted for 70% of Nigeria’s inflation has also continued to compound Nigeria’s hunger and poverty crisis while Nigeria continues to retain its position as the poverty capital of the world.
Also, it should be noted that the Central Bank already devalued the naira in the year 2020 from N305 to N380 in order to attract more foreign investors into the country. However, despite adopting this measure, a recent ranking by the Rand Merchant Bank reveals that Nigeria is still not one of the top 10 investment destinations in Africa.
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Also, according to the IMF, “prices are rising at the fastest pace in almost four decades while the new Omicron variant has also raised additional concerns of supply-side inflation. Emerging countries are therefore confronted with elevated inflation and substantially high public debt”. Since the IMF recognizes the fact that emerging countries are still faced with the issue of rising inflation and high debt profile, why should it compound the already existing challenges by suggesting further devaluation?
One major danger especially for a country like Nigeria that has unfavorable terms of trade is that devaluation of the naira will increase the prices of imports thereby making foreign goods more expensive for consumers. When not properly managed, devaluation will further lead to an increased rate of inflation which might not augur well for the nation’s stability and growth especially considering the fact that like most nations, Nigeria has still not fully recovered from the devastating effect of the Covid-19 pandemic; since then, the nation’s economy is just getting off its feet therefore; employing a contractionary monetary tool for a country that is currently witnessing both socio-economic and political downturn might not be in the best interest of its citizens.
Experts have opined that IMF loans and its conditions have been designed in such a way that will further degenerate the economies of developing countries as the economic measures proposed by the IMF have been largely discovered to be inappropriate in addressing the needs and challenges of Africa. Since 1986 when it was forced to devalue its currency following the IMF recommendation, the country cannot make reference to any positive impact derived from this policy.
What then will make the story different in the present era? Especially going by the fact that in the last 6 years, Nigeria has escaped 2 different periods of economic recession after which the country experienced its own share of the Covid-19 pandemic. The current wave of insecurity across the nation has also not done Nigeria any good. All these factors is a straight pointer to the fact that further devaluation of the naira will not be in the best interest of Nigerians especially since the country is still import-dependent.
Industrialization remains an important strategy for ensuring a nation’s economic stability and sustenance, not devaluation. The way out of this puzzle is to develop local industries in order to reduce the rate at which the country depends on foreign products and currency.
