Devaluation of Naira: is it good or bad?
Currently writing my MBA thesis on devaluation and how it affects the economy and will like to share my thoughts on the argument why Devaluation if adequately managed is actually good for the economy in the long run.
To understand the underlying situation of Nigeria, keeping it simple and first, you must follow the genesis of the problem as below
1. Debt — Nigeria currently isn’t servicing its debts, it means we are not generating as much as we spend to pay for monies that we borrow to make these expenses. We burn more cash than we can settle our debts, we are not yielding profits, not making use of our revenue channels healthily
2. The balance of Payment — We Import more than we export, meaning we transfer more money abroad than we receive into the country, so the BOP is negatively skewed against our economy
3. Exchange rate — Our rates are currently tightly controlled by the CBN. Kept at a steady rate of $360 by supporting the demand with Naira injection and reducing demand for forex by banning some imports from reducing demand and at the same time protect local industries.
4. GDP — The total sum value produced is dependent on the price of oil, which has been steadily below $100
Let’s leave it at this even though we might want to go deeper with infrastructure problems, trust /corruption and the rest.
Because the exchange rate is tightly monitored and controlled there are always calls to devalue the currency when the economy is not doing well to promote capital influx inflow, increase export demands, prop up FDI, FPI, and SPVs. Just like the naira doesn’t portray it’s a real value at the moment so there is capital flight because you wouldn’t want to buy something so expensive today only to be sold at a meager price tomorrow. If the exchange was free floating the market forces will determine the rate. Devaluation /currency manipulation works for example in a country like China, where export is high, devaluing the currency will make the value of the exporting goods more attractive and thereby increasing sales and having a positively skewed BOP.
Yes, devaluation for a country like Nigeria with the monocultural economy, the masses will suffer in that the cost of petroleum might increase, which in itself causes inflation as the price of transportation, generating electricity, etc. will increase, this can cripple the economy if not properly managed.
My advice is to devalue the currency, we are financially redundant if we don’t, not devaluing is just moving the financial collapse date. Asides from borrowing we need foreign individuals and institution to pump in their forex into our economy. These set of people study the market before getting in, they will make sure the prospect of the economy is at least guaranteed stability for say 5 years, because their investments could have a minimum payback period of 3 -5 years also people want to set up shop where they can stay for many years.
So many issues about devaluation. Nigeria has to be productive before it can be interesting, yet we need the influx of forex into our system. It is a problem of the chick and the egg which comes first. For me, it is devaluation or better still free float, then cleaning up shop and making Nigeria’s ease of doing business excellent. Devaluing will encourage exports and promote locally produced goods with the right infrastructures such as electricity, motorable roads or other transport systems. The govt needs to fix a goal or realistic target to fix infrastructures and also clean up its act or fixating figures, the world is watching. Nigeria has resources, we can maintain a standard but the complexity of being a renowned economy we must attract more forex and be more valuable asides our natural resources.
keeping it simple.
Ekene Obi
Guru Capital LTD
