Nigeria And The Economics Of Devaluation

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The persistent depreciation of the Naira to the United States dollar in particular and other foreign currencies like the British Pound, Euro etc. in general has generated debate among those interested in the Nigerian project.  President Buhari’s opposition to devaluation stressing that he has no intention to ‘kill’ the Naira reactions in some quarters. There are those who perceive that the President is not an expert in the subject and hence should allow the ‘experts’ to examine the situation and offer solutions. It is expected that the President has advisers to discuss with and obtain insight into the economics of the foreign exchange market and its nuances. Who are the experts on the foreign exchange market?

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Nigeria has economists who specialize in international trade and/or international economics with emphasis on the foreign exchange market.  Most stakeholders would have a broad view of the theory and practice of the foreign exchange market.  The economics of devaluation / appreciation remains a sub-set of the forex market.

Within the context of basic international economics, the market for foreign exchange is nothing more than the organizational framework within which individuals, firms, and banks, buy and sell foreign currencies. The Foreign exchange consists of convertible currencies that are generally accepted for international trade transactions and other external commitments. The Naira is not a convertible currency.  Consequently, certain factors determine its value to convertible currencies like the United States dollar, British pound etc.  Theoretically, on the basis of market forces, the price in the foreign exchange market is the exchange rate – often referred to as the equilibrium exchange rate. One of the key functions of the foreign exchange market is the provision of a platform where exchange rates are determined.  It can become complicated when one tries to determine the nominal exchange rate, real exchange rate and effective exchange rate, among others.  Equilibrium exchange rate is a theoretical construct and a bench-mark for determining other rates.  Even if an equilibrium exists, it is pertinent to determine whether it is unique and stable.

Because Nigeria trades with the rest of the world, the value of the Naira vis-a-vis other currencies becomes very important.  Consequently, devaluation/depreciation refers to a reduction in the foreign exchange value of a national currency. When it involves outright government intervention to reduce the value of the currency, it is devaluation. When it is done by the market, it is known as depreciation. It is the amount of foreign exchange that is exchanged for a unit of Naira that gives its value thus indicating the quality of foreign goods and services that it can purchase. There are several exchange rate regimes such as fixed, multiple, floating and unified.

A country devalues to make her exports cheaper and imports expensive.  The country would increase its exports and earn more revenue depending on the elasticity of the prices of the goods and services.  For a country to benefit from devaluation, it would depend on the structure of production and foreign trade, the state of the economy’s activities as well as the labour market.  Nigeria exports crude petroleum and has no control over its price and quantity.  However, non-oil exports in Nigeria seem to be increasing and there are players in the non-oil export market that require the foreign exchange to buy inputs necessary for production. The question to address is how large is the non-oil export sub-sector in the country?  The National Bureau of Statistics puts the contribution of non-oil export to GDP at 90 per cent as of the last quarter of 2015. Therefore, in order to encourage manufacturers, it is necessary to align the value of the Naira with convertible currencies so that domestic firms would be globally competitive.  But the problem is the absence of the enabling environment for the manufacturers to produce for export as was the case in the Asian countries.

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