Hence, the CBN thought the best way to ease pressure on the Naira was to devalue the currency from the official fixed exchange rate of N155/US$ to N168/US$.
Well, devaluation is a monetary policy tool most governments use worldwide. It occurs when a government deliberately reduces the value of its currency against other currencies.
In most cases, devaluation is used to correct the trade deficit. A trade deficit happens when a country imports more than it exports. In that case, the government spends more foreign currencies than it receives. This situation will pressure the local currency as it outflows to foreign markets.
Well, devaluation is a monetary policy tool most governments use worldwide. It occurs when a government deliberately reduces the value of its currency against other currencies.
In most cases, devaluation is used to correct the trade deficit. A trade deficit happens when a country imports more than it exports. In that case, the government spends more foreign currencies than it receives. This situation will pressure the local currency as it outflows to foreign markets.
If the fundamental reason for the devaluation of a currency is to encourage export and the balance of trade, then, what export is the CBN promoting? Practically, there’s nothing to export except crude oil. Oil is already priced in US Dollars, so devaluation will not induce more crude exports.
More so, the Nigerian economy is predominantly import-oriented. There’s virtually no production in the country, most items are imported. Thus, devaluation will only increase the cost of living and prolong the miseries of the already trampled population.
Although the decline in oil prices may affect the value of the Naira, the real pressure comes from Nigerian politicians. They constantly need Forex to siphon their state’s wealth to foreign banks.
So, no amount of devaluation will deter these politicians from demanding Forex since they steal the Naira equivalent.
For the devaluation policy to work, the export of goods and services must increase. And the crazy demand for foreign exchange by politicians must be checked.
Where these are not effectively pursued, the consequences will be unimaginable. Obviously, the money supply will skyrocket, which could spike inflation and the total collapse of the economy.
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