The Central Bank of Nigeria has been under pressure to devalue its currency as the price of oil remains low and demand for dollars hit unbearable levels. Analysts surveyed locally and internationally have called for a devaluation of the currency rather than the more extremest controls the CBN has adopted. The CBN on the other hand has responded that a further devaluation of its currency is not necessary as they are focused more on demand management whilst discouraging imports.
So who is right or wrong about devaluation and why do countries devalue?
To Boost Exports
One of the most important reasons why countries devalue is because of the immense benefits it provides for exports. When a country devalues its currency the value of the goods and services it exports are more competitive abroad thus boosting the local currency. For example, if the price of oil is $50 per barrel and a company exports 100,000 barrels they will earn a dollar inflow of $5million. If the exchange rate remains at N200 that will translate to a revenue of N1 billion for the company. If the CBN however devalues to N250 that amount rises to N1.25 billion. Devaluation has therefore brought in an extra N250 billion. They claim since the CBN is bent on encouraging exports it can only successfully do so because proceeds from exports increase when converted to the local currency as a result of devaluation.
Whilst this looks good on paper, devaluation mostly favors countries that are purely export oriented. Unfortunately, Nigeria’s export proceeds is still dominated by oil and in total forms about 10% of our GDP.
Relying on devaluation to boost exports also helps with reducing trade deficits. Nigeria still relies heavily on imports to drive local production even though it has operated a trade surplus in recent times. Data available also suggest the CBN is not fully able to capture the true value of invincible trades which largely rely on imports backed by black market dollar supplies.
Too guard the external reserves
Supporters of devaluation also point to the fact that it can help save guard the nations reserves which is under severe pressure as a result of the drop in oil prices. Using the example above, a devaluation from N200 to N250 means you now need N50 more Naira to buy $1. Therefore if the Naira side remains the same, devaluation will increase the Naira end whilst reducing the dollar required to meet each Naira. With the dollar effectively costlier demand for the dollars will be expected to fall in the short run thus introducing currency stability.
The CBN in response believes businesses who seek dollars should be able to source the greenback themselves via export oriented ventures rather than relying on the CBN to fund their inputs which largely relies on imported items. According to the CBN Governor,