All things being equal, there devaluation is a measure put in place when a country's economy is dwindling or undergoing a downturn. Nigeria's economy is at that point.
Recent reports confirm that the Federal government has devalued the Naira, and like anything that could potentially affect a lot of Nigerians, there have been a lot of questions on either side of the devaluation fence.
What does devaluation of the naira mean for Nigeria's economy? What does it mean for its citizens? What does it mean for the government? What are the short term effects on the economy? Are there any long term benefits? These are some of the questions which Nigerians are asking.
All things being equal, there devaluation is a measure put in place when a country's economy is dwindling or undergoing a downturn. Nigeria's economy is at that point. The recently signed budget is going to be run on a deficit, which means the government would have to borrow to fund it - devaluation automatically fills that funding gap that would have been caused by the deficit.
Another benefit of devaluation is that the real economy will be provided an opportunity to grow exponentially. When a currency is devalued, a lot of real sector players can come into play. As opposed to looking outside the country for goods to import, loads of middle and large scale manufacturers will start to emerge from every sector of the economy. When this happens, a lot of entrepreneurs who used to rely on the importation of goods will no longer need to look outward, instead they would have what they need being manufactured locally.
Also, devaluation of a currency helps the local capacity of the real sector grow gradually. In the long term, there will be significant growth in the real sector of the economy since local capacity will be boosted. In a sense, you can say devaluation is aimed at growing the real sector.
Devaluation will also see a great increase in the production of goods that rely heavily on agricultural produce, thereby fostering a decrease in the importation of agricultural produce - simultaneously growing the agricultural and manufacturing sectors in the process. Since the cost of importation will be on the rise, the manufacture of agricultural products will be forced to take place locally.
Employment is also another plus of devaluation. In real economic terms, it is expected that the devaluation of a currency will foster a new wave of increased interest in entrepreneurship and subsequently, more jobs will be created. There will also be a lot of direct investment in the country because with a little foreign capital, a lot can be achieved in a devalued economy.
In the long run, when all of these things stated above happen, the economy will grow considerably. A lot of manufacturing will take place, imports will reduce, and the country's balance of payment will be healthier. In the right conditions it can then grow healthier and get to the point where the country starts to export much more than it imports - a sign that the economy, and ultimately the quality of life of the citizens of that country, is improving and growing.
All of that is assuming the conditions which are needed to maximize the benefits of devaluation are in place. But are they?
Let me know what you think about devaluation and what it means, or could mean, for Nigeria, in the comments section below.