Naira Devaluation Why Nigeria is not ready

The devaluation of an economy has enormous benefits, all things being equal. The key phrase here however is "all things being equal". In Nigeria, all things are not equal.

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A trader changes dollars with naira at a currency exchange store in Lagos, Nigeria in this February 12, 2015 file photo. play A trader changes dollars with naira at a currency exchange store in Lagos, Nigeria in this February 12, 2015 file photo. (REUTERS/Joe Penney/Files)
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For the longest time, many economic experts and political leaders have advocated that President Muhammadu Buhari and Central Bank of Nigeria (CBN) governor Godwin Emefiele devalue the naira due to the extensive depreciation the currency has undergone in the last year or so and the slowdown of the economy due to the drop in prices of the country's major revenue source - Crude Oil.

President Muhammadu Buhari speaks at the Commonwealth Tackling Corruption Together Conference in the United Kingdom on May 11, 2016. play

President Muhammadu Buhari speaks at the Commonwealth Tackling Corruption Together Conference in the United Kingdom on May 11, 2016.

(Twitter)

 

However, the President had maintained his position to not devalue the currency, a position criticised by many - including the International Monetary Fund (IMF) - until about two days ago, when news broke that the president had succumbed and devalued the naira.

Following the news, there has been parts of the citizenry that have hailed the decision and others who have expressed their reservations. In the same vein, a large majority have nurtured largely unsure convictions towards the devaluation move.

Central Bank Governor Godwin Emefiele speaks during the monthly Monetary Policy Committee meeting in Abuja, Nigeria January 26, 2016. play Central Bank Governor Godwin Emefiele speaks during the monthly Monetary Policy Committee meeting in Abuja, Nigeria January 26, 2016. (REUTERS/Afolabi Sotunde)

 

So what does devaluation mean for the Nigerian economy at this present time?

Well, devaluation of an economy has enormous benefits, all things being equal. The key phrase here however is "all things being equal". In Nigeria, all things are not equal.

We have epileptic power supply - a very crucial determining factor in the process of enjoying the benefits of devaluation. Also, the real sector - local, direct economy - is largely undeveloped, so local manufacturers, and agricultural entrepreneurs - who, again, form a large part of the core imports and would stand to gain the most from devaluation - cannot benefit in any way from said devaluation.

People queue with their vehicles to buy fuel in front of a fuel station at Agege district in Lagos, Nigeria April 5, 2016. To match NIGERIA-OIL/ REUTERS/Akintunde Akinleye play People queue with their vehicles to buy fuel in front of a fuel station at Agege district in Lagos, Nigeria April 5, 2016. To match NIGERIA-OIL/ REUTERS/Akintunde Akinleye

 

READ: President reportedly succumbs to IMF pressure, approves devaluation of naira

All of this means that Nigeria cannot immediately benefit from the devaluation of the naira. Let's get a little bit of perspective: At this present moment, a lot of local manufacturers have already borrowed loans from foreign creditors when the rate of the naira was say, N150 per dollar, for example. With the devaluation, they have to service those loans at N300 per dollar, which in turn means that they will incur losses of over 200%, thereby plunging the economy into more problems and eroding the benefits of devaluation in the process. Government stands to lose the most because it is probably the largest borrower of foreign currency.

Naira play

Naira

(GT Bank)

 

Another problem is the high interest rates of local banks. Most of the banks still lend at double figure interest rates per annum, a figure which inadvertently crushes the rise of local entrepreneurs and stifles the growth of the manufacturing sector. Loss in human capacity is another problem that comes with the devaluation of the naira in the present state of the naira. Professionals will want to go out of the country where they know that they will  be paid more and they can come back and change that foreign currency into more local currency. All of this even without considering the immediate inflation that follows the devaluation of a currency.

Workers arrange bags containing cocoa beans at a cocoa processing factory in Ile-Oluji village in Ondo state, southwest Nigeria March 30, 2016. Picture taken March 30, 2016. play Workers arrange bags containing cocoa beans at a cocoa processing factory in Ile-Oluji village in Ondo state, southwest Nigeria March 30, 2016. Picture taken March 30, 2016. (REUTERS/Akintunde Akinleye)

 

In conclusion, there are incredibly dire consequences for the Nigerian economy and its citizenry with the naira being devalued while the economy is still in its current state. Although, the government cannot control the events that could lead up to a dwindling economy, or one undergoing an economic downturn, devaluation could cause more problems if the conditions to optimise its benefits are not in place - which they aren't.

Let me know what you think about the government's recent devaluation of the naira in the comments section below.

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