What Exactly Is Devaluation?
Devaluation can simply mean the diminishing or undervaluing of something’s value or significance.
“The general devaluation of expertise in our culture Economically a financial crisis will result in severe devaluation of the country’s currency” refers to the decline in a currency’s official value relative to other currencies.
When a nation purposefully devalues its currency about one or more foreign nations, this is known as devaluation.
Impact Of Devaluation
Devaluation may be advantageous to domestic businesses but detrimental to the populace of a nation. For foreigners, on the other hand, devaluation may be advantageous to foreign residents but detrimental to foreign companies.
For an illustration of who wins and who loses, look at China’s devaluation of the yuan about the US dollar. China’s devaluation of their currency was solely to compete with other currencies like Dollars and Euros which has instigated foreign investment as the cost of production is cheaper, which led many American Companies to produce or manufacture their products in China.
The move made by China has also boosted economic growth and created employment opportunities for its citizens.
Many Countries like third-world developing countries have experienced huge negative impacts on currency devaluation.
Sometimes devaluation is good and sometimes bad but only if the country has a strategy economically to put in place to avoid unnecessary negative consequences on the citizens.
Devaluation On Import And Export
Devaluation ultimately causes a shift in international commerce, tipping the scales in favor of the depreciating nation. When the value of one currency fluctuates about another, the relative cost of commodities from each nation also changes.
A purposeful reduction in the value of a nation’s currency about another currency, a set of currencies, or a standard is known as devaluation. It is a mechanism used by nations with fixed or semi-fixed exchange rates to implement monetary policy. It isn’t revaluation or depreciation.
In Nigeria, the devaluation of currency aids in the exportation of Goods or raw materials that is cheaper to foreigners to increase productivity and cash flow. As a result, more people go to farm which has reduced the dependency on crude oil and brought about diversification.
Devaluation has the exact opposite effect on imports as it does on exports. Imports will cost more as a result. Thus, there will be less of a need for imports. The country’s currency now has less worth when compared to the exchange rate, making imports more expensive.
That should make people feel demoralized to import goods to maintain a stable economy free of inflation. But in Nigeria’s context is highly detrimental because of the nonstop importation and prioritization of foreign goods.
In a sense, devaluation will force customers to purchase domestic products. This is because imported items will eventually cost more than domestically produced goods.
Devaluation Vs Depreciation
A government’s decision to alter the fixed exchange rate of its currency is known as devaluation. It is only possible when the exchange rate is regulated by a central bank. The majority of currencies that are exchanged on foreign exchange markets are not fixed against one another.
Depreciation is the loss of value of a floating currency relative to another currency (not to be confused with the accounting word). It is said to have appreciated if its value rises.
The Video Below Is The Difference Between Depreciation And Devaluation Watch Full;
Purchasing Power Parity
A common macroeconomic study tool used to evaluate living standards and economic productivity between nations is purchasing power parity or PPP.
It studies the strength of the currency of a particular product and its cost between two or more countries.
Devaluation In Nigeria: Issues And Way-forward
Devaluation is putting a foreign currency that is dominant ahead of the country’s currency, for example, Nigeria can decide Naira against the dollar due to the shortage of foreign currencies. If there’s a high demand for foreign currency for the importation of goods, payments of school fees, medical bills, tourism, and debt service; to fulfill all in foreign currencies. This is why the devaluation of currency. Here’s where the fixed exchange regime and floating regime come in.
At the moment, Tinubu’s administration said it shouldn’t be a fixed exchange regime because greedy politicians are taking advantage of it, So they brought about a floating regime where the market forces of demand and supply determine the rate. It is a good policy but it is ill-timed.
It was enacted in the period when Nigeria was in shortage of inflow of dollars. This is because the demand for dollars outweighs the supply. The oil importation promotes giving out lots of dollars. It is a policy at a time when Nigeria is exporting, for example (when the Dangote refinery is fully functional and more agricultural produce is in high demand for exportation).
When Nigeria does not need so many dollars for importation. But Nigeria needs dollars coupled with the issue of subsidy.
In my personal opinion, the subsidy should have been removed in phases for example 25%, and see how it goes. Before taking the next step avoid economic casualties or multiplier effects on the economy and hardship to Nigerians.
Indices Of Devaluation
- More import and less export: Countries that import more than they export are prone to the devaluation of the currency.
- Forex Trading: Only if a country’s citizens trade in their local currencies, that will help in prioritizing less of another country’s currency e.g. Dollar.
- Dollar Bank Account: most politicians and businessmen have foreign accounts where most of their money is saved. That also contributes to the devaluation of the currency.