Naira Devaluation: Basic things you should know

 

Meaning: The removal or lessening of something's value.

As it pertains to currency: The intentional or deliberate lowering of a currency's value compared to another country's currency or a standard value.

What led to devaluation?

• The countries borrowed heavily (current account deficits)

• Currency values increased rapidly

• Uncertainty over the government actions makes investors jittery.

• Low export exchange or demand on local currency.

Surely, we must consider other options;

Quoting from The Punch,

“I don’t think it is healthy for us to have the naira devalued further,”

Buhari said in an interview with France 24.

He said further; “That’s why we are getting the central bank to make modifications in terms of making foreign exchange available to essential services, industries, spare parts, essential raw materials and so on – but things like toothpicks and rice, Nigeria can produce enough of those.

A case of currency crisis

(Culled from www.investopedia.com/articles/economics/08/currency-crises.asp)

Example 1: Latin American Crisis of 1994

On December 20, 1994, the Mexican peso was devalued. The Mexican economy had improved greatly since 1982, when it last experienced upheaval, and interest rates on Mexican securities were at positive levels. Several factors contributed to the subsequent crisis:

Economic reforms from the late 1980s, which were designed to limit the country\'s oft-rampant inflation, began to crack as the economy weakened.

The assassination of a Mexican presidential candidate in March of 1994 sparked fears of a currency sell off. The central bank was sitting on an estimated $ 28 billion in foreign reserves, which were expected to keep the peso stable. In less than a year, the reserves were gone.

The central bank began converting short-term debt, denominated in pesos, into dollar- denominated bonds. The conversion resulted in a decrease in foreign reserves and an increase in debt. A self-fulfilling crisis resulted when investors feared a default on debt

by the government. When the government finally decided to devalue the currency in December of 1994, it made major mistakes. It did not devalue the currency by a large enough amount, which showed that while still following the pegging policy, it was unwilling to take the necessary painful steps. This led foreign investors to push the peso exchange rate drastically lower, which ultimately forced the government to increase

domestic interest rates to nearly 80%. This took a major toll on the country\'s GDP , which also fell. The crisis was finally alleviated by an emergency loan from the United States.

Compiled by Abiodun Lawal

(freelance writer:abiodunolarinre@gmail.com /07069597664)