A lot of unfavorable may result to be the effect of Naira devaluation on Nigerian economy. Many of these consequences of this estimation usually, according to some study, oftentimes show that Naira devaluation should have no noticeable impact on change in trade balance in the long-run in Nigeria in the periods under study.
However, the truth of this study has in the long run proven untrue. Hence, the question comes staring one in the face as to whether the study is made through the ivory-tower perspective or it is practically based on the realities of the Nigerian society in terms of its economy.
A country might devalue its currency to address trade imbalance. Devaluation lowers the price of a nation’s exports, making them more competitive on the international market, which in turn raises the prices of imports.
If imports are more expensive, domestic consumers will be less likely to buy them, supporting domestic businesses even more.
A better balance of payments results from rising exports and falling imports because the trade deficit narrows. In other words, a country that devalues its currency can cut its deficit because there is a greater demand for less-expensive exports.
Consequences of Naira Devaluation
What is devaluation? Devaluation is the deliberate downward adjustment of the value of a country’s money relative to another currency or standard. It is a monetary policy tool used by countries with a fixed exchange rate or semi-fixed exchange rate. It is a downward adjustment to a country’s value of money relative to a foreign currency or standard.
Though some countries do not actively encourage currency devaluation, their monetary and fiscal policies still have the same result and allow them to compete in international trade. Foreign investors are drawn to more affordable assets like the stock market by monetary and fiscal policies that have a depreciating effect on currencies.
Read Also: Frequently Asked Questions about the Devaluation of Naira
It can be caused by various reasons; some of which may be: boosting exports and encouraging imports, narrowing the trade deficit, or reducing the sovereign debt burden. Below is the effect of Naira devaluation on Nigerian economy:
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Rise in Interest Rate and Cost of Borrowing
Due to the capital intensive nature of the projects undertaken by different big companies, there’s always the possibility of external funding from banks to finance major projects. But with the recent naira devaluation, there’s bound to be a raise in the base lending rate making the cost of borrowing funds to escalate.
This is a corrective measure from the CBN to ensure the inflation caused by the naira devaluation will not further escalate due to more money in circulation. So to discourage more lending, they raise the base lending rate and increase the cost of borrowing.
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High Costs of Doing Business
The Nigerian construction industry for instance is heavily dependent on foreign importation for the raw materials and equipment they use for construction. With a devalued naira, the cost of purchasing these raw materials and equipment will definitely increase.
The effect of the naira devaluation is already being felt by developers as the cost of construction has risen since most of the materials for construction are being imported from foreign countries such as China.
