From Kelechi Deca
The CBN has been spending over $27 million daily for most part of this year to defend the Naira? They however had to devalue yesterday when their defence strategy was not yielding results, and was eating up the foreign reserve.
Mr. Godwin Emefiele said yesterday after the MPC meeting that efforts to defend the Naira had led to “dwindling foreign reserves” and that a “more flexible exchange rate is the most viable option as falling oil prices have consistently reduced the accretion to external reserves, thus constraining the ability of the CBN to continually defend the Naira and sustain the stability of the Naira exchange rate,”
The foreign reserves fell to a five-month low of $37.17bn by November 21, down 5.1% from the previous month as the central bank stepped up its defence of the ailing currency.
The last time the Bank devalued was in November 2011, when the CBN lowered the band from 145-150 Naira to the dollar. Yesterday, the bank moved the target band of the currency to 160-176 naira to the US dollar, compared with 150-160 naira previously, owing to prolonged currency weakness and high dollar demand.
Now that the oil price is still falling irrespective of OPEC’s abracadabra meaning that our earnings will not get the short in the arm expected to come from sales of petroleum product, and the currency has been devalued after months of spending billions of Dollars to hem it in.What is the way out?
Since yesterday, there has been a lot of comments and narrations over this development with so many not knowing what devaluation is all about or how it may impact the society.
The major advantage of devaluing a currency is that if you devalue your currency, it makes your goods cheaper than that of your competitors. Keeping your currency low increases demand for your products and more demands for your products help increase your productive capacity and more hands will be needed meaning more people are employed.
And higher level of exports should lead to an improvement in the current account deficit. Higher exports and aggregate demand can lead to higher rates of economic growth. But it all depends on if your country produces anything at all.
If your country does not produce, and only consumes what others produce, devaluation will be wicked.
First, it will most definitely cause inflation because importers cannot buy stuff at higher costs and resale at same price.
It will make imported goods very expensive which will eventually lead to demand pull inflation.
The firms and exporters will have less incentive to cut costs because they can rely on the devaluation to improve competitiveness
It will reduces the purchasing power of citizens, and make it expensive for them to even travel abroad because they will need a basketful of Naira to get a handful of dollars.
A large and rapid devaluation may scare off international investors. It makes investors less willing to hold government debt because it is effectively reducing the value of their holdings.
You can analyze for yourself on how this may affect Nigerians.
