Why Devaluation of the Nigerian Naira is Not the Solution

The International Monetary Fund (IMF) has suggested that Nigeria consider devaluing its currency. However, this recommendation goes against the historical evidence and current economic realities in Nigeria, where devaluation has never led to a better outcome for the country's citizens. In this article, we delve into why devaluation may not be the right path for Nigeria's economic recovery and what the potential consequences might be.

Historical Perspective on Devaluation

Repeated devaluations of the Nigerian Naira have occurred over the years, but they have consistently failed to produce positive outcomes for the Nigerian people. Those who have experienced devaluation firsthand can attest to its detrimental effects. The hypothesis that devaluation can be beneficial is not supported by historical data, and thus, accepting it as a viable solution today would be a regressive move.

Mac Tan’s Take on Devaluation

Photo by Mac Tan on Unsplash

Mac Tan, a renowned artist, once said that devaluation should not be a default answer unless it is accompanied by a willingness to take significant salary cuts. The reality is that devaluation, while providing a temporary fix, only digs the economic pit deeper, perpetuating dependence on oil and reducing internal revenue. This strategy has proven ineffective and counterproductive for the Nigerian economy.

Understanding Currency Devaluation

It is essential to understand that currency devaluation occurs when the value of a country's currency falls relative to other currencies. This happens naturally with an improvement or decline in a country's economy. If the economy is lagging behind others, the currency may depreciate. However, this adjustment process is not a silver bullet for ailing economies.

Global Context and Nigerian Economy

The situation for the Nigerian Naira is currently dire. Since 2006, the Naira has seen significant depreciation against the U.S. dollar, particularly in the aftermath of the 2008 financial crisis and again around 2014 during the oil price crash. Nigeria pegged its currency to the U.S. dollar to halt the slide, and the central bank has maintained this peg surprisingly resiliently at around 200 naira per U.S. dollar. However, the question of whether devaluation would be beneficial for Nigeria is still unresolved.

Consequences of Devaluation

Devaluation would likely exacerbate existing economic issues in Nigeria. For an economy heavily reliant on oil, like Nigeria's, where oil and oil products account for over 90% of exports, the value of the naira has minimal impact on competitiveness. A devaluation would hike the value of foreign-denominated liabilities, significantly shrinking external wealth. In emerging market economies, where such liabilities can represent over 90% of debt, this can lead to a severe contraction in wealth, reducing consumption and investment, and ultimately, output.

Expert Opinion

Professor Jon Levin, an economist, has discussed this topic on Quora. His insights highlight the complex economic dynamics involved in currency devaluation. Given the emerging trends and the current economic stagnation in Nigeria, a devaluation would likely result in greater economic harm than benefit.

Conclusion

The historical track record of devaluation in Nigeria does not support the notion that it is a viable solution to the country's economic challenges. Given the current economic context, devaluation could have severe contractionary effects, particularly on external liabilities and overall wealth. It is important for policymakers to consider alternative strategies that focus on stable economic growth and diversification rather than short-term fixes like devaluation.