What is devaluation?
Devaluation is the deliberate downward adjustment of a country’s currency value. This monetary policy is usually used by countries with fixed or semi-fixed exchange rates. In May 2021, Nigeria’s apex bank devalued the currency by 7.6% against the dollar as the Nigerian government continued their bid to move to a single exchange-rate system for the Naira.
According to speculations, there is an imminent move by the Central Bank of Nigeria to devalue the Naira. As a result, there has been news of panic buys by forex users, speculative trading, and front-loading of future demand.
Before now, Nigeria have been operating a multiple exchange rate to avoid an outright devaluation of the Naira; maintaining a more reliable rate for official transactions and weaker exchange for unofficial transactions.
Reasons why countries devalue their currency
To Boost Exports
On a global scale, countries compete with each other with exports and imports. If the value of currency A decreases against currency B, the price of goods sold by currency A will be less expensive, giving room for more demand. On a broad scale, this encourages competitiveness between countries. On the flip side, as demand for a country’s exported goods continues to increase, prices might begin to rise, normalizing the initial effect of devaluation. Also, other countries might devalue their currency which might eventually lead to unchecked inflation.
To Reduce Sovereign Debt Burdens
For countries with a lot of sovereign debt to service, devaluation might be to their advantage. If debt payments are fixed, a weaker currency makes these payments less costly over time. However, this measure might backfire if the country holds many foreign bonds because it will make those debt payments relatively more expensive.
Devaluing a currency, however, does not always lead to its intended benefits. Having a fluctuating currency might create a hole in citizen pockets due to the uncertainties attached to devaluing or revaluing a weak currency. One way to retain value is by investing in a more stable currency.
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