Per its projections, Goldman Sachs, the American multinational Investment bank & financial service company with headquarters in New York City, has predicted that a devaluation of the naira between the next 12-18 months at the rate of N500-N550 will help to stabilize Nigeria’s foreign reserves. Devaluation is a monetary policy tool of countries that have a fixed exchange rate or semi-fixed exchange rate expanding domestic production, promoting exports, and replacing imports which leads to more job creation.
The Naira was introduced on 1st January 1973 replacing the British pound at a rate of 2N=1 Pound and has continually been devalued since then while inflation remained above 10% as of 2019. As relating to the naira, devaluation is an intentional downward adjustment of the value of the naira relative to the dollar.
In the year 2020, the Central Bank of Nigeria (CBN) adjusted the exchange rate twice from N307/$1 to N360/$1 and N360/$1 to N380/$1.
Why does this matter?
The plunging oil prices have aggravated pressure in the naira since Nigeria exports mainly crude oil but spends more on purchasing foreign goods. In a report by Nigeria’s Foreign Trade, a whooping sum of N16.959 trillion ($47 billion) was spent on imports in 2019 against 13.1 trillion ($136.5 billion) spent a year earlier. It spent $28.7 billion on invincibles. Nigeria’s incessant import activities increase its need for dollar.
Devaluation of the naira will lead to an increase in exports creating a market for local goods in the international market. It will also enhance the production of local goods for production, substitute foreign goods, and open the country to more job opportunities locally and internationally as well as increase economic growth and generate more revenues for the country. The side effect of this will be inflation and low purchase. Also, repayment of debts in foreign currencies will be at a more punitive rate.