The Nigerian Naira (NGN) is the official currency of Nigeria. In recent times, the value of the Naira has been subject to significant fluctuations, with the currency experiencing periodic devaluations.
The effect of Naira devaluation on the Nigerian economy cannot be overemphasized. In this post, we will examine the causes of Naira devaluation and its effect on Nigeria’s economy.
So, if that’s what you’re here for, let’s get started right away!
What is Currency Devaluation?
Currency devaluation is the intentional or deliberate reduction in the value of a currency by the country’s government or central bank. This is achieved by reducing the exchange rate of the currency in relation to other currencies.
This is usually by allowing the market forces of supply and demand to determine the exchange rate, or by directly intervening in the foreign exchange market.
Therefore, in the case of Nigeria, Naira devaluation, also known as Naira depreciation, is simply a reduction in the value of the Naira in relation to other currencies, such as the US dollar. For example, recent black market Dollar to Naira rates.
Having known what Naira devaluation means, let’s see its causes.
Causes of Naira Devaluation
Devaluation in Naira is caused by many factors including:
Trade Imbalance
One of the causes of Naira devaluation is trade imbalance. Nigeria has a trade imbalance, where the country imports more goods than it exports.
This leads to a high demand for foreign currency to pay for imports, which puts pressure on the Naira. The high demand for foreign currency causes the Naira to depreciate.
Dependence on Oil Exports
Nigeria’s economy is heavily dependent on oil exports. When the price of oil falls, Nigeria’s revenue from oil exports reduces, which affects the country’s foreign reserves. A reduction in foreign reserves puts pressure on the Naira, which results in Naira devaluation.
See Also: Why is Dollar Rising Against Naira?
High Inflation Rate
Another cause of Naira devaluation in Nigeria is the inflation rate. A high inflation rate erodes the value of the Naira.
When the inflation rate is high, it reduces the purchasing power of the Naira. This leads to an increase in demand for foreign currency, which causes the Naira to depreciate.
Political Instability
Political instability affects investor confidence in Nigeria. Investors tend to withdraw their investments during times of political instability, which reduces the amount of foreign currency available in the country. A reduction in foreign currency puts pressure on the Naira, which results in Naira devaluation.
Decreased Foreign Investments
Lastly, a decrease in foreign investments can also cause Nair devaluation. Foreign investments are crucial for Nigeria’s economy.
When there is a decrease in foreign investments, it reduces the amount of foreign currency available in the country. A reduction in foreign currency puts pressure on the Naira, which results in Naira depreciation.
Those (above) are the causes of Naira devaluation. Now let’s see the impact on the Nigerian economy.
Effects of Naira Devaluation on Nigeria’s Economy
The effects of Naira devaluation on Nigeria economy include:
Increased Inflation Rate
The first major impact of Naira devaluation on Nigeria economy is that it leads to an increase in the inflation rate.
This is because imported goods become more expensive, and local manufacturers also increase the prices of their products to reflect the increased cost of importing raw materials.
Related: Impact of Inflation Rates on Exchange Rates in Nigeria
Decreased Purchasing Power of Citizens
Naira depreciation also reduces the purchasing power of citizens. This is because the Naira can buy fewer goods and services, which leads to a decrease in the standard of living.
Reduced Foreign Investments
Another effect of Naira devaluation on the country’s economy is that it reduces foreign investments in Nigeria. This is usually because foreign investors are less likely to invest in a country with a devalued currency.
Increased Debt Burden
Nigeria’s debt burden increases when the Naira is devalued. This is because the country has to pay more Naira to service its foreign debt.
Increased Cost of Imports
Lastly, one of the most popular effects of Naira devaluation on Nigeria economy is that it leads to an increase in the cost of imports. This is because it takes more Naira to buy the same amount of foreign currency, which makes imported goods more expensive.
Now that you’ve known what the impact of Naira depreciation is on Nigeria’s economy, let’s see how to reduce the effect.
Steps to Mitigate the Effect of Naira Devaluation on Nigeria’s Economy
Diversification of the Economy
Nigeria needs to diversify its economy to reduce its dependence on oil exports. Diversification will increase Nigeria’s foreign reserves, which will reduce the pressure on the Naira.
Encouraging Foreign Investments
Another way to mitigate the effects of Naira devaluation in Nigeria is to create an enabling environment for foreign investors. This will increase the amount of foreign currency available in the country.
Boosting Local Production
Boosting local production to reduce the country’s dependence on imported goods can also help Naira in gaining more value. This will reduce the demand for foreign currency, which will reduce the pressure on the Naira.
Addressing Political Instability
Nigeria needs to address political instability to boost investor confidence. As a result, there will be an increase in the amount of foreign currency available in the country.
Related: How Political Instability Impacts Dollar to Naira Exchange Rate
Increasing Exports
Lastly, increasing exports to generate more foreign currency can also help in reducing the impacts of Naira devaluation on Nigeria economy. This will increase the country’s foreign reserves, which will help Naira gain more value.
Conclusion
The effects of Naira devaluation on Nigeria’s economy are significant. Naira devaluation leads to an increase in the inflation rate, a decrease in the purchasing power of citizens, reduced foreign investments, an increased debt burden, and an increase in the cost of imports.
We believe this post has helped you know not only the causes of Naira devaluation in Nigeria, but also the effects, and how to curb it.
