Devaluation is the decision to reduce the value of a currency
in a fixed exchange rate. A devaluation means that the value
of the currency falls. Domestic residents will find imports and
foreign travel more expensive. However domestic exports will
benefit from their exports becoming cheaper.


Advantages of devaluation

1. Exports become cheaper and more competitive to foreign
buyers. Therefore, this provides a boost for domestic
demand and could lead to job creation in the export
sector.

2. Higher level of exports should lead to an improvement in
the current account deficit. This is important if the country
has a large current account deficit due to a lack of
competitiveness.

3. Higher exports and aggregate demand (AD) can lead to
higher rates of economic growth.



Disadvantages of devaluation

1. Is likely to cause inflation because:
Imports more expensive (any imported good or raw
material will increase in price)
AD increases causing demand pull inflation.
Firms / exporters have less incentive to cut costs because
they can rely on the devaluation to improve
competitiveness. The concern is in the long-term
devaluation may lead to lower productivity because of the
decline in incentives.

2. Reduces the purchasing power of citizens abroad. e.g.
more expensive to go on holiday abroad.

3. 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.

4. If consumers have debts, e.g. mortgages in foreign
currency – after a devaluation they will see a sharp rise in the
cost of their debt repayments. This occurred in Hungary when
many had taken out a mortgage in foreign currency.
The impact of a devaluation depends on many factors:
The state of business cycle – In a recession a devaluation
can help boost growth without causing inflation. In a boom
a devaluation is more likely to cause inflation.
Elasticity of demand. A devaluation may take a while to
improve current account because demand is inelastic in
the short term.
If the country has lost competitiveness in a fixed exchange
rate, a devaluation could be beneficial in solving that
decline in competitiveness.

SAY NO TOO DEVALUATION OF NAIRA, it not good for Nigeria cause the demerits it felt more. we don't have the significant export to enjoy devaluation.


Thanks

End time naira

When policies of CBn are devaluing the naira already , what is the best solution to the situation?