In other words, a devaluation is a decline in the country's standard of living. Traditionally, it is a tool used by a desperate government with a poor economic policy. - http://www.economist.com/blogs/buttonwood/2013/02/currencies

A devaluation occurs in a fixed exchange rate. A depreciation occurs in a floating exchange rate system. Both mean a fall in the value of the currency. e.g. a devaluation in the Pound means it is worth less Euros.

Effects of a devaluation
1. Exports cheaper. A devaluation of the exchange rate will make exports more competitive and appear cheaper to foreigners. This will increase demand for exports

2. Imports more expensive. A devaluation means imports will become more expensive. This will reduce demand for imports.

3. Increased AD. A devaluation could cause higher economic growth. Part of AD is (X-M) therefore higher exports and lower imports should increase AD (assuming demand is relatively elastic). Higher AD is likely to cause higher Real GDP and inflation.

4. Inflation is likely to occur because:

Imports are more expensive causing cost push inflation.
AD is increasing causing demand pull inflation
With exports becoming cheaper manufacturers may have less incentive to cut costs and become more efficient. Therefore over time, costs may increase.
5. Improvement in the current account. With exports more competitive and imports more expensive, we should see higher exports and lower imports, which will reduce the current account deficit.



Evaluation of a Devaluation
The effect of a devaluation depends on:

1. Elasticity of demand for exports and imports. If demand is price inelastic, the a fall in the price of exports will lead to only a small rise in quantity. Therefore, the value of exports may actually fall. An improvement in the current account on the Balance of Payments depends upon the Marshall Lerner condition and the elasticity of demand for exports and imports

If PEDx + PEDm > 1 then a devaluation will improve the current account
The impact of a devaluation may take time to have effect. In the short term, demand may be inelastic, but over time demand may become more price elastic and have a bigger effect.
2. State of the global economy. If the global economy is in recession, then a devaluation may be insufficient to boost export demand. If growth is strong, then there will be a greater increase in demand. However, in a boom, a devaluation is likely to exacerbate inflation.

3.Inflation The effect on inflation will depend on other factors such as:

Spare capacity in the economy. E.g. in a recession, a devaluation is unlikely to cause inflation.
Do firms pass increased import costs onto consumers? Firms may reduce their profit margins, at least in the short run.
Import prices are not the only determinant of inflation. Other factors affecting inflation such as wage increases may be important.
4. It depends why the currency is being devalued. If it is due to a loss of competitiveness, then a devaluation can help to restore competitiveness and economic growth. If the devaluation is aiming to meet a certain exchange rate target, it may be inappropriate for the economy.

http://www.economicshelp.org/macroeconomics/exchangerate/effects-devaluation/

Certainly, devaluations amid crisis can contribute to and are very often associated with significant economic contractions. History is quite clear on this point. The interesting question concerns what happens next. Take an economy that has been enjoying a boom backed by large capital inflows, and which then faces a sudden stop, capital flight, and crisis. Foreign lenders had been willing to finance a consumption and investment boom, but for one reason or another they panic and demand to be repaid. To repay foreign loans, the once-booming economy must export more than it imports. To do this, it must raise exports, which requires an improvement in competitiveness relative to trading partners, which requires a reduction in wages and/or an increase in productivity. And it must reduce imports, which requires a reduction in purchases of foreign goods. How will this adjustment take place?

Certainly not painlessly, no matter how one proceeds. But the argument for devaluation is that the pain can occur relatively quickly. A big currency depreciation instantly hits consumer purchasing power and reduces wages. Purchases of foreign goods quickly fall because prices of foreign goods quickly soar. The pace of adjustment will depend on how quickly domestic industries pivot toward import replacement and exporting. But to analyse episodes of devaluation is to see a lot of steep lines: sudden plunges in output and fast, V-shaped recoveries, and sudden jerks in the current account from large negative numbers to near-zero or positive ones.

Absent devaluation, the path is slower. When the party ends, domestic firms and households can no longer afford to buy domestic goods and services, and foreigners aren't interested in buying overpriced goods and labour. So...firms go bust and unemployment rises. With lots of unused industrial capacity and crowds of unemployed workers, prices and wages slowly decline. More flexible labour markets with lots of room for productivity growth will adjust faster than stodgier economies. But the pace of adjustment is likely to be slow. You get the steep side of the drop on the way down, and then you get a few years of sideways movement while unemployment drags down wages, and then you get the lift as exports pull the economy back toward potential.

The worry, of course, is that the slower route will result in a lot of needless pain: that there are risks to devaluation, but they're likely to be worth the faster adjustment, and that the pain of the slower route might be bad enough that the economy gives up on the hard road and devalues anyway. Or worse; long, grinding depressions have been known to produce nastier things than high unemployment.

So again, the argument is not that when a country faces a balance-of-payments crisis and devalues it somehow gets off scot free. Rather, it's that adjustment is typically much faster and easier and carries less political economy risk (including the possibility that devaluation may ultimately be necessary anyway). I did not think this was a particularly controversial view, and it seems that Mr Cowen's view—that there is open controversy—is rooted in the belief that I'm arguing a different point.

http://www.economist.com/blogs/freeexchange/2012/07/devaluation

IMPACT OF RECENT VALUATION OF VENEZUELA, A SIMILAR ECONOMY WITH NIGERIA

When Venezuela devalued the Bolivar Fuerte just a little over a week ago, we suspect that it may have been yet another step in a slow dance of continued economic deterioration. The authorities devalued the currency from 2.15 bolivars per dollar to a new dual exchange rate scheme where essential goods, such as certain food and medicine, would be traded at 2.6 bolivars per dollar and non-essential goods would trade at 4.3 bolivars per dollar. The move to sharply devalue the currency, despite last year's continued pledges by the authorities to maintain the peg, is likely to have significant implications on fiscal, inflation and economic growth fronts. While a devaluation can often boost domestic activity, the first details from Venezuela's devaluation leave us concerned that it is unlikely to stop the steady deterioration in the business climate that we have seen in recent years.

Impact on Activity

A devaluation can often boost economic activity as it supports exports, while channeling resources to domestic industry which may gain the upper hand over now much more expensive imports. On the flipside, when the move is first announced, it may weaken confidence of local agents who fear that the devaluation from a fixed exchange rate regime represents a broken promise and may lead to concerns that additional policy moves could be announced, creating even greater uncertainty. In the case of Venezuela, we expect that the benefits normally associated with a devaluation - namely the realignment of relative prices and incentives for domestic producers - are likely to be limited, and hence we doubt that Venezuela's manufacturing base will see an important jump start in 2010 from the measures announced at the beginning of the year.

Our cautious stance on the Venezuelan economy is based on three reasons:

First, we suspect that current exporters are unlikely to get a significant boost from the devaluation. Venezuela's export basket is dominated by oil, whose production is unlikely to be helped significantly by the devaluation. According to the latest available data, Venezuela's exports were 94% oil in 2009. There is little currently being exported by Venezuelan manufacturers or from the agricultural sector.

Second, we suspect that any potential exporters may be deterred by the adverse business climate. In theory, local industry could use the devaluation to invest in building capacity for export-oriented production. But given the track record of the authorities - including regulatory pressure and expropriations - the risks associated with rebuilding industrial capacity may outweigh the short-run benefits of a more competitive exchange rate. It is no coincidence that Venezuela ranked 177th out of 183 countries in the World Bank's latest Doing Business survey that measured the hospitability of a country's business climate during 2009. Thus, we suspect that industry in Venezuela may not benefit from the weaker exchange rate, breaking one of the channels that often helps to boost activity in the aftermath of a devaluation.

Finally, we suspect that the negative impact of the devaluation on investment may prove to be a drag on activity. While we suspect that the devaluation may not bring industrial exports back to Venezuela, it is reasonable to expect that imports will be hurt. While diminishing imports can represent a positive contribution to growth as local production picks up the slack, we are most concerned by the potential negative impact on the imports of capital goods, a crucial component for domestic investment. Indeed, we suspect that to the extent that the devaluation makes capital and intermediate goods more expensive, it may harm existing industry further.

Could there be an alternative channel whereby the devaluation helps to strengthen activity in Venezuela? For that, we need to examine the fiscal impact of the devaluation.

Fiscal Impact

The devaluation significantly improves Venezuela's near-term fiscal outlook. The biggest boost to the fiscal accounts comes on the back of the higher local currency value of the state oil company's oil exports. After all, the authorities have dubbed the devalued exchange rate ‘the oil dollar' because state oil company PDVSA will receive 4.3 bolivars for every dollar sold to the central bank. On top of near doubling the local currency value of the oil revenues, an additional benefit to the state oil company of the two-tiered exchange rate regime is that imports of inputs are set at the new 2.6 exchange rate. And the benefits to the state oil company should also translate into an overall fiscal boost, given our estimate that 55% of all fiscal revenues are tied to oil. Indeed, all else constant, we estimate that the devaluation would reduce Venezuela's fiscal deficit to -2% of GDP from -7% of GDP. However, we suspect that all else will not be constant - we suspect the authorities may boost fiscal spending ahead of September's parliamentary elections.

We are revising our fiscal balance forecasts, respectively, for 2010 and 2011 to -3.2% of GDP (from -7.2% previously) and -2.0% (from -5.9% previously). While the authorities may boost spending ahead of parliamentary elections, we still expect the devaluation to significantly improve Venezuela's overall fiscal outlook, at least in the short run. The boost to fiscal spending could have a positive impact on economic growth, either through public works projects or higher public sector wages.

However, we suspect that, while positive, the effects of improved fiscal position on economic activity will remain limited. Indeed, if history is any guide, the relationship between fiscal spending and economic activity may not be robust. In the past few years, we have observed periods of joint fiscal and economic expansion, fiscal expansion without growth and growth without fiscal expansion. The lack of a clear historical relationship does not mean that it does not exist, but it does make us less comfortable in our assessment of the likely impact of any fiscal expansion. As for public works - that impact is more uncertain, given the issues with efficiency of execution of any planned projects.

Financing Needs

While the fiscal improvement may have limited growth effects, we expect it to help with Venezuela's financing needs. Markets have penalized Venezuela during the global recession, but we suspect that Venezuela's debt service obligations will remain manageable during 2010 and 2011. We estimate that Venezuela should have US$6.2 billion in financing needs this year and US$4.7 billion in 2011. To finance that gap, the authorities can rely on international debt markets or internal sources, such as the US$35 billion in international reserves or US$25.1 billion in other assets. To the extent that the fiscal improvement translates into stronger capacity for debt service, we suspect that the near-term effect of the devaluation should be positive for the markets. Indeed, our colleagues in EM Strategy believe that the dollar-denominated debt in the short end of the curve will see the great part of the benefits of the higher fiscal cushion and manageable financing needs (see "Venezuela: The Rally and The Risks", EM Strategy Update, January 12, 2010).

Inflation Impact

The short-term impact of the devaluation may be the improved fiscal position and strengthened position to service debt, but in the longer term, the key challenge for Venezuela in the aftermath of the devaluation is likely to be inflation. Despite the announcement by the authorities that they will expropriate businesses found raising prices in the aftermath of the devaluation, we suspect that inflation pressures may rise in the months ahead.

We are most concerned that Venezuela may see a significant increase in imported inflation. Venezuela is highly reliant on imports for a range of goods, from food to cars. The country's largely underdeveloped agricultural and manufacturing sectors historically have suffered a paucity of investment, as the majority of internal and external capital was focused on developing the energy industry. With such a high reliance on imports, the devaluation of the currency should, over time, have a significant impact on the price of consumer goods in the domestic market.

We expect the devaluation to raise inflation by nearly 10pp during the course of 2010. To fully assess the inflation impact of the devaluation, we have to consider the details of the multiple exchange rate regime in Venezuela. We estimate that near 56% of Venezuela's imports in late 2009 were made at the parallel exchange rate. For the goods that continue to trade at the parallel exchange rate, the devaluation has no inflationary impact. However, the goods that were imported at the official 2.15 exchange rate - roughly 44% of all imports - will now be imported at the 2.6 rate for essential items or the 4.3 rate for non-essential goods. For non-essential items, the great majority of items that are traded at the official rate, the devaluation means that the local currency price of these goods should double. Of course, the pass-through is usually less than 100%, but anecdotal evidence from local businesses suggests that in Venezuela the pass-through could reach as high as 50%.

To better summarize the inflation impact of the devaluation, we built an effective exchange rate using import shares as weights for the parallel exchange rate and the official exchange rates. We find that the devaluation and the continued depreciation of the parallel exchange rate mean that the effective exchange rate has weakened by near 20%. With 50% pass-through from exchange rate to inflation, we expect this move to add nearly 10pp to headline inflation in 2010. We are now forecasting inflation to reach 45.0% in 2010 versus 38.5% previously.

Of course, our initial work on the inflationary impact is fraught with difficulties. There is significant risk that many goods may continue to be imported at the parallel market rate (currently above 6.0). There has been talk that the authorities will reduce the amount of dollars they make available at the official exchange rate - perhaps as much as a 40% reduction in dollar sales according to some local news accounts - potentially pushing some imports from the official rate of 4.3 into the parallel market with clear inflationary consequences.

Bottom Line

There is little doubt that Venezuela's fiscal accounts will be a major beneficiary of the devaluation announced at the beginning of the year. While increased spending ahead of key elections scheduled for September may erode some of the initial fiscal improvement from the devaluation, the new exchange rate should provide a much-needed boost to the public sector. Whether this has any positive impact on real economic activity will turn in part on the magnitude of the inflationary increase. Our greatest concern is that, aside from the boost to nominal government spending, the other traditional channels that allow a devaluation to improve economic activity are largely absent. With a tiny non-oil export sector and an adverse business climate, we doubt that the new exchange rate regime will do much to boost exports or spur investment in domestic industries. Without a revival of private investment and with the specter of still higher inflation, we think the devaluation is unlikely to do much to reverse Venezuela's path of continued macro deterioration.

http://www.morganstanley.com/views/gef/archive/2010/20100120-Wed.html

My conclusion

Devaluation should be the last resort and not a top of the list option as in the case of the clueless CBN and FG.

Nigeria being a monoeconomy with an unfavourable balance of payment, the best the FG could have done was to establish and personally manage industries with the highest import e.g Rice, Fruit, consumer goods etc as it is obvious that the commercialisation policies designed to encourage local production of these products are not working as no entrepreneur is willing to take the risk and invest heavily in the industries due to unpleasant competition with importers in the same industries who would rather trade quality for quantity at the expense of local producers. The government could however commercialise or totally privatise the companies established after a predetermined number of years.

(c) Ayobami 2014

It is very certain, you don't have knowledge of economics. You should have kept mum rather than exposing your ignorance. Try to understand the Nigeria's economy and the rationale behind the devaluation of naira and other changes in monetary policy....

benebaby77:
It is very certain, you don't have knowledge of economics. You should have kept mum rather than exposing your ignorance. Try to understand the Nigeria's economy and the rationale behind the devaluation of naira and other changes in monetary policy....

Educated people do not attack the personality but the topic and it is however obvious that you are an educated illiterate. If you disagree with the post or my conclusion, you can bring on your defence and debate it and not attack the personality. If Nigeria is overpopulated with people like you, then God help Nigeria.

In future, attack the topic and not the personality. Work on your ethics

BTW, i have forwarded the materials you requested for.

Cheers!

benebaby77:
It is very certain, you don't have knowledge of economics. You should have kept mum rather than exposing your ignorance. Try to understand the Nigeria's economy and the rationale behind the devaluation of naira and other changes in monetary policy....

u tht knw it why didnt u tell us hw it works rather than attacking peopl who tried their best this is exactly d type of peopl we hv as leaders APC v PDP (attacking without bringing solution)

My brother the devaluation was in evitable, you cant blame CBN. Our sole dependence on oil has exposed us to the fluctation of the international oil market. i just hope we learn from this.

During the 70's oil boom our currency was higher. We were just caught napping

hayoakins:


Educated people do not attack the personality but the topic and it is however obvious that you are an educated one. If you disagree with the post or my conclusion, you can bring on your defence and debate it and not attack the personality. If Nigeria is overpopulated with people like you, then God help Nigeria.

In future, attack the topic and not the personality. Work on your ethics

BTW, i have not forwarded the materials you requested for.

Cheers!

Educated illiterate and Ignorance!

So you guys saw my request for the materials, and you chose to neglect. I have been asking for these materials over two weeks, so tey I come be like street beggar, none seemed concerned.

Anyways, thanks for the materials
May God bless you

benebaby77:

Educated illiterate and Ignorance!

So you guys saw my request for the materials, and you chose to neglect. I have been asking for these materials over two weeks, so tey I come be like street beggar, none seemed concerned.

Anyways, thanks for the materials
May God bless you

"Educated ignorant" you meant

you chose to neglect...You sure know people were busy burning candles right, don't always base your conclusion on invalid and insufficient evidences. Btw, did you mention me? i guess not.

hayoakins:


"Educated ignorant" you meant

you chose to neglect...You sure know people were busy burning candles right, don't always base your conclusion on invalid and insufficient evidences. Btw, did you mention me? i guess not.

Educated illiterate and ignorance, I meant.
Educated ignorant ( both words are adjective)
, take note please.
I intentionally omitted some words there to avoid using foul words.

But wait oooo, are people still using candle to read
? Lip sealed

benebaby77:
whizqueen, dereformer, hayoakins, strongpenis and others, please I need the ICAN study packs/materials on knowledge and application level.
This is my e-mail: benebaby@gmail.com
Thanks, may God bless you

Of course, I mentioned your name... But all una feel ontop of the world because of that materials.
Thanks sha; and I'm sorry for attacking your personality.

Very soon we too will be talking about trillions like Zimbabwe and Ghana.

benebaby77:


Educated illiterate and ignorance, I meant.
Educated ignorant ( both words are adjective)
, take note please.
I intentionally omitted some words there to avoid using foul words.

But wait oooo, are people still using candle to read
? Lip sealed

Of course, I mentioned your name... But all una feel ontop of the world because of that materials.
Thanks sha; and I'm sorry for attacking your personality.

But all una feel on top of the world because of that materials? lip sealed

Nigeria's going south pretty fast.

Balance of Payments in Nigeria
http://articlesng.com/balance-payments-analysis-development-nigeria/