There's been a lot of argument on Nairaland in the last 24 hours over the new CBN Forex Policy. Some have argued that it is a devaluation, asking why Buhari stubbornly refused to devalue the naira before, only to do so now. Others say it is in no way a devaluation. I'm not an Economist, so I decided to do some research, after all, we learn every day. I found some interesting articles that might throw a little more light on the matter.

Devaluation and Depreciation Definition

In general, everyday use, devaluation and depreciation are often used interchangeably. In fact for A Level economics it is not absolutely essential to distinguish between the two, but there is a distinct difference and using them correctly is good practice.

Essentially devaluation is changing the value of a currency in a fixed exchange rate. A depreciation is reducing the value in a floating exchange rate.

Definition of Devaluation

A devaluation is when a country makes a conscious decision to lower its exchange rate in a fixed or semi fixed exchange rate. Therefore, technically a devaluation is only possible if a country is a member of some fixed exchange rate policy.

For example in the late 1980s, the UK joined the Exchange Rate Mechanism ERM. Initially the value of the Pound was set between say 3DM and 3.2DM. However, if the government thought that was too high, they could make the decision to devalue and change the target exchange rate to 2.7DM and 2.9DM.

Definition of depreciation

When there is a fall in the value of a currency in a floating exchange rate. This is not due to a government’s decision, but due to supply and demand side factors. (Although if the government sold a lot of their currency they could help cause a depreciation.)

For example, the dollar has depreciated in value against the Euro during the last 12 months. This is due to market forces, there is no fixed exchange rate target for Euro to Dollar.

The problem is that in ever-day use, people talk about a devaluation in the dollar, when, technically speaking, they mean a depreciation in the dollar.

http://www.economicshelp.org/blog/355/trade/devaluation-and-depreciation-definition/

Found some more info on the topic.

Depreciation of Currency: Let us start with the meaning of the term depreciation of the currency. Depreciation of currency happens in those currencies which are linked to floating exchange rate and it is likely to change / vary on day to day basis (in actual practice popular currency rates change almost every few minutes / seconds). A floating exchange rate means that the global investment market determines the value of a country's currency. These countries allow supply and demand to determine the value of their currency relative to the currencies of other countries. Depreciation occurs when the forces of supply and demand cause the value of their currency to drop. To check the high volatility, as a prudent measure, almost all central banks of the respective countries try to influence the exchange rates through various means so as to curb such volatility, yet in the end it is the free market that determines the exchange rate of all the currencies linked to floating exchange rate. These days all major economies use a floating exchange rate. Thus, Appreciation / Depreciation (only marginal change) of all such currencies regularly occurs number of time during the period market remains open.. It is only in rare cases, that currency depreciates or appreciates by a wide margin. Such changes happen if something major happens on economic / political front of such country or in the global markets. If a country’s currency has depreciated it will mean that this country's money has less purchasing power in other countries because of the depreciation.


Devaluation of Currency : Devaluation of a currency happens in countries with a fixed exchange rate (or also where it is managed floating rate). In a fixed-rate economy, it is the government that decides what its currency should be worth compared with that of other countries. In this case, usually the government pledges to buy and sell as much of its currency as needed to keep its exchange rate the same. The exchange rate can change only when the government decides to change it. If a government decides to make its currency less valuable, the change is called devaluation.

http://www.allbankingsolutions.com/Banking-Tutor/Depreciation-vs-Devaluation-of-Currency.htm

What is the impact of depreciation or devaluation of the currency on economy of the country:

Broadly speaking both have similar impact in the short term. Both of these (i.e. depreciation or devaluation) help the companies which are exporting goods as a drop in the value of the home currency allows the other countries to import goods at a cheaper price from the country whose value has depreciated / devalued. Thus, exports from country whose currency has devalued / depreciated are likely to increase. On the other hand, the citizens will find it costly to buy goods which are imported from other countries as such goods will become costly. Thus, this is likely to benefit the economy to remain competitive in the international market. These events are good for companies that sell the goods produced from domestic raw material, and also to companies that export to other countries.

A drop in home currency exchange rate makes it more expensive for local people to buy goods from other countries, as import of such goods becomes costlier after depreciation / devaluation. Thus, they will either buy more goods manufactured by domestic companies or reduce their consumption of goods from abroad.



Long Term Impact of Depreciation or Devaluation of the Currency :

Depreciation of the currency is a slow process and value of the currency automatically gets adjusted by the market forces. Thus, once the currency of a country has depreciated, the investors from other countries will see an opportunity and are likely to shift from other economies. This will help in boosting the economy which may in the long run even push back the value of the currency.

On the other hand in case of devaluation, there is less trust in the economy and once currency is devalued, Government finds it very difficult to revalue the same by government dictate as there will be fear that such revaluation can backfire and put the economy in risk mode.

http://www.allbankingsolutions.com/Banking-Tutor/Depreciation-vs-Devaluation-of-Currency.htm