‘Persistent currency devaluation hurts African nations’

Against the backdrop of growing calls in some quarters for the Central Bank of Nigeria (CBN) to devalue the naira, a financial expert has warned of the dangers of oil exporting African countries such as Nigeria embarking on such a move. The Founder, Managing Director and Senior Financial Analyst, Thaddeus Investment & Research Ltd, Mr. Jude Fejokwu, stated this in a note made available to the New Telegraph.

He argued that while devaluation would lead to the generation of much needed income for some countries; it would hurt their economy in the long run. The expert said: “I agree that revenue will come into the country in local terms (assuming constant demand.) Continual devaluation of African currencies portends serious danger for African economies.” Besides, he noted, “Devaluation leads to a currency being dumped by even those who do not need dollars. Why? No one wants to hold a currency that does not hold value.

The devaluation creates an expectation of future near term need to devalue further and this puts sell pressure on the local currency as all sorts of people seek a currency that has and holds its value.” Most oil exporting countries in Africa according to him are import- dependent. He said, “Oil is their major export, which is transacted in dollars. The devaluation of the currency leads to more expensive imports of goods and services into the local economy and this is almost always passed on to the defenceless consumer.

“This leads to higher inflation, which impacts other goods and services that are not even imported as citizens strive to hold onto their profits in a rising price economy. This act does encourage more exports as buyers can buy same quantities for less. Exporters receive less of a currency on average that is already losing value due to inflation across board.” Indeed, Fejokwu argued that inflation fuelled by devaluation usually encourages consumption and leads to a reduction in savings.He said, “When people do not save, they cannot invest and investment is needed to move any country’s economy progressively forward.

Recurrent expenditure becomes the major drainer of funds instead of capital expenditure as people are more interested in using the currency that does not hold value instead of keeping it.” Instead of oil dependent African countries continually devaluing their countries, Fejokwu averred that such countries, “should pursue diversification to reduce reliance on one commodity for revenue in addition to encouraging a culture of saving when commodity prices are high.” He added that this serves as a buffer during low commodity prices,” as is the case in Saudi Arabia that is even selling more oil now than before as it strives to keep its market share.”