Hidden Clauses of Devaluation

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Last week, Sam, a worker at Grand Cereals Limited received his monthly paycheck of fifty-five thousand naira (55,000). Almost everywhere in the world, paychecks are considered a guest of some great repute. Luckily, Sam had only himself to fend for. With an unequalled financial confidence, Sam took a walk to the store down the street. As usual with him, he picked up all his basics; A bag of semovita, 10kg bag of rice and some other items.

“Oga Sam, your money is forty-six thousand naira (46,000) Sir”, the store attendant said to him. A year ago, he had bought the same set of items for only twenty-two thousand naira (22,000).  In the field of economics, a rise in the prices of goods and services is called “inflation”.

In simple term, inflation is the persistent rise in the prices of goods and services. inflation dwindles the local consumers capability to buy more commodities and services. Last week, I delved into an area titled “Devaluation; The Gospel of Foreign Lenders”. What has this got to do with anything? Click on the link below to get a quick foundation; https://kogireports.com/devaluation-the-gospel-of-foreign-lenders/.

In the real sense of living, nothing happens by coincidence.  Unfortunately, inflation doesn’t leave the local consumers wealthy. From the story told above, it is safe to conclude that Sam is right now twice as poor compare to a year ago.

However hard the government try to keep it sealed, devaluation does not only increase inflationary rate in a given economy. Alongside, devaluation renders exports cheaper and ensures that imports becomes much more expensive. In the jargons of economics, it is assumed that foreign buyers will in the event of devaluation be propelled to buy more.

Of course, the argument is that; Aggregate Demand (AD) will get an instant increase. But many have argued that devaluation is a necessary evil for a thriving economy especially one with catalogs of debts. Perhaps, the underlying tricks is that while devaluation propels inflation in the local market, this is not the case for foreign buyers. Instead,  they get to enjoy a favourable balance of trade.

Frank Hollenbeck from the Mises Institute brings to light some of the issues associated with currency manipulation and its effects on domestic producers, consumers, and Central Banks. Does devaluing currency really help exporters? Yes, this in fact is true owing to the fact that local sellers can export more of their goods to foreign buyers. However, the problem with most developing nations is that they rarely have anything to export. Even when they eventually do, the items exported are usually raw materials such as crude oil, unrefined gold e.t.c. In essence, even though devaluation portends some very unusual form of economic come-back strategy, Like Nigeria, our economic indices does not allow for a win win situation. I think that it is time to ask Africans about their own model of solution instead of imposing one.

Up next, Finding a way around devaluation

– Olayinka Kayode Kingsley
Email: olayinkakayodekingsley@gmail.com

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