Devaluation is the deliberate downward adjustment of the value of a country’s money relative to another currency, group of currencies, or currency standard (for NG this would be USD, GBP, and EURO). It is a monetary policy tool to combat trade imbalance.
Devaluation helps to reduce the cost of a country’s exports, thereby rendering them more competitive in the global market, which in turn increases the cost of imports so domestic consumers are less likely to purchase them, further strengthening domestic businesses.
So basically exports increase and imports decrease, and the government uses devaluation as a tool to discourage importation.
While devaluing a currency may be an attractive option, it can have negative consequences. Higher exports relative to imports can increase aggregate demand which can lead to higher Gross domestic product and inflation.
The Nigerian inflation rate as of Oct 2019 stood at 11.61, an all-time high from 11.28 in January. If devaluation occurs, the rate will increase.
The Naira was devalued in 2016/2017 with an all-time high exchange difference of N500 to $1.
What does this mean to you as an investor?
- The purchasing power of the Naira will be greatly reduced hence you would be better off buying more of foreign currency now that the naira has a higher purchasing power.
- Any investment with a rate lower than the current inflation rate 11.61 will do no good in protecting the Naira against inflation. It will only further erode purchasing power.
- As an investor, there is no better time than this to invest in foreign currency denominated assets – Investing in Rise is a good place to start.