Currency Devaluation Has Negative Impacts On Developing Nations – Dr. Thompson

The Chairman and Chief Executive Officer, CEO, Safewater Energy and Environmental Restoration, SWEER Global, Dr Thaddeaus Thompson has said that Federal Government’s decision to devalue the Naira was a big mistake.

Just as Nigerians continue to tackle the harsh economic realities, Thompson made it known during an interview with Vanguard. He expressed concern over the unwavering inflation trend that continues to draw the economy backwards at all business levels between Nigerian and other African countries.

He noted that the currency’s devaluation has adverse impact on developing nations particularly African countries that “produce less to nothing”.

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He said: “It is true that devaluing a country’s currency helps reduce imports and monies owed by the country to foreign trade partners. It also minimises direct borrowing and curtails unnecessary spending on foreign goods.

“Judging from these standpoints every citizen on the borrowing side shares the blame for the consequences that devaluation of currency often brings – ardent poverty. A critical look at the assumptions and subsequent decisions that led to the devaluation of the Naira shows that there were flaws in the decision-making process.

“Devaluation of currency has often had a negative effect on developing nations, especially African countries that produce less to nothing compared to developed nations. Nigeria’s decision to devalue the Naira without taking into consideration its position as a non-supplier nation was a mistake.

“If say a school plans to raise funds by selling raffle tickets to the public at a school outdoor event and decides to devaluate the items it wants to sell, the visitors can buy more items with less money and the school will lose for reducing the prices of the items on display. This scenario might seem unrelated to foreign trade, but it does.

“Those who thought devaluing the Naira will increase purchases from Nigeria made a huge mistake because this works only if the country has a high supply tendency or high demand for its goods abroad. It works well for China to devalue its currency because it’s the world’s leading producer of tangible goods.

“China is a high supply nation. Nigeria does not have the same tendency as China, therefore, devaluing its currency will benefit countries buying from Nigeria and not the Nigerian economy.

“If the Naira price of goods is set below a level that enables the nation to cover its costs of acquiring the goods and services sold in the country, the nation will lose money.

“While the government’s scheme of undervaluing the Naira will indeed increase the volume of sales made in Nigeria, this scheme results in the nation, on the net, transferring economic value to the country’s trading partners ra ther than the nation getting net economic value from those trading partners.

“So, the traders gain because the undervalued Naira subsidizes their consumption. Further, because the nation does make more sales, also reaping benefits are the people paid to work at the production facilities, as well as the stockholders who supply the goods sold in the country, which in today’s circumstance is the foreign countries, such as China, US, Germany, Britain, and Brazil (Nigeria’s main trading partners). But without question, the nation itself is made poorer.”

He (Thompson) also pointed that, “Think of Dollar and Yuan as currencies that Nigerians use to buy Chinese and American goods. The Federal Government of Nigeria agreeing to undervalue its currency in terms of foreign currencies is actually subsidizing the consumption of foreigners who purchase its country’s exports. As a few of its citizens make gains by working to supply goods for export, currency undervaluation makes most of the nation’s citizens poorer.

“If, for example, Nigeria successfully arranges for foreign traders to purchase Nigerian Naira at below-market prices, Nigerian exports to foreign countries will indeed rise, and foreign exports to Nigeria will fall.

“Foreign firms that sell more to Nigerians will reap large benefits while Nigerian firms whose sales fall as a result of the undervalued Naira will suffer.

“Nigerian exports to foreign countries have not risen to substantiate any claims of success. And even if there is anything visible to be proud of as export gains, which I doubt exist, the Nigerian people as a whole have become poorer by an undervalued Naira.

“After all, to produce additional goods to ship to foreign countries require real resources. These goods are not crafted literally out of money; they are real resources that must come from somewhere. They come from the Nigerian people who, because of the undervalued Naira, can purchase for their own use fewer goods and services than otherwise.”

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He stated that;

“Also, despite visible losses of some foreign firms, the foreign traders as a whole will be made richer by an undervalued Naira. After all, foreign buyers – final consumers as well as foreign firms that use Nigerian imports as inputs in production – are the lucky recipients of the additional resources that Nigeria’s currency policy extracts from the impoverished Nigerian populace.

“The real costs of goods exported to foreign countries by Nigerians are not lowered simply because Nigeria keeps artificially low the dollar price of its currency – Naira – that foreign traders use to purchase goods and services in Nigeria.

“Indeed, because any “successful” undervaluation of the Naira relative to foreign currencies artificially drains real resources out of Nigeria and into foreign countries, such undervaluation impoverishes Nigeria as it enriches its foreign trading partners.”

Source; Ghgossip.com

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