Business/Economy

EXCHANGE RATE DEPRECIATION: THE GOOD, BAD AND UGLY

      

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     Evidence abounds in the economic literatures on the double-edged sword nature of exchange rates, as there are victims and beneficiaries of the exchange.. Its management varies from one economic agent to the other. These include the household, businesses, as well as government; the custodian of a country’s economy.
      Exchange rate devaluation, or depreciation could be refered to as a calculated attempt by a country to either conserve foreign exchange by making imported goods costlier and less attractive -thereby making the inhabitants develop less appetite for imported goods and patronise locally made goods instead- or an  attempt at generating foreign exchange by making locally produced goods more attractive in the global market. Against this backdrop and the desire to guarantee the allocative efficiency of economic resources, Nigeria’s as well as many other countries economies have been liberalized. An example of the repercussion of that status quo is the abysmal depreciation of the naira against the dollar from about N0.75/$1 in 1985 to as low as N160/$1 in 2013. This is all  courtesy of economic mismanagement.
         Like the game of football that can end in losing/winning or drawing, exchange rate position (depreciation in this case) can make the gainer gain more and the loser lose more. The gainers in exchange rate depreciation are: exporters of domestic goods who sell at international price and convert the proceeds to local currency, thereby getting richer. Given the reltively  lower prices, foreign companies who source for their inputs or raw materials in our local economy also gain as they need little foreign exchange to secure a greater number of commodities. The Nigerian government also gains more foreign exchange in oil earning since the price of crude oil is quoted in dollars. For example, $1billion oil earning translates to N160billion given exchange rate of N160/$1. Foreigners who come for holiday; schooling; business etc, are not left out, as the little foreign exchange they bring translates into more local currency. Moreover, Nigerians in the diaspora are also the beneficiaries of exchange rate depreciation as their little earning overseas converted to local currency makes them richer than their kinsmen and women residing in the country. 
        The losers of exchange rate depreciation are: manufacturers whose inputs or raw materials are imported. This is because they need more foreign exchange for the importation of equipments, semi- finished goods and raw materials. This translates into higher costs of production, which in turn prompts higher prices for the finished goods and subsequently,  low patronage. Nigerians seeking to travel abroad either for pilgrimage, excursions, business trips, holiday, etc suffer, as they pay more local currency to cover international air fares.  The economy bears the burden,  since ‘dollarization’ of local currency has become a business of sorts for some unscrupulous elements. The assumption that the depreciation of currency generates more foreign exchange inflow especially in the non-oil sector has been proved contrary. This is not unconnected to the fact that Nigerian non-oil exports are majorly primary products, which have low income elasticity of demand, coupled with volatile prices.
      However, portfolio investment is immune to exchange rate shock and portfolio investors are less likely to be affected by such volatility. This is due to the self regulated, inbuilt mechanism that is the driving force of portfolio investment. Contrarily, Foreign Direct Investment (FDI) is vulnerable to exchange rate volatility. Therefore, foreign direct investors must invest in projects that are foreign exchange intensive, that is, investments that will generate foreign exchange in return.

Nurdeen Azeez
E-mail: lanreazeez@gmail.com

Nurdeen is an avid writer and researcher, as well as the helmsman at his own business, which offers economic solutions and consultant services. Read more about this below:

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Maasalam,
HSMx

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