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How Import Substitution Can Alleviate Pains Of Devaluation

There are several reasons nations devalue their currencies. Some devalue currencies to combat trade imbalance. Others devalue their currencies to enable their exports to become less expensive and competitive globally.
 
This makes imports more expensive, such that local consumers are less likely to purchase them. Some industrialized nations devalue their currencies based on the dynamics of the global currency markets
 
Some less developing nations, however, devalue their currencies to correct past economic mistakes and decrease the volatility of their currencies. Nigeria belongs to this category of nations in its currency devaluation endeavor.

Nigeria has been an import-dependent economy for more than four decades relying on crude oil for almost 80 percent of its foreign exchange (forex).
No wonder it has recorded fewer confirmed cases of Covid-19 when compared to other countries but the global pandemic’s growing impact on its economy is far more significant.
As an oil major, while global demand drops drastically in the wake of the outbreak, Nigeria’s economy is being caught in the crosshairs. Essentially, with oil being Nigeria’s biggest export, the government relies heavily on the resource for dollar earnings to fund its national budget. With this year’s $35 billion budget passed with a benchmark oil price of $57 per barrel, Africa’s largest economy cannot currently fund its budget.

The Central Bank of Nigeria (CBN) last Friday, officially devalued the naira to N380 to a dollar. The devaluation came after over three years of push from financial market managers, the World Bank and the International Monetary Fund for the local currency to be devalued.

Analysts, operators, and investors argued that as long as crude oil remains a major source of revenue for Nigeria, and the economy is mismanaged, there would be volatility in its forex earnings.
To break the jinx, stakeholders at the weekend called for a deepening of the nation’s import substitution as a foil to the negative effects of the recently adopted naira devaluation policy of the Central Bank of Nigeria (CBN).

The stakeholders, who spoke on the new value of the legal tender, insisted that the decision provides an opportunity for business managers and entrepreneurs to replace costly imports with cheaper, locally made goods.

According to them, the current situation affords Nigerians the opportunity to embrace import substitution and reduce the demand pressure on foreign exchange by importers and ultimately conserve the nation’s hard-earned reserves.
Specifically, an economist, Johnson Chukwu, in a telephone interview with The Guardian, argued that it would be sub-optimal to continue to heavily deplete the country’s reserves in defending the naira and as neither the CBN nor the Federal Government is in control of the major factors causing the depreciation of the nation’s currency

According to him, sustained pressure on the reserve, in addition to the continuous exit of foreign investors and crude oil price below $30 billion per barrel have made it become inevitable for the CBN to devalue the Naira.

Chukwu, who is also the Chief Executive Officer of Cowry Asset Management Limited said: “With current reserve at less than $36 billion, it will make it imperative for the CBN to consider devaluing the currency.”

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Written by PH

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