THE ROLE OF CURRENCY DEVALUATION IN DEVELOPING COUNTRIES
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THE ROLE OF CURRENCY DEVALUATION IN DEVELOPING COUNTRIES
Background of The study
Currency devaluation, according to Cooper (1971), is one of the most traumatic economic policy actions that a government can implement, and as a result, most countries are hesitant to devalue their currencies. A large trade deficit, on the other hand, can cause a country to devalue its currency.
Thailand, China, Mexico, and the Czech Republic all depreciated sharply after their trade deficits hit 8% of GDP. Currency depreciation is chosen by the government that issues the currency and is the result of governmental operations. One reason a country’s currency may be devalued is to address trade imbalances.
Devaluation reduces the cost of a country’s exports, making them more competitive on the global market. As a result, imports become more expensive, making native customers less likely to acquire them. Local manufacturing and commodity exports are encouraged by making the domestic currency relatively cheaper (i.e. devaluation).
This contributes to the economy’s output growth (Aguiar, 2005), as noted in (Momodu and Akani 2016:152).
Currency devaluation is the purposeful reduction in the value of a country’s currency in relation to another currency or reference currency (often dollars). It is one of the monetary policy tools used to stabilise the economy, particularly in less developed countries that use a fixed or semi-fixed exchange rate.
Devaluation boosts domestic industries’ international competitiveness, which leads to a shift in consumption from foreign goods to domestic goods (Yilkal, 2014), as quoted in (Osundina 2016: 1944). It is used to boost exportation, discourage importation, and repair a negative balance of payment by making domestic items less expensive.
Foreign countries are expensive in the home country, as are foreign commodities.
Statement of The problem
The Nigerian government used the Nigerian pound until 1973, when it was replaced by the Naira. The Nigerian authorities elected not to depreciate the Nigerian pound during the American dollar’s devaluation process in 1971,
resulting in an appreciation of the Nigerian pound dollar exchange rate of $2.80 – $3.80 to the naira pound. The naira replaced the Nigerian pound in 1973, and Nigeria devalued at the same rate as the US, resulting in a $1.5 exchange rate (Ogundipe et al 2013:234).
According to (Osundina 2016:1947), currency devaluation is not a bad notion for solving Nigeria’s economic balance of payments crisis, considering that other developing countries have utilised it as a weapon. He went on to say that while currency depreciation benefits exporters, it reduces output because lower real wages cause demand to decline.
These discrepancies piqued my interest in conducting this research. Some economists feel currency depreciation is beneficial to the economy, while others say it should be avoided.
This was also confirmed by Eromosele (2016) in an argument for and against Naira devaluation and the alternatives proposed by the former finance minister in the This day newspaper, where he stated that the Naira is already undervalued and should not be depreciated.
Against this backdrop, the study seeks to evaluate the pattern of currency depreciation in Nigeria as well as to comprehend the function of currency depreciation in emerging countries, with a specific focus on Nigeria.
objectives of The study.
The primary goal of this research is to investigate the role of currency depreciation in developing nations, with a specific focus on Nigeria. The following are the specific aims to reach this goal:
1.) To comprehend currency depreciation in underdeveloped nations.
2.) Investigate the causes and trends of currency depreciation in Nigeria.
3.) Research the role of currency depreciation in developing economies.
4.) To investigate and determine, to the greatest extent practicable, ways for reducing the risk associated with exchange rate volatility.
Research Questions.
1.) What function does currency depreciation have in underdeveloped countries?
2.) What is the connection between currency depreciation and economic growth?
3.) How has currency depreciation affected the Nigerian economy and the economies of other developing countries?
research. Hypothesis
1.) Currency depreciation has no meaningful impact on the economy.
2.) Currency depreciation has a tremendous impact on the economy.
The significance of the research.
This study is noteworthy because it adds to the literature and will help policymakers and economists make decisions about currency depreciation.
When completed, the study will be extremely beneficial to student researchers who are interested in learning more about currency depreciation and the numerous ways it can damage the economy. It will serve as a guide for student researchers who may find the study’s recommendations and findings valuable.
scope of The study.
This research will look at currency depreciation in emerging countries and how it has impacted their economies. A case study of Nigeria will be examined, as well as a study of currency devaluation since its start. A profile of Nigeria’s exchange rate development will also be taken.
The study has some limitations.
Several restrictions were encountered over the course of this investigation. The issue of information collection. A limitation is also the time constraint in carrying out the study.
definition of Term
1.) Currency depreciation: This is a macroeconomic fiscal policy that focuses on the purposeful depreciation of the national currency in order to maximise gains in tradable items.
2.) Exchange Rate: The price of one country’s currency expressed in the currency of another country.
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