Before the reader concludes that he is being led down the road to devaluation, let’s review the arguments for and against devaluation. Of all the arguments justifying devaluation, the trendiest one, in both theory and empirics, is its potential to stimulate increased exports and simultaneously reign in imports, culminating in improvements in BOP and foreign exchange reserves. To the extent that this is realisable, it has salutary effect on the value of the naira.
The counterfactual is that the efficacy of devaluation depends, to a large extent, on the relative price elasticities of demand for both imports and exports, requiring the absolute sum of both to be greater than unity or, numerically speaking, one. Thus, the positive effect of devaluation on the value of the naira is dubious for two reasons. One, given the well-known issue of lag in economic policy transmission, trade in goods tends to be inelastic in the short term, leading to a worsening terms of trade in the initial period. Even if our traded goods sector satisfies this condition, the stalled EPA negotiations; quality issues; and domestic supply rigidities may conspire against Nigeria benefiting from this advantage in the short to medium terms.
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