In retrospect, as a country, Naija nation never experienced a huge recession in any measures historically, and given that context, the great depression typified by unprecedented decline in economic activity majorly only when stock market is completely in comatose, banks were closed down and macroeconomic factors destabilized.
The major recession in history was generally to have occurred between 1929 and 1939. Although parts of the economy had begun to recover by 1936,then the high unemployment rate persisted until the Second World War but the reversed circumstances pixilated Nigeria context...despite our high unemployment rate domestically our macroeconomic stability remain solid, we still #1 economy in African continent till date hence our 2009 banks reform are still adamantly functional except for our manufacturing industry that remain weak as primal breeder for export growths to enhance foreign earning which stands to be the biggest fear I have for this devaluation, but considering all fronts amidst economic imbalances Nigeria towered the biggest economy in Africa mantle. How this new devaluation affects us econometrically?
Devaluation is ok as long as it doesn't cause us a loose monetary policy, and our central bank remains apolitical which can eventuate future inflation e.g. hyperinflation in Japan after 1936 is a good lesson to share
If we can recall vividly, lately the tumbling of oil prices has emanated serious doubt in the sustainability and survival of any oil economies worldwide, Nigeria is not an exception to the rule, and President Buhari was just a victim of circumstances, the previous administration should have seen it coming and saved hugely during the rainy days instead of wasteful spiral spending spree on security votes that was never executed, the naira that had just nosed dived had lost 40% of its value in one single "black Wednesday" is no surprise in an analyst corridors, its long awaited there is no doubt that in a such awkward economic situation present administration could have done anything differently than to succumb to a natural market driven method to revive the economy and our exchange given with little price of devaluation on a short term, the move was expected to be painful but 40% devaluation is an hard pill to swallow...but on long term naira floating freely will definitely translate to a fairer and positive economy growth down the road.
This measure will definitely give us a new template to operate on, however it will have an adverse effect on our sound macroeconomic values and that might in a short run create an economic stress to the whole continent being the largest economy in Africa however, this is the first step toward great moderation to steady economic growth and I see it as a right step forward.
As we all know in a simple terms a devaluation occurs when the exchange rate falls in value and this causes our exports to be cheaper and imports to be more expensive. In theory, it can help increase economic growth, though it may cause hyperinflation if unchecked
The impact of naira devaluation as in Nigeria context, depends on economic circumstances. If a country as our nation is suffering from being uncompetitive with high increasing unemployment rate and low inflation ( averages 8% - 9% before devaluation) a devaluation as right recipe may help considerably given historical perspectives, between 2008 and 2013, the British pound experienced same economic shocks at 25-30% devaluation in sterling, but the United Kingdom had a weak recovery despite their strong manufacturing sector, some cost push inflation and a surprisingly large current account deficit occurred. And it was obvious that the depreciation then in pound did little help to the UK economy
In theory, a devaluation of Naira will cause the following to happen to Nigeria economy:
Presumably, a) the price of imported goods into Nigeria will increase. This will reduce our spending on imports and instead we will be more likely to buy domestic goods given our growing population as a consumer economy – it is a good stress to have.... and the quick fix should be for our govt to give huge incentives to promote "Made in Nigeria" goods aggressively and improved on their standard for export gains.
b} The price of Nigeria exports will be lower in foreign currencies, this will increase the competiveness of Nigeria exports and it will cause an increase in demand for "Made in Nigeria" produce for export, solutions: Government should pump money and incentives (tax free etc.) to manufacturing industries for huge volume of production
c}Considering our balancing of trade temperament, focusing on: Made in Nigeria" mass productivity for exports the increased competiveness should cause an improvement in our current account and that will eventually solidify our foreign reserves.
Again, on simple terms, devaluation is the decision to reduce the value of a currency in a fixed exchange rate. A devaluation simply means that the value of the currency falls which eventually affords domestic residents to find imports and foreign travel more expensive because the rate of naira exchanges to foreign currencies become greater which will later typify hyperinflation, however on the long run domestic exports will benefit from their exports becoming cheaper and the manufacturing industry grows.
In the current conundrum, our export become cheaper and locally made goods becomes more competitive to foreign buyers. Therefore, this provides buffer and a boost for domestic demand and could lead to job creation in the export sector. And on the hindsight, the higher level of exports should lead to an improvement account deficit especially Nigeria as a country has a large account deficit due to lack of competitiveness. And in my opinion, I strongly believe that higher exports and aggregate demand can lead to higher rates of economic growth and that buttress Buharinomics moving in the right direction on the long term.
It is no doubt, that in a recession a devaluation can help boost growth without causing inflation however, in a boom a devaluation is more likely to cause inflation and besides, a devaluation may take a while to improve current account because demand is inelastic in the short term.
If we can recall, past years with fixed 195 naira to dollar, Nigeria had lost its competitiveness in a fixed exchange rate and as of now only a devaluation could be beneficial in solving that decline in competitiveness
However, with all great merits of devaluation, it is also good to note some warning signal aspects of it.... Devaluation may as well likely to cause inflation because any imported goods or raw materials will increase in price and that can make imports more expensive, devaluation might cause an increase in our aggregate demand which will eventually cause demand pull inflation.
Obviously, devaluation tends to reduce the purchasing power of citizens abroad e.g. more expensive to go on holiday, Solutions will be to build more domestic resorts for vacation
It will also not hurt to note that a large devaluation may scare off foreign investors (it reduces FDI – Foreign Direct Investment). It might reduce the competitiveness investors less willing to pump funds to the economy for fear of reducing value of their holdings and repatriation of their capital gains home might be a huge challenge
Overall, and to Buharinomic's credit, this current devaluation is a relatively painless way to boost domestic demand and unlike fiscal policy you don't have to borrow to supplement the economic revival however, one drawback of devaluation is that usually it can be inflationary, but in a recession inflation is unlikely to be a problem. And finally as an economist, I strongly believe our first objective as a country is to pursue the monetary policy which is most suitable for our economic situation. If a country like Japan is experiencing deflation. It is correct to pursue expansionary monetary policies. They should be seeking to reduce the value of their currency and pursuing looser monetary policy.
Nigeria is in a competitive devaluation mode and that implies that country pursue the correct monetary policy by allowing the market to seek the exchange rate to find its correct level unlike China with huge current account surplus in early 2000s with their currency manipulation, but still intervened to keep the value of their Yuan undervalued and the whole world reacted. Current administration in Nigeria had played save. Kudos to the govt on this new Buharinomics.