Devaluation is not the ideal option for oil exporting countries in Africa
Dear Africa interested individuals:
We have heard the rampant advice that African oil exporting countries should devalue their currency whenever oil dips significantly and remains there for a prolonged period of time.
Proponents say it generates more income for the countries in question to use internally and reduce the impact of the lower revenue on government spending. I agree that more revenue will come into the country in local terms (assuming constant demand.) Continual devaluation of African currencies portends serious danger for African economies. I will highlight just three in this article in a concise form.
1. Devaluation leads to a currency being dumped by even those who do not need dollars. Why? No one wants to hold a currency that does not hold value. The devaluation creates an expectation of future near term need to devalue further and this puts sell pressure on the local currency as all sorts of people seek a currency that has and holds its value.
2. Most oil exporting countries in Africa are import dependent. Oil is their major export which is transacted in dollars. The devaluation of the currency leads to more expensive imports of goods and services into the local economy and this is almost always passed on to the defenceless consumer. This leads to higher inflation which impacts other goods and services that are not even imported as citizens strive to hold onto their profits in a rising price economy. This act does encourage more exports as buyers can buy same quantities for less. Exporters receive less of a currency on average that is already losing value due to inflation across board.
3. Inflation encourages consumption and not savings. When people do not save, they cannot invest and investment is needed to move any country's economy progressively forward. Recurrent expenditure becomes the major drainer of funds instead of capital expenditure as people are more interested in using the currency that does not hold value instead of keeping it. A similar situation over time, led Zimbabwe to dump it's currency and utilise the US dollar. African countries should pursue diversification to reduce reliance on one commodity for revenue in addition to encouraging a culture of saving when commodity prices are high; this serves as a buffer during low commodity prices as is the case in Saudi Arabia that is even selling more oil now than before as it strives to keep its market share.
Tell others to tell others about this Africa Research Blog; a new dawn is here.
We have heard the rampant advice that African oil exporting countries should devalue their currency whenever oil dips significantly and remains there for a prolonged period of time.
Proponents say it generates more income for the countries in question to use internally and reduce the impact of the lower revenue on government spending. I agree that more revenue will come into the country in local terms (assuming constant demand.) Continual devaluation of African currencies portends serious danger for African economies. I will highlight just three in this article in a concise form.
1. Devaluation leads to a currency being dumped by even those who do not need dollars. Why? No one wants to hold a currency that does not hold value. The devaluation creates an expectation of future near term need to devalue further and this puts sell pressure on the local currency as all sorts of people seek a currency that has and holds its value.
2. Most oil exporting countries in Africa are import dependent. Oil is their major export which is transacted in dollars. The devaluation of the currency leads to more expensive imports of goods and services into the local economy and this is almost always passed on to the defenceless consumer. This leads to higher inflation which impacts other goods and services that are not even imported as citizens strive to hold onto their profits in a rising price economy. This act does encourage more exports as buyers can buy same quantities for less. Exporters receive less of a currency on average that is already losing value due to inflation across board.
3. Inflation encourages consumption and not savings. When people do not save, they cannot invest and investment is needed to move any country's economy progressively forward. Recurrent expenditure becomes the major drainer of funds instead of capital expenditure as people are more interested in using the currency that does not hold value instead of keeping it. A similar situation over time, led Zimbabwe to dump it's currency and utilise the US dollar. African countries should pursue diversification to reduce reliance on one commodity for revenue in addition to encouraging a culture of saving when commodity prices are high; this serves as a buffer during low commodity prices as is the case in Saudi Arabia that is even selling more oil now than before as it strives to keep its market share.
Tell others to tell others about this Africa Research Blog; a new dawn is here.
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