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The Impact
Of Naira Devaluation On Economic Growth In Nigeria
ABSTRACT
This
research critical examine the impact of Naira devaluation on economic growth in
Nigeria. That without exchange rate, the
exchange of goods and services among trading partners will be focused with a
lot of problems which may virtually narrow it down to trade by barter. Thus
exchange rate is also used to determine the level of output growth of the
country.
Nigeria is
one such economy where demand for locally produced goods is at such a pitiful
level. This makes it difficult for the exportation of such goods to the
economies they were assumed to have from. As a result of the excess of
import-over export Nigeria increase the cost of product and also result to
inflation (cost push). By making the domestic currency relatively cheaper,
local production and exportation of commodities is thereby encouraged. This
will help solve unemployment problem and create a favorable balance of trade.
This study
made use of the ordinary least square (OLS) regression techniques in analyzing
the impact of Naira devaluation on economic growth in Nigeria: 1980-2009.the
battery test and also t-statistic table was carried out and our findings is that real exchange rate has
significant impact on the economy which means that Naira devaluation have
positive impact on the economy. It was therefore recommended that the policy
devalues apt attention and should pursue.
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The early
1980s drove home a truth which had been emerging in the 1970s that the world
economy was becoming increasingly unstable. The combined effects of the second
oil shock, an associated recession in OECD countries, a prolonged slump in real
commodity prices, the outbreak of debt crisis with all its consequences for developing
economies access to world saving and the erosion by non-tariff barriers of
previous trade liberalization put the balance of payment of many developing
countries under great strain making imperative decisive policy responses
(killick 1995). On the economic scene of Nigeria, ‘the oil boom(1973-74)
affected not only the investment, production and consumption patterns of the
country but also its socio-cultural valves, political aspirations, style of
economic management and policies and programmes implemented (Olaniyan 1996).
Massive investments were made into infrastructures with significant capital
outlay for imported components. Industries were outward-looking such that the
global crisis meant for them acute shortage of essential raw materials, capacity
under-utilization and factory closures. The competitiveness of the agricultural
sector was eroded by the overvalued exchange rate and investment was skewed in
favor of ‘short-term highly profitable ventures such as construction, commerce
and services sector at the expense of such productive sectors as agricultural
and manufacturing which have long-term gestation periods creating structural
imbalance within the economy. There was a growing desire for imported
consumer’s goods and conspicuous consumption was the order of the day among the
affluent. Capital assets were neglected and maintained culture virtually died
out. And all this against the background of financial misappropriation in the
public sector and concerted misuse of import licenses and overloading of
invoices between many Nigerian businessmen and their overseas counter parts;
the gross abuses and import and export tariff at many custom points; fraudulent
money transfer overseas aided and abetted by many banking officials’ (Yesufu,
1996:1989). The compound effect of the above was fiscal crisis,
The Impact
of Nigeria Devaluation on economic growth in Nigeria
foreign
exchange shortage, balance of payment and external debt crisis, high
unemployment rate and negative economic growth (Olaniyan, 1996).
The global economic crisis created an
awareness in the OECD Government and the International Financial Institution
(IFIs, consisting of the IMF and the World Bank) that ‘many past policy
interventions were aggravating rather than easing economic problems in
developing countries and needed to be reformed’. The world Bank response was
the opening of a structural adjustment window while the IMF introduced (or
revived in the case of the Extended Fund Facilities: the EFF) the structural
statement fund (SAP) and Enhance Structural Adjustment Fund (ESAF) (Killick,
1995).
The first
response of the Nigeria Government to the deterioration economic conditions in
the country was to introduce some stabilization, austerity and counter-trade
measures between 1982 and 1984. The Economic stabilization Act (1982) imposed
more stringent exchange control measures and import restrictions supported by
appropriate monetary and fiscal policies. In order to secure foreign assistance
to solve its balance of payments problems, the government approached the IMF
for a three-year extended facility loan in 1983. In line with its new policy
however, the IMF introduced some conditions that must be met for the loan to be
given- the much popularized ‘IMF conditionatlities’. These were sixty per cent
devaluation in the national currency, rationalization in the size of the public
services, trade liberalization and removal of petroleum subsidy. The Babangida
government in a bid to capture the confidence of Nigerians and thus-secure for
itself legitimacy, decided to throw the matter to the generally public. By
public debate involving the learned and the unlearned who knew not so much as
what the IMF is and what the conditionalties really meant by various
expressions of public opinion encompassing both the professional and the street
trader, Nigerians were to make their view known whether they wanted the IMF
loan with its attached condtionalities or not. Of course, the Nigerian public
rejected the loan. Barely one year after, however, in July 1986, the government
adopted an externally packaged structural adjustment program.
The Nigeria
Structural Adjustment program was designed to fit the standard IMF- World Bank
structural adjustment package and meant to effectively alter and restructure
the consumption and productive pattern of the Nigerian economy, as well as to
eliminate price distortions and heavy dependence on the export of crude oil and
import of consumer and producers goods’. (Anyanwa, 1993 p. 243). The programme
was initially proposed as ‘an economic package deigned to rapidly and
effectively transform the national economy’ over a period of less than two
years (Yesfusu, 1996 p. 91)
Three
factors were proposed as being the rationale for the adoption of SAP
a) An excessive dependent by nation on
imports, especially consumers’ goods including food.
b) Almost total neglect of domestic production
in all the five sectors of the economy: agriculture, industry, construction,
commerce and transportation.
c)
Almost total
dependence on earnings from oil exports alone boosting government revenues as
well as for accumulated foreign exchange reserve.
The major
negative fall-outs of the above were persistent balance of payment deficit
(external imbalance) and huge fiscal deficits (internal imbalance).
The BOP problem was identified to be a
consequence of the over-devaluation of the Naira. Under the SAP therefore, the
exchange rate is to reflect the scarcity value of the national currency. The
devaluation of the Naira would enhance the level of non-oil exports; discourage
import thus reducing the nominal value of import while increasing the value of
exports.
Also inflation is proving to be a persistent
problem in Nigeria with significant, impacts on individuals, firms and
governments, concern over resource limitations and dramatic prices increase for
energy, food and other basic items are changing lifestyles, with resultant
impacts on the market for many goods and services. These same factors are
causing economic activities to by undergo rapid transformations, a situation
compound by increasing importation of foreign goods and services into the
economy. In such a setting, sound economic policies and analysis have taken on
greater importance in economic field.
In a country
like Nigeria she tries to bring quick economic growth. She has to import
machinery, equipment’s, raw material and other technological know-how. In
addition to the imports both visible and invisible account also increase, while
export is lag behind this will position the balance of payment become deficit
i.e. unfavorable. Such a nation has to adopt both short and long term measures
to correct this disequilibrium in the balance of payments. Export promotion and
import restriction are the two important measures to correct the deficit of
balance of payment others include fiscal policy, monetary policy. The balance
of payment deficit can also be adjusted by the use of naira devaluation policy.
The
challenges of facing the Nigeria economy presently require the solution the
devaluation can help provide. The government can use devaluation to boost
aggregate demand in the economy in an effort to fight unemployment. Also the
price of foreign currency increase which makes import dearer and export
cheaper. This causes expenditure to switch from foreign to domestic goods as
the country’s export rise and country produces more to meet the domestic and
foreign demand for goods with reduction in imports. It reduces the foreign
reserve which affects the economy in long run which leads to increase in
unemployment and reduces the economy growth in the economy. With all this
factors in mind the research aims at finding the impact of naira devaluation on
economic growth in Nigeria.
1.2 STATEMENT OF THE PROBLEM.
Year
Gross
Domestic Product (GDP)
Gross
Domestic Product Growth
Exchange
Rate
Exchange
Rate Growth
1980
19632.3
0.5464
1982
49069.3
-563
0.6729
0.1265
1984
59622.5
10553.2
0.7649
0.092
1986
69147.0
9324.5
2.0206
1.2557
1988
139085.3
69938.3
4.5367
2.5161
1990
267550.0
128467.7
8.0378
3.5011
1992
532613.8
265063.8
17.2984
9.2606
1994
899863.2
367249.4
21.8861
4.5877
1996
2702719.1
1802855.9
21.8861
0
1998
2708430.9
5711.8
21.8861
0
2000
4537637.2
1829206.3
102.1052
80.2192
2002
5403006.8
865369.6
120.9702
18.865
2004
11411066.9
6008060.1
133.5004
12.5302
2006
18564594.7
7153527.8
128.6576
-4.8428
2008
23842170.7
5277516
118.5669
-10.0907
Source:
Central Bank Statistical Bulletin 2009.
From the
table above, it show that in 1982 that GDP decreases by 563 as the exchange
rate depreciate with 0.1265. The GDP increase from 1984 to 1992 as the exchange
rate depreciates, in 1994 the GDP increase but exchange rate did not depreciate
much (appreciation). However in 1994 to 1998 exchange rate is stable which also
affected GDP to decrease from 1802855.9 to 5711.8. We observe that exchange
rate has an inverse relationship with gross domestic product meaning that if
exchange rate depreciates, GDP will increase and if exchange rate appreciates
GDP will reduce.
From the foregoing analysis the
research will be guided with the question.
What is the
impact of Naira Devaluation in Nigeria?.
1.3 OBJECTIVES OF THE STUDY
The major objective of this research
is to determine the impact of Naira devaluation on economic growth in Nigeria.
The others
objectives includes
1. To determine the effect of Naira and
relative effectiveness of monetary policy on the Nigerian economy.
2. To determine whether inflationism is
necessary for economic growth in Nigeria.
3. To make recommendations based on the
study.
1.4 STATEMENT OF HYPOTHESIS
The study is
designed to test the following hypothesis.
H0: Naira
devaluation has no impact on economic growth in Nigeria.
H1: Naira
devaluation has significant impact on economic growth in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY
The study is
significant as it would add to existing literature on Naira devaluation and how
it affects economic growth in Nigeria. It will serve as a guide to further
research, academic work and as a self-help study material for those who might
wish to firsthand knowledge about naira devaluation.
It is also
hoped that Nigeria policy makers will find it’s a helpful material in the
formulation and implementation of policies on devaluation of naira and how it
facilities growth in Nigeria.
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