THE DEPRECIATION OF NAIRA ON NIGERIAN ECONOMY: CAUSES, EFFECTS AND REMEDY

ABSTRACT

The study investigated the effect of depreciation of naira on Nigeria economy, causes effect and remedy using time series analysis and annual data from 1990 – 2009. The regression analysis model were used to capture both the long-run and short-run dynamics of the variables in the model. The empirical results indicate that depreciation of naira have significant effect on economic growth. There also exists a unique long-run relationship between economic growth and its determinants, including exchange rate, inflation rate and interest rate. It is relevant that Nigeria as a nation should critically look at her economic policies and exchange rate regimes to curb the instability in the naira exchange rate as well as boost her external balance.

CHAPTER ONE

BACKGROUND OF THE STUDY

1.1     INTRODUCTION

In economics, depreciation is the decrease in the economic value of the capital stock of afirm, nation or other entity, either through physical depreciation, obsolescence or changes in the demand for the services of the capital. Depreciation refers to two very different but related concepts which are decline assets to periods in which the assets are used.

Soludo said the drop in the value of the local currency was a government -supported devaluation in the face of falling oil prices. Oil revenue account for 90 percent of Nigerian’s export revenue. Oil has slumped more than 60 percent from a year ago. The naira has dropped more than 23 percent since November when the central bank limiting the supply of dollars to defend its foreign exchange reserves.

The central bank’s depreciation policy has been criticized by some analysts who say it could have grave implications for import­-dependent Nigerian economy. Mike Obadan (2005); stated that “each time the naira depreciates in relation to the dollar and pound sterling, it adds to the inflationary problems in the economy”, Obadan (2004); also stated that the reason for it is that the production structure of the Nigerian economy is heavily dependent on the importation of inputs in the form of equipment, transport for production and even raw material. Therefore, each time the naira depreciates it makes the cost of importing all these inputs very high and the cost of production jacks up and the producers reflect the higher costs in higher prices”.

The naira dropped to a record low of 153 per U.S. dollar Monday, from 146 naira on January 9. Central Bank Governor Soludo says the government is committed to a stable, market-determined exchange rate. Analysts predict a further weakening of the naira in the face of widening demand for foreign currency and speculation about the health of the Nigerian economy.

The future of the Nigerian economy looks precarious, indeed the country’s economy is under severe threat as crude petroleum, as the mainstay of the economy since the early 1970s has consistently headed south from last November. Just as most experts have noted that forces that precipitated naira’s value erosion over this periods are largely visible in the crash of the nation main foreign exchange earner which has fallen from an all-time high of about $140 in July, 2008 to less than $40 per barrel early January, 2009. What perhaps is making the scenario very disturbing is the fact that President Umar Yar’Adua had already predicated his 2009 Appropriate Act on an exchange rate of N 117 -8 per dollar, on the understanding that crude oil earnings would not fall below the $45 benchmark.

But today, several things seem to. have fallen apart and the biggest challenge for the Central Bank of Nigeria, which had earlier this year assured Nigerian’s that the global economic meltdown would not affect Nigerian and her economy, remains how to save the naira from nose-diving further.

Economy experts have since argued that government’s consent to the depreciation of naira at this time may not be unconnected with its attempt to partly finance the budget with proceeds from the market, since expectations of doing so through oil revenue is fast fading away with the crash in the price 0’£ crude petroleum at the London spot market.

1.2     STATEIIEIIT OF THE PROBLEM

The depreciation of the naira has generated enough heat to the country that the economy of the country is now shaky or rather in shambles. The problem of this investigation is to identify the major causes of the devaluation of the naira with a view to proffering solutions to appreciate the naira using Lagos State as a case study.

It is a very serious matter at this point in time when our economy is deregulated that the naira is devaluating further. Every commodity in the country today is very expensive as regard the depreciation of naira. It is like too much money are pursuing few items thereby sky-rocketing the prices. Therefore, a reduction in the degree of over-valuation of the naira was to be brought about in an effort to adopt a realistic exchange rate policy.

1.3   AIM AND OBJECTIVES OF THE STUDY

The aim of this study is to examine “The Depreciation of Naira on Nigerian Economy: Causes, Effects and Remedy (A Case Study of Lagos State}”. The following are the specific objectives of the study:

i.       To examine the impact of depreciation of naira on Nigerian economy.

ii.    To examine the causes of depreciation of naira on Nigerian economy.

iii.   To examine the effects of depreciation of naira on Nigerian economy.

iv.     Finally, to examine the remedy to economic growth of Nigeria.

1.4     RESEARCH QUESTIONS

Therefore, the statement of problems is stated below by finding answers to the following questions:

a.      What are the impacts of depreciation of naira to Nigeria economy?

b.      What are the causes of depreciation of naira?

c.       What are the solutions to economic growth of Nigeria?

d.      What are the defects of depreciation of naira to economy of Nigeria?

1.5    SIGNIFICANCE OF THE STUDY

The tendency is that through this study the masses will be able to understand the real nature of the economy, hence the ways to avert further occurrence.

If one could critically read this project work he or she will find out that many questions on how to revitalize the economy were answered. This tackling of some hard nuts problems thereby will help to arrest the problem of the depreciation of the naira to Nigerian economy, the causes and the remedy and also suggestions received from individuals and civil society as a whole.

It would encourage individuals on how to depend solely on locally produced goods and uses of local raw materials and it also helps government to ensure internal and external balance for the economy, but there is palpable fear among Nigerians as to how far the policy can go in stabilizing the economy in the face of the current economic meltdown.

1.6    RESEARCH HYPOTHESIS

Based on the research problems and objectives of the study, the following hypotheses have been formulated:

Hypothesis 1

H0:    There is no significant relationship between depreciation of naira and economic growth.

HA: There is significant relationship between depreciation of naira and economic growth.

Hypothesis 2

Ho:    There is no significant relationship between depreciation of naira and exchange rate.

HA:   There is significant relationship between depreciation of naira and exchange rate.

Hypothesis 3

Ho:    There is no significant relationship between depreciation of naira and inflation.

HA:   There is significant relationship between depreciation of naira and inflation.

1.7     RESEARCH METHODOLOGY

In order to achieve the objective of methodology for this research, data for this purpose will be mainly secondary data from various sources will be made use of. The source of such secondary data will include the followings: Central Bank of Nigeria (CBN) National Bureau for Statistics, Nigeria National Petroleum Cooperation Statistics Bulletin, Relevant Journal, Articles textbooks and other relevant material to the pursuit of the objective of this study.

1.7.1 ANALYTICAL TECHNIQUE

Regression analysis techniques will be employed using the ordinary least square method. The variables to be used are stated below:

Y                = F (DN, INT, ER0

Where Y    = Gross Domestic Product (GDP)

F                 = Function

DN             = Depreciation of Naira

INT            = Interest Rate

ER              = Exchange Rate

Y                = βo + β1 + β2 + X2 + β2X1 + U

Where Y   = Dependent Variables

βo               = Constant Term

β1, β2        = Coefficient of Independent Variables

X1, X2        = Independent or Explanatory Variable

U                = Error Term (Stochastic Variable)

1.8     SCOPE OF THE STUDY

This study assessed the depreciation of Naira on Nigerian economy, causes, effects and remedy (A Case Study of Lagos State between 1994-2009).

1.9     LIMITATION OF THE STUDY

In the course of this research work, some problems were encouraged. These problems are basically of time, finance and lack of cooperation among group’s members. Inspection of all, the research work was carried out successfully.

1.10   DEFINITION OF TERIIS

Inflation: Means persistent change in prices of goods and services.

Economy: Money, wealth, goods and other resources which a community or society and individual has.

Naira: Unit of Nigerian currency.

Depreciation: Lose in value or standard.

1.11   ORGANIZATION OF THE STUDY

Chapter one consists of the introductory chapter, which gives us an insight into the introduction, statement of problem, research question, aims and objectives, significance of the study hypothesis, methodology, scope of the study, limitation of the study, definitions of terms, plan of the study and the references. Chapter two also focuses on the review of intensive, which is rent to review previous works that are related to the topic under study. Chapter three consists of structural composition of the study. Chapter four also consists of research methodology, data analysis, interpretation and presentation of the results while chapter five consists of the summary, findings, recommendations, conclusion, then followed by the references.