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,

 

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.

1.6   SCOPE AND LIMITATION OF THE STUDY