DEVALUATION OF CURRENCIES IN NIGERIA, SOLUTION FOR ECONOMIC GROWTH AND DEVELOPMENT

ABSTRACT

This research study investigates the Devaluation of currencies, solution for economic growth and development in Nigeria. Currency devaluation as a policy instrument has been used in several countries (both developing and developed). The decision taken by monetary policy committee in November 2014 on naira devaluation has generated a lot of arguments both for and against and its workability on an import driven economy like Nigeria. Renowned economists in the country have not had any consensus hence the need to analyze the impact of currency devaluation on economic growth and development is highly important. Exchange rate, import, export and interest rates were used as proxies for currency devaluation while GDP was used to measure growth. A time series data was used to analyze the variable in question, from 1974-2015. The result of the analysis which is in line with the a priori expectation shows that devaluation reduces importation; encourages exportation and increases interest rate. Inflation and unemployment are the side effects of currency devaluation in the short run according to Marshall-Lerner’s condition which produces a J-shaped curve of devaluation. Discretionary policies such as fiscal measures should be put in place to curb the associated increase in inflation. This research study identifies that diversification of export is inevitable for Nigeria to achieve economic growth in the face of devalued currency.

CHAPTER ONE

INTRODUCTION

1.1   Background of the study

Currency devaluation is a deliberate downward adjustment of the value of a country’s currency relative to another currency or standard currency (usually dollars). It is one of the tools of monetary policy to stabilize the economy most especially the less developed ones operating fixed exchange rate or semi-fixed exchange rate.

Sometimes currency devaluation can be gotten from the vandalization or misuse of another countries currency by a country. One major policy option for a country facing a persistent balance of payments deficit is devaluation of its currency ( Bahmani-Oskooee1985).Using the recent high demand of rice as an example in Nigeria. Balance of payment can be traced from the period where the demand for rice import increased in Nigeria, Nigerians excessively import rice from other country not minding the competitiveness of its export produce, shortly, because of the disequilibrium in import and export produce in Nigeria.This brings about balance of payment deficit.

According to (Bahmani-oshooee, 1985) view which interprets that the major option for a country suffering balance of payment deficit is devaluation and this devaluation of currency makes it possible for a nations export to be affordable and cheap for other countries willing to buy her produce for the nation to repair or corrects its balance of payment. Following the above, the need to study the devaluation of currencies and its lead to economic growth and development is highly recommended. Variables of interest used in this research work are GDP, exchange rate, imports of goods and services, export of goods and services, interest rate.

Over the years, looking at the the history of Naira’s fluctuation and devaluation ,various occurrences was recorded.

In 1973 Nigeria devalued her Naira for the first time by 10%, the effect of devaluation was salutary as Nigerians foreign exchange reserves grew by 773.5% in 1974.

In 1975 under the regime of Maj.Gen murtala mohammed as the president/head of state and Mallam Adamu Ciroma as the Central bank of Nigeria (CBN)Governor the exchange rate of Naira to Dollar was N0.616 to $1 due to the compounding economic economics crisis that occurred during that period.

In 1976 Maj.Gen Olusegun Obasanja emerged as the Head of states, during this periods Mallam Adamu Ciroma was looking out for policies that could suite the economy but then Naira was exchange for N0.62 to $1.

In 1977 Mr. O.O Vicent took over from Mallam Adamu Ciroma as the CBN Governor, just then the dollar didn’t seize its upward movement over the Naira,N0.647 to $1.

Following these years above ,Nairas value to dollar continues a fluctuating movement, movement was in a wave like pattern and as such is postulated below with the various presidents/Head of states and (CBN)Central Bank of Nigeria Governors of those periods.

TABLE 1.1 Past presidents/Head of states, CBN. Governors and the exchange rate of naira to dollar in Nigeria

From the day Gen. Sani Abacha took the mantle in 1993 to the day he died on 8 0f June 1998, the official exchange rate of naira to dollar never changed from N17.30to $1.In 1995 the autonomous foreign exchange market(AFEM) was introduced as a way  for Central Bank of Nigeria(CBN) to sell forex to end users at market rates.

The Regime of Joseph Sanusi (CBN Governor from 1994-2004) was next phase where The interbank foreign exchange market (IFEM) was introduced ,given on the bases that Nigeria’s reserve had been depleted severally in two years before he took over, The Naira was never going to survive military fiction rate of N22.33 to $1 for a very long time. within a year the Naira was trading at N85 to $1 but this time the gap with the black market had closed considerably at N105 to$1.

Furthermore was the regime of Chukwuma Soludo(CBN Governor 2004-2009).The persistence rise in the oil price per barrel boomed the economy for the first time Nigeria gained 20% against dollar without anyone explicitly trying to strengthen it. when he left the office in 2009.naira was exchanged for N145 to $1 due to oil prices started falling again but Chukwuma Soludo did his best to stable the economy and recover the price.

Next  in line was the regime of Sanusi Lamido Sanusi (CBN Governor 2009-2014),as soon as oil price recovered, Sanusilamido Sanusi restored the Interbank Foreign exchange market(IFEM) that was banned by Soludo but he then faced somewhat strange problem. Oil prices were high but Nigeria was not building up it reserves for reasons that are not obvious. This meant that he did not have enough dollar to defend and stabilize the Naira. The naira was trading at N148 to $1 when he took office and then it rises to N170 to $1 by the time he was suspendered from office February 2014.

The final phase was the regime of Godwin Emefiele (CBN Governor 2014-tilldate), a lot of maladjustment in economic activities has contributed to the recession that stormed Nigeria. In 2016 Nigeria devalues its currency by 30% of its value against Dollar, this move saved Nigerians oil dependent economy which is poised for a recession; keeping the naira strong had drained the country’s foreign reserves and scared investors.

The country is now in dilemma of the effect of further devaluation of Naira as the former CBN Governor Sanusi Lamido and some other renounced Nigeria economist are clamoring for it, while others like Prof. Sherriffden Tella, Dr. Ayo Teriba and Prof. Pat Utomi in their various report see this as no solution to economic problem facing the country.

1.2 Statement of Problem

Excessive importation of capital goods has caused a problem to the economy, damaging the balance of payment of countries to another which leads to devaluation of currencies.

Over the years the Naira devaluation has been a recent development because of lack of infrastructure and facilities for capital goods production, hence there have been a massive importation of capital goods and as well other goods that can be locally made in our locality, be locally made in our locality, because of this lack of interdependency and inferiority complex in the demand and supply of foreign goods, the law of demand and supply sets in. High demand of foreign goods causes more importation and increment in the demand of strong currencies like USD used for foreign exchange of goods and services which make their prices high and our Naira is so devalued and this can drown our nation’s economy if there are no proper management; this operation also discourages our local producers in their production process and lessens the economic activities in nation.

Aiya (2014) assessed people’s perception on the impact of devaluation of Nigerian currency on the performance of poverty alleviation programmes in Edo state Nigeria, using Primary data and chi square statistical analysis, he found that currency devaluation limits the performance of poverty alleviation programmes in Edo state. He recommends that there should be proper funding of Poverty Alleviation Programmes because the devaluation of currency as often recommended by the Breton Wood institutions such as IMF and the World Bank has resulted in hyper inflationary trend in the economy.

Siddig (2012) examined exchange rate devaluation in Sudan using computable general equilibrium .The paper reports the impact of devaluation on several economic indicators considering domestic commodity markets, the factors market and institutions. Responses of specific economic variables such as prices, household demand, welfare, and the balance of payment are used to describe the resulting equilibriums of the economy as a result of devaluations in the three scenarios. The results reveal that devaluation of the Sudanese pound will considerably increase most domestic commodity prices. This is desirable for producers who target the world market because their returns in the local devalued currency will tend to be higher. Accordingly, export oriented sectors, which have a larger share of exports in their total output, show the greatest increases in output and exports compared to other sectors. He concludes that, devaluation of Sudan’s currency would increase domestic prices of tradable goods and encourage producers to export. However, domestic consumers are negatively affected because the increase in prices is unaccompanied by similar increases in household income. This could also lead domestic production to deteriorate at a certain point in time since the cost of intermediate inputs will also increase especially imported intermediate inputs. Therefore, devaluation would encourage producers of some sectors to increase output and exports, while it would hinder consumers to enjoy the previously cheaper imported and domestic commodities since domestic prices increase.

This research study intend solving the problem of economic crisis through devaluation of currency which makes it easier and cheaper for Nigeria to trade out her goods at services and to enhance economic activities to attain growth and development.

1.3 Objective of Study

The objective of this research study is to critically study the devaluation of Nigeria currency and to know if it can lead to economic growth and development.

1.4 Research Question

In line with the objective, the question remains as to whether devaluation of Naira provides solution for economic growth and development. Moreover, do naira devaluation in Nigeria provide solution for economic growth and development?

1.5 Hypothesis

H₀ : devaluation of naira does not provide solution for economic growth and development.

H₁ : devaluation of naira provide a solution for economic growth and development.

1.6 Significance of Study

Different countries like japan, Canada, SouthAfrica, Brazil, see (www.travelstart.co.za/blog/5-suprising-examples-countries-whos-currencies-devaluing-faster-rand) has experienced devaluation of their currency in international trade but still manage their economy to a better one.

This study tends to benefit the infant and local industries in the nation (Nigeria) because when a country devalues her currency the other countries of the world find it easier and cheaper to trade or buy goods and services from such countries, also this study tends to build the balance of payment through the increment of exports due to the devalued nature of the currency.

The study strives at tackling the problem of unemployment because the availability of international customers due to the devaluation makes it possible for more hands to join the manufacturing and industrial sector in other to meet the demands of other country.

Furthermore the research study aims at increasing the foreign reserve through accumulation of foreign currency gotten from the traded goods and services due to the fact that’s it’s cheaper to trade with such country.

1.7 Scope of Study

This research study covers the effect created by devaluation of Naira to economic growth and development. This study focuses its axis on Nigeria and as such not a comparative one, also it covers the dates in which Nigeria’s Naira was devalued and its effect (1974-2015).

The variables of interest are exchange rate, interest rate, exportation, importation and GDP (gross domestic product).

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