The Impact of Persistent Depreciation of the Naira Currency on the Growth of Nigeria’s Economy
Chapter One
Objective Of Study
The main objective of this study is to critically find out the impact of persistent depreciation of the Naira currency on the growth of Nigeria economy. Other purposes of this study are:
- To find out the effect of currency depreciation rate on grow domestic product (GDP)
- To surgically find out how currency depreciation rate affect interest rate
- To find out the impact of currency depreciation rate on inflation.
CHAPTER TWO
LITERATURE REVIEW
DETERMINANTS OF NIGERIA’S Naira valuation
In terms of finance, Naira valuation (also known as a foreign Naira valuation, forex rate, ER, Fx rate or Agio) between two currencies is that rate at which on currency will be exchanged for another. It is also regarded as the value of one country’s currency in relation to another. In a commonest definition, Naira valuation ‘ER’ is the price of a nation’s currency in terms of another currency.
An Naira valuation can be quoted in two ways, direct and indirect.
- Direct; the price of the foreign currency in terms of dollars.
- Indirect: the price of dollars in terms of foreign currency.
SOME OF THE MAJOR TYPES OF Naira valuation ARE AS FOLLOWS:
- Fixed Naira valuation system.
- Flexible Naira valuation system.
- Floating Naira valuation system. Naira valuation system: This refers to a system in which Naira valuation for a currency is fixed by the government.
The basic purpose of adopting this system is; to ensure stability in foreign trade and capital movements.
To achieve stability, government undertakes to buy foreign currency when the Naira valuation becomes weaker and sell foreign currency when the rate of exchange gets stronger.
Flexible Naira valuation system: This refers to a system in which Naira valuation is determined by forces of demand and supply of different currencies in the foreign exchange market.
In this Naira valuation system, the value of currency is allowed to fluctuate freely according to changes in demand and supply of foreign. There is no official (government) intervention in the foreign exchange market. Flexible Naira valuation is also known a ‘floating Naira valuation.
Naira valuation movements is an important determinant of international transactions. Furthering, Ogunleye (2010) noted that the Naira valuation in Nigeria has been principally influenced by external shocks resulting from the vagaries of world price of agricultural commodities and oil prices, both major sources of Nigeria export and foreign exchange earnings; contending that when the economy depended on agricultural exports, Naira valuation volatility was less pronounced given the fact that these products were subjects to less volatility and that there were more trading partners involved in the calculation of the country’s Naira valuation. This is minimally affected by the real Naira valuation fluctuating by only 0.14% between 1970 and 1977. The increased dependence of the country on oil, resulted in several trade shocks from global oil price shock fluctuating the Naira Naira valuation by 10% between 1970 – 1985 (Ogunleye 2010). To Iyoha and Oriakhi (2002), movements in real Naira valuation during this period were nominal shocks resulting from fiscal expenditure in ambitious development projects; and when the windfall ended, the government resorted to financing its expenditures through money creation. Thus expansionary monetary fiscal policy according to him, exerted upwards pressure on inflation, aggravating sharp movements in real Naira valuation. From 1986, the adoption of the structural adjustment programme (SAP) became a contributory factor in shaping the dynamics of real Naira valuation in Nigeria. One of the cardinal points of this policy was floating nominal Naira valuation policy. As the Naira was allowed to float the nominal Naira valuation movement became more pronounced.
FOREIGN EXCHANGE RATE, EXPORT PERFORMANCE AND ECONOMIC GROWTH
Fluctuations, positive or negative, are not desirable to producers of export products as it has been found to increase risk and uncertainty, international transactions. Findings by the International Monetary Fund (IMF) (1984) revealed that these fluctuations include undesirable macro-economic phenomena inflations though observed positive effect of Naira valuation fluctuations on export trade in European Union countries (Caballew and Carba, 1979).
Walsh and Yu (2010) viewed the effect of these fluctuations from first its impact on foreign direct investment where they noted that low Naira valuation favour the importation of production, machinery and production export in periods of high foreign Naira valuation. Furthering, ford and stein (1991) found a strong evidence of a weak host country increase inward model as depreciation (down change in Naira valuation) make a host country less expensive.
Blongein (1997) argued that Naira valuation depression in host countries tend to increase foreign direct investment inflows adding that a strong real Naira valuation strengthens the incentives of foreign companies to produce at home for export instead of investing in a host country for export. Different open economies experience different episodes of Naira valuation appreciation. Naira valuation induces a contraction of the exporting manufacturing sector. Maintenance of export performance to them require the depreciation of the real Naira valuation of a country’s currency, the achievable through monetary injections noting that a policy of Naira valuation depreciation can successfully prevent a contraction of export output, having an allocative effect in the economy (Lama and medina, 2010).
Adubi and Okunmadewa (1999) posited that Nigeria as a developing nation is expected to gain from export conversion price increases as a result of currency devaluation findings by Obadan (1994) and Osuntogun et al (1993) on the effect of stable Naira valuation on export performance showed that Naira valuation affect a country’s export rate with its attendant risk affect export earnings, performance and growth positive to exporters when devaluated poor result from the floating Naira valuation regimes of the 1970’s necessitated a change in foreign Naira valuation management. The structural adjustment programme was introduced in 1986, with the cardinal objective of restructuring the production base of the economy with a positive bias for agricultural export production. This reform facilitated the continued devaluation of the Nigerian Naira with the expected increase in domestic prices of agricultural export boasting domestic production.
CHAPTER THREE
RESEARCH METHODOLOGY
MODEL SPECIFICATION
We shall employ the single equation technique of econometric simulation for this study. The model specification involves the determinant of the dependent and independent variables were included in the model the priori expectation of the signs and sizes of the parameters of the functions, the functional form of the model, the mathematical form of the equation.
The model that will be adopted is the classical least regression model that will be used (OLS). The choice of this method is predicted on the basic features of OLS (BLUE).
MODEL 1
The model will be used to capture these objectives. Objective 1: The econometric model is stated as;
GDP = b0 + b1 NV + b2 INT + b3 DOP + ei
Where:
ER = Naira valuation
INT = Interest rate
CHAPTER FOUR
PRESENTATION AND ANALYSIS OF RESULTS
PRESENTATION OF RESULTS
Two models were estimated in this research work based on the topic the researcher is discussing. The models were estimated using the ordinary least square (OLD) method. The result of the models are presented below as thus:
CHAPTER FIVE
CONCLUSION AND POLICY RECOMMENDATION
CONCLUSION
Having conducted this research in the study of Naira valuation stability on economic growth, thus there is needed to maintain a stable Naira valuation. Using time, series data from 1980-2015, I estimated the effect of exchange rate on export performance in Nigeria, our result showed that export trade performance are influenced by Naira valuation stability. The study showed that Nigeria Naira valuation stability has a positive and significant effect on export and GDP, which is, if exports are sufficiently risk averse, and increase in exchange rate raises the marginal utility of export revenue and therefore induces them to increase exports. A stable Naira valuation will curtail inflation, increase export, maintain a favourable balance of trade, and help to solve the problem of deficits and increase the external reserve of the economy.
Policy Recommendations
Sequel to the findings of this study, I specifically made the following policy recommendations to the maintenance of stable Naira valuation. To control Naira valuation, these policies have to be adopted.
- The government should create incentive such as loan subsidy etc, to small scale industries, thereby encouraging them to process on domestic goods into processed goods that will help boast our export.
- The government should encourage the export promotion strategies in order to maintain a surplus balance of trad
- An effective policy should be made based on the fiscal and monetary policies which should be aimed at achieving a realistic Naira valuation for Naira.
- An appropriate environment and infrastructural facilities should be provided so that foreign investors will be attracted to invest in Nigeri This will provide employment opportunities, increase the level of income and the standard of living of the people.
- Strict foreign exchange control polices should be adopted in order to help in determination of appropriate Naira valuation valu This will go a long way to strengthen the Naira.
- Inthe case of imports, tariffs can be placed to be very high on imported goods, thereby discouraging imports.
- Naira valuationliberalization is also critical in facilitating trade in any economy, we therefore advice the policy makers to ensure that Naira valuation should be determined by the forces of demand and supply.
- Interestrateshould be at minimum, in order for the purchasing power of an average Nigeria to in
- . Finally,the government should influence the foreign Naira valuation, by positive economic reforms that will reduce the adverse effect of unstable Naira valuation on the Nigerian economy with respect to trade flow and export.
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