The Depreciation of Naira on Nigerian Economy: Causes, Effects and Remedy
CHAPTER ONE
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:
- To examine the impact of depreciation of naira on Nigerian economy.
- To examine the causes of depreciation of naira on Nigerian economy.
- To examine the effects of depreciation of naira on Nigerian economy.
- Finally, to examine the remedy to economic growth of Nigeria.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
INTRODUCTION
Currency devaluation are a natural outcome of the floating exchange rate system that is the norm for most major economies. There has been an ongoing debate on the appropriate exchange rate policy in developing countries like Nigeria. Exchange rate is the rate at which a unit of the currency of one country can be exchanged for a unit of the currency of another country. It determines the relative prices of domestic and foreign goods, as well as the strength of external sector participation in the international trade (Adeniran et. al, 2014). Exchange rate regime and interest rate remain important issues of discourse in the International finance as well as in developing nations (Obansa et. al, 2013) and the choice of exchange rate regime stands as perhaps the most contentious aspect of macroeconomic policy (Calvo and Reinhart, 2002).
Exchange rate fluctuations in emerging markets, which has become more pronounced in the last two decades, have had significant impact on the economies of the affected countries. Empirical evidences have shown that exchange rate volatility in turn is caused by both real and financial aggregate shocks (Calvo and Reinhart, 2002). Adam, (2002) opined that these shocks are engendered largely from collapse of commodity prices in the world market, reduced foreign lending and increased cost of external borrowing. The volatility of exchange rates in developing countries is widely contended as being one of the main sources of economic instability around the world (Adeoye and Atanda, 2012). Conversely, fluctuations in the currency strength of major economic powers like United States drive considerably the impact of the global economy on budding economies like Nigeria. In recent years, these fluctuations have been enormous, volatile and frequently unrelated to underlying economic fundamentals (Philippe et al., 2006). Fluctuations in exchange rate has different implications on the economic growth as measured by key macroeconomic variables. The right choice of exchange rate regime will bring an economy back to the equilibrium and many economists claim that it is one of the factors for the positive economic development (Saqib, 2013). Previous research on the impact of exchange rate has reached contrasting results- currency depreciation could have expansionary or contractionary effect on economic growth. As demonstrated by Guittian (1976) and Dornbusch (1988), the success of currency depreciation in promoting trade balance largely depends on switching demand in the proper direction and amount, as well as on the capacity of the home economy to meet the additional demand by supplying more goods.
In recent times, the fall in the exchange rate has been attributed to fall in oil price which resulted in a continuous and heavy depletion of the country’s external reserve, a strategy employed by Central Bank of Nigeria (CBN) to defend the naira.
CHAPTER THREE
RESEARCH METHODOLOGY
This section describes the model specified for the problem, the variables used and their definition. It also describes the different test that is to be carried out. This test refers to the diagnostic test such as; autocorrelation test, stationarity test, co-integration test, e.t.c. It also talks about the hypothesis test, method of data analysis and sources of data.
MODEL SPECIFICATION
Thus, the model is specified as RGDP =F (MS, INT, EXCH)
Where;
RGDP = Real gross domestic product
MS – Money supply
INT – Interest Rate
Exch – Exchange Rate
Our model can be restated in an econometric form as;
RGDP = b0+b1 MS+b2 INT + b3 EXCH + µ
Where:
b0 – b3 = being the coefficient of the variable
µ = Stochastic variable or error term
METHOD OF EVALUATION
EVALUATION BASED ON ECONOMIC CRITERIA (A’PRIORI EXPECTATIONS)
This is based on the principle of economic theory. Here, our results can be checked for their reliability with both the size and sign of economic a’ priori expectation.
CHAPTER FOUR
PRESENTATION AND ANALYSIS
INTRODUCTION
This section covers the analysis of data and presentation of results, the hypothesis tested and the findings of the study were also discussed.
Regression Result
Unit Root
CHAPTER FIVE
CONCLUSION AND RECOMMENDATIONS
CONCLUSION
The study concluded that depreciation though an economic recovery panacea always recommended by the International Monetary Fund and the World Bank had never helped any Nation to recover and so Nigeria will not be an exception. Although currency devaluation would promote trade balance, alleviate balance of payments difficulties and accordingly expand output and employment it switches demand from imports to domestically produced goods by increasing the relative prices of imports and making export industries more competitive in international markets thus stimulating domestic production of tradable goods and inducing domestic industries to use more domestic inputs. The result of our analysis shows that although money supply, interest and exchange rate affect economic growth significantly, currency devaluation has a negative and insignificant impact on economic growth of Nigeria during the period under review.
Recommendation
- The paper recommends that Nigeria should diversify her economic base, create an enabling environment for export oriented manufacturing to grow and instead of devaluation, trade restriction, ban on some selected imports and other monetary measures should be introduced to address the country’s balance of payment position.
- Monetary authorities should do what they can to reduce the temporary increase in prices lest it become permanent. Timing at this point becomes very crucial. More so, the Nigerian government should consider devaluation of currency as the last resort to the economic imbalance.
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