THE EFFECT OF DEVALUATION OF NAIRA IN NIGERIA ECONOMY


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ABSTRACT

THE EFFECTS OF DEVALUATION OF NAIRA IN NIGERIA ECONOMY

Economist and Policy maker researchers had long believed that devaluation is one of the effective tools for improving the economy. This is because devaluation is expected to expand domestic Production, Promoting exports and replacing imports and as a result generating more jobs. But this is not so in the Nigeria experience. The rate of devaluation in the economy is great as many sector of economy has been attacked, many project were embarked upon but few were completed, many exporters have exported almost all the goods in the economy to the outside nation to the extent that such goods becomes more expensive than their imported counterparts, there is increase in national debt and unemployment.

 

As a result of this, the researchers aimed to embark on this project purposely to highlight those effects of devaluation of a thing on the overall Nigeria economy.

 

In the course of this research, a number of textbook and journals on devaluation were reviewed. The literature Review exposed the researchers to the beneficial effects of devaluations, reasons for its adoption, unemployment issues and others. Also, a number of copies of questionnaire were administered to elicit more facts. Questionnaires was employed to gather all the required relevant data from both the general public and importing and exporting firms. The data collected were analyzed and interpreted. Finally, Conclusions were drawn based on the data collected and analyzed with a view to offer enabling suggestions and recommendation that will aid the problem of unemployment, poverty and devaluation of naira        

 

 

 

 

 

 

 

TABLE OF CONTENT

 

Certification

Dedication

Acknowledgement

Abstract

Table of content

 

CHAPTER ONE

1.0            Introduction

1.1     Background to the Study

1.2     Statement of the Problem

1.3     Significance of the study

1.4     Scope of the study

1.5     Limitation of the study

1.6     Definition of terms

 

CHAPTER TWO

LITERATURE REVIEW

2.0     Introduction

2.1     Capital Flight due of naira devaluation

2.2     Theoretical issues in national Economic Management

2.3     The market mechanism and the economy

2.4     Keynesian Demand management

2.5     The idea of Economic deregulation

2.6     The philosophy of guided deregulation

2.7     Preliminaries of guided deregulation

2.8     Era of financial system deregulation  (1986 to date)

2.9     How the world Bank sold out Nigeria

2.10   Nigeria stabilization and structural Adjustment programmes Economic Stabilization Act of 1982

2.11       Definition of devaluation

2.12       Currency devaluation

2.13       Bastardization of the Naira

2.14       Circumstances leading to Devaluation 

2.15       Reason for Devaluation

2.16       Importance of Devaluation

2.17       Effects of Devaluation

2.18       Other effects of Devaluation

2.19       The Nigeria Socio –Economic Predicaments

2.20       Current issues the proposed Naira Re- Denomination

 

CHAPTER THREE

3.0     Introduction

3.1     Research Design

3.2     Population for the study

3.3     Sampling Techniques

3.4     Research Instrument

3.5     Procedure for data Collection  

3.6     Statistical Analysis

 

CHAPTER FOUR

4.0     Introduction

4.1     Method of Data Analysis

4.2     General Public Questionnaire (Section A)

4.3     General Public Questionnaire (Section B)

4.4     Imported and Exporter Questionnaire (Section A)

4.5     Importer and Exporter Questionnaire (Section B)  

4.6     Analysis of Questionnaire

 

CHAPTER FIVE

5.0     Introduction

5.1     Summary of the study

5.2     Conclusion

5.3     Recommendation

5.4     Suggestions  

CHAPTER ONE

 

INRODUCTION

From time immemorial and since the emergence of nation states governments and policy makers have been seriously concerned with economic growth and development of their geo – political territories. As civilization unfold and political sovereignty defines the boundaries of each nation or country, the guest for national development as an index of total emancipation and economic sovereignty becomes the focal point of all nationals. With the advents of economics as a separate fixed of study and the subsequent industrial revolution in western Europe board national development objectives emerged which ever since here became the target of every nation              

 

These board economic development objectives whenever in contempary times define the direction of economic policy  objectives of every country, Nigeria inclusive are:

-Stable price level

- High level employment

- Favourable balance of payment

- High and sustainable rate of economic development.

 

Nigeria all along was Agriculture – based until when petroleum was discovered in Nigeria. With the discovery of  petroleum, drilling and mining became a prominent of sector  the economy. The sector has since then been accounting for a Significant proportion of the country’s export earnings Agriculture on the other hand, though seriously declining in terms of export earning, it still provides employment for high proportion of the population.

 

Apart from the discovery of out of all, the attempt to develop the modern sector seriously affected the Agricultural in Nigeria. The modern sector is the target of young school leavers. The curricula of the school provides skills needed in the modern sector alienating the school leavers from the Agriculture Sector. The result was a decline in Agriculture output both inform of food items and raw material that should have fed the modern sector.

 

The modern sector predominantly concerned with processing pf raw materials and production of a few consumer goods for domestic markets depending sector arose from the devaluation of the naira. Such problems include, capacity utilization, fall in domestic demand and smuggling.

 

Devaluation refers to the process of reducing the value of a currency in terms of other currencies. The prime objective of devaluation in an economy operation within the existing international economy order is the substainment of the exchange rate of the local currency at a rate which keeps the balance of payments at equilibrium. As devaluation has to do with substainment of the exchange rate of local currency at a rate which keeps the balance of payments at equilibrium. As devaluation has to do with sustaining desirable exchange rate, it is therefore patients to examine the Nigeria experience in devaluation if we are to look at the exchange rate polities in Nigeria. The devaluation had  tremendous negative effects in several sectors of the economy.

 

Theoretically, devaluation is expected to expand domestic production, promoting exports and replacing imports and as a result generating more jobs. But this is not so in the Nigeria experience. The evidence so far in the implementation of the structural adjustment programmes (SAP) and devaluation in Nigeria pointed to increasing unemployment in spite of the enormous resources the government had been putting into employment creating activities.

 

BACKGROUND TO THE STUDY

The drive toward economic development and growth has however failed to yield the excepted result in many nations because of the three attendant problems which had frailed this economics.

In the experience of some nations it has been inevitable while other arose due to lack of proper management of resource and factor endowments. Whatever the cause, the problem of inflation, unemployment and poverty continue to task the best of all economic polices and development planning with little rewarded success.

 

Inflation in the simplest form has been defined as a high persistent rise in the general price of commodities and factors of production.

 

Thus, during inflationary period, money income rise on average as fas as the money prices of commodities (Lipseyi, 1983) changes in the price level brought about by inflationary pressure in the economy have become a matter of services concern because.

1.       Assessing the effects of inflation and hence making a national assessment of the harms it does depends significantly on other variables like demand, cost level of money supply and others in the economy.

2.       Inflation influences the allocation of resources by changing relative prices (including relative wages) of ten in haphazard fashion.

3.       Inflation re-distributes wealth from lenders to borrowers.

 

4.       Inflation reduces the living standard of those on fixed income

5.       Inflation is a major cause of arbitrary and sometimes socially destructive redistribution. The continued erosion of the purchasing power pf fixed money income is tragic to those who suffer it and as such is one of the many services redistributions effects of inflation

 

STATEMENT OF THE PROBLEM

In line with the recent trend, various discussions on the attainment of full employment, price stability and poverty seem to have different meaning to different people. The problems that informed me to carry out this study can be summarized below:

i.        The devaluation of naira and its effect on the economy.

Ii       The extent to which these problem affect the Gross Domestic Product (GDP)   

Iii      The measures to solve these economic problems

Iv      The effect of devaluation on the local market.

 

Furthermore, one of the aftermath effect of devaluation of the naira is the Balance of Payments Deficit.

 

Balance payments is a summary of a country’s financial transactions with the rest of the world. It is a systematic records of all payments to and receipts from foreign countries during a specific time period, usually a year.

 

A balance of payment deficit is when the total of payments and transfers to foreign countries exceed total receipts from foreign countries.

The balance of payment deficit therefore had led to the following problems in Nigeria.

 

1.       Poor Performance of non-oil exports:- Over the past 20yrs the share of non-oil sector made essentially of the agricultural and manufacturing sectors, has been very  low, less than 10percent on the average. This unimpressive performance was due majorly to neglect of the agricultural sectors of the economy in favour of non –existing white collar urban jobs.

 

Moreover, most of the Nigeria industries have not been able to penetrate foreign market because they are high – cost producers using crude methods and techniques of production as compared with cost saving highly developed mass production technology of the developed countries.

 

The division of Nigeria balance of payment into out and non-oil sector underscores the relative importance of crude petroleum in the Nigeria economy.     

 

2.       High debt service payment:- The oil glut of 1978 caused a considerable fall of the prices in international oil market and a sharp decline in government revenue, especially foreign exchange earnings. Inability to settle imports bills and the desire to increase the productive base of the Nigeria economy made it expedient for the government to borrow for balance of payments support and project financing this in turn led to the promulgation of Decree No 30 of 1978, authorizing the federal Government to raise external loans up to a maximum of N5 billon.

 

But contracts of external debt require that a proportion of export earnings set aside to meet debt obligations. This obviously constitute a major “conduct pipe” for the outflow of scare foreign exchange, and hence, a principal sources of balance of payments deficit.

 

3.       Low Level of Foreign Direct Investment

Direct investment has remained very low in Nigeria. This may be largely due to frequent change of industrial polices, instability in foreign exchange rates and interest rates, rising inflation, and long drawn crisis – ridden programme of transition of democratic governance – all combining to render the country’s investment climate hostile to inflow of foreign investment capital.  

 

In relation to the above, the following are also contributing factors:

1.       The technology progress in the developed countries

2        Low level of receipts from the provision of international services and income

3.       Import substitution and industrialization and

4.       Expansionary fiscal and monetary polices.

 

SIGNIFICANCE OF THE STUDY.

The aim of this project is to carryout a research work on the effects of devaluation of naira in Nigeria economy

 

This is often used in the developing countries of which Nigeria is a typical example to solve the following problems:

i.        To reduce large external imbalance.

ii        To correct perceived over –Valuation of the real exchange rate.

iii       To increase international competitiveness

iv       To promote export growth.

v.       To promote the activities of the local market.

The study also aim to providing  solution to the sectors that have been affected by the devaluation policy one of the solution of this problem is the fiscal policy.

 

Fiscal policy is one of the means through which the government intervene directly in the country’s economic activities. It is the use of taxation and government expenditure to regulate economic activity.

 

Fiscal policy can be used to solve the problems of unemployment inflation, external balance (Balance of payment deficit), for economic growth e.t.c

 

Fiscal Policy and Unemployment:- A period of economic slack with rising unemployment would call for:

a.       An increase in the level of government spending through – e.g awards of contacts to improve socio –economic infrastructures, and increased subventions to government ministries, parasitical and agencies

b.       A reduction in tax rates, especially income tax and company tax to boost aggregate demand of private individuals and business.

 

c.       Tax relief and concessions, and fiscal incentives to stimulate domestic private enterprises and to induce foreign private investors to locate their enterprises in the country with a view to enhancing creation of employment opportunities.

 

The study also highlights the foundation of the central government in performing the following economic functions of

Providing the legal framework and a social environment conducive to the effective operation of the prince system.

 

Creation and maintenance  of social and economic infrastructures

Redistribution of income

Reallocation of resources; and

Promotion of macro economic objectives

 

SCOPE OF THE STUDY

The scope of this study will cover the affected area of the Nigeria Economy on devaluation of Naira such as the Gross Domestic Product, Gross National Product, Unemployment inflation and poverty levels.

 

It will also comprise of the effect of devaluation of Naira on the poverty level in Nigeria, the enjoyment of economic, social and cultural right herded by the absence  of the rule of low, the existence in Nigeria of military governments, the Supervision of the constitution in favour of the intimidation and the negative effects that widespread  corruption has on the functioning of government institutions

 

It will not fault to mention the negative attitude of the government of Nigeria in respect of the promotion and protection of human rights in general and economic, social and cultural right in particular.

 

Most important point to mention is the reform program and the structural Adjustment program. The strike actions embarked upon by trade unions and the Hike in fuel prices if not mentioned will not make the study a complete one.

 

Another major point of study is the IMF loan itself which is an inspired attacks programme on the working masses. It led to more fees being imposed on student combined with the cuts in funds for education. Pensions and salaries being constantly withheld, privatization/ liquidation of public co operations and utilities intensified drastic cuts funds meant for social service

 

 

LIMITATION OF THE STUDY

There is bound to become limitation or another in a research of this nature. Therefore, the limitation that is encountered during the cause of this study is hereby stated and analyzed.

 

Firstly, there are financial constraints when it is to realize enough money to  finance the project, obstacle in transportation and buying of all materials necessary for use.

 

The political instability of the economy also posses the problem of not able to freely more from one place to the other because of the political unrest particularly in Ibadan.

 

Also the inadequate power supply also contribute in a large extent to the inability  of getting necessary information from the internet because of constant blackout. The Hike in the fuel price has also contributed in no small way as there is increment in the amount paid to download information on the internet per minute because of the exorbitant amount of money used to run the so called internet Cafes.

 

The furthermore, the limitation of combing academic studies as well as the distance to be covered also contribute an hindrance.

Finally, the time to do justice to the research work was too mineral to exploit all necessary material on the topic of discussion.

 

DEFINITION OF TERMS

DEVALUATION:-This is the reduction of the value of the home currency in terms of foreign currencies. It is an official decrease in the value of country’s currency.

ECONOMIC:- This is the act of careful management of resources so as to prevent unnecessary expenditure of is managing the little available resources in order to achieve maximum output.

POVERTY:- Poverty is the insufficiency of means relative to human need it is also viewed as chronic inadequate of resources of all types to satisfy the basic human needs.

INFLATION:- This is a situation where there is increase in the value of money or purchasing power in the circulation without corresponding increase in production such case lead to persistence rise in the general price level.

UNEMPLOYEMENT:-This is an involuntary idleness of a person willing to work at the prevailing rate of payment but unable to find the work. It is when those who are capable and willing to work cannot find any befitting job to do.

 

NAIRA:- This is the currency that is generally acceptable as a medium of exchange in Nigeria.

GRASS NATIONAL PRODUCE (GNP):- This is the value of monetary value of any goods and services produced by the citizen of a country within or without the country.

GROSS DOMESTIC PRODUCE(GDP):- This is the monetary value of goods and services produced in a given nation with a year

 

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