The impact of the decrease in oil prices and the depreciation of the Nigerian currency on economic growth of the country
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The impact of the decrease in oil prices and the depreciation of the Nigerian currency on economic growth of the country
INTRODUCTION TO CHAPTER ONE OF THE INFLUENCE OF THE REDUCTION IN OIL PRICE AND THE DEVALUATION OF NAIRA ON THE ECONOMIC GROWTH OF NIGERIA
1.1 BACKGROUND OF THE STUDY
Nigeria, the most populous black nation in Western Africa, is well-known for its primary source of revenue: crude oil. As a result, Nigeria became increasingly reliant on oil revenue, which has fallen in price per barrel and production over the last few decades.
With oil money being the mainstay of the Nigerian economy, economists are very interested in predicting the implications of a drastic change–a reduction in oil price–on the Nigerian economy as a whole.
The term “oil fall” refers to a rapid, unexpected decrease in oil price or output that has undoubtedly influenced the value of the naira (Ozumba, 2009). This study, on the other hand, focuses on the impact of lower oil prices and naira depreciation on Nigerian economic growth.
Because the Nigerian economy is mostly dependent on oil, the naira depreciation would set off a series of events, many of which may have unintended consequences. The depreciated naira will stimulate export of indigenous items, which do not now exist in sufficient quantities,
but will impose an additional burden on the public, as the cost of commodities would rise across the board. The cost of loanable funds would have increased as a direct result of the increase in the base lending rate.
In such a circumstance, the development will be unproductive and go against the government’s touted job-creation objective (Cooper, 1999).
Because of the large exchange rate gap between the dollar and the local currency, it is expected that the government’s revenue in naira will rise. However, because of two variables – dropping oil prices and decreased crude output aggregate – this assumption may not be realised.
When currencies are depreciated in wealthy countries, it is to boost exports because the prices of local products serve as an incentive and bait for overseas customers.
In the process, they earn foreign currency, expand output, and generate new jobs. Unfortunately, Nigeria is not in this position.
Devaluation is a decrease in the value of a currency in relation to the commodities, services, or other monetary units for which it may be traded. It also refers to the official depreciation of a country’s currency within a fixed exchange rate system, in which the monetary authority legally establishes a new fixed rate in relation to a foreign reference currency (Dornbusch et al, 2011).
Devaluation is a monetary policy instrument used by countries with a fixed or semi-fixed exchange rate. This is by no means a full definition of the phrase. Depreciation is a notion that is closely related to devaluation and is sometimes confused with currency devaluation.
Depreciation and devaluation are sometimes used interchangeably, despite the fact that they both refer to values in terms of other currencies. The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) recently decided to devalue the Naira to N198 from N160 to the US dollar.
However, due to the continuous global drop in oil prices, international crude oil prices fell dramatically from an all-time high of $141 per barrel at the end of July 2008 to $45 per barrel at the end of January 2009. This has compelled the federal government to reduce the budget benchmark from $65 to $45.
This will limit government spending, which will have an impact on the provision of goods and services in 2015. However, given that a skyrocketing oil price in the last sixteen years had no discernible influence on the economy,
some believe that a drop in crude oil prices could be a blessing in disguise for Nigeria. The government would be compelled to look inward and spend more wisely. We have a bubble economy that cannot resist pressure.
1.2 STATEMENT OF THE PROBLEM
Crude oil accounts for around 95 percent of Nigeria’s foreign exchange receipts. Countries whose economies rely heavily on oil for a significant portion of their foreign exchange earnings have been hurt the hardest.
The International Monetary Fund (IMF) enables countries to weaken their currency to rectify “fundamental disequilibrium” in their balance of payments in order to encourage economic growth. In 1967,
the United Kingdom depreciated its currency. The United States depreciated in 1973, and France followed suit in 1969, followed by 14 Francophone African countries. Thus, devaluation is not a novel concept and should not be regarded as a heinous and heinous conduct;
it is a lawful means of determining the exchange value of a currency in light of new supply and demand realities. While devaluing a currency owing to a drop in oil prices may appear to be an appealing alternative, it might have detrimental effects. Making imports more expensive safeguards native industries,
which may become less efficient in the absence of competition. Higher exports relative to imports can also boost aggregate demand, leading to inflation.
Currency devaluation lowers the price of a country’s domestic output, whether deliberate or as a result of a drop in oil prices. This has the ability to help boost economic growth by increasing export volume.
1.3 OBJECTIVES OF THE STUDY
The following are the study’s objectives:
1. To investigate the impact of lower oil prices on Nigeria’s economic growth.
2. To investigate the impact of naira depreciation on Nigerian economic growth.
3. To find elements that can stimulate Nigerian economic growth.
1.4 RESEARCH QUESTIONS
1. What effect has the drop in oil prices had on Nigeria’s economic growth?
2. What effect has the naira depreciation had on Nigeria’s economic growth?
3. What are the things that can stimulate Nigeria’s economic growth?
1.6 SIGNIFICANCE OF THE STUDY
The following are the study’s implications:
1. The findings of this study will inform the general public and financial sector players on the impact of falling oil prices and naira depreciation on Nigeria’s economic growth.
2. The findings of this study will serve as a useful reference for the Nigerian government and policymakers in determining the relationship between the drop in oil prices, the devaluation of the naira, and economic growth in order to ensure their effective management.
3. This research will also serve as a resource base for other academics and researchers interested in conducting additional research in this sector in the future, and if implemented, will go so far as to provide new explanations for the topic.
1.7 SCOPE AND LIMITATIONS OF STUDY
This study will look at the drop in oil prices, the naira’s depreciation, and Nigeria’s economic development.
STUDY LIMITATIONS
Financial constraint- A lack of funds tends to restrict the researcher’s efficiency in locating relevant materials, literature, or information, as well as in the data collection procedure (internet, questionnaire, and interview).
Time constraint- The researcher will conduct this investigation alongside other academic activities. As a result, the amount of time spent on research will be reduced.
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