IMPACT OF DEVALUATION OF NAIRA ON NIGERIA’S BALANCE OF PAYMENTS
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IMPACT OF DEVALUATION OF NAIRA ON NIGERIA’S BALANCE OF PAYMENTS
Chapter one
INTRODUCTION
1.0 Background of the Study
Prior to 1958, when Nigeria first sold crude oil, the Nigerian economy relied on cash crop exports to generate foreign revenue. Only in the early 1970s did the oil boom of the mid-1970s, with its resultant favourable balance of payments situation, usher in an era of unrestricted food import policy.
Import limitations were removed in some circumstances, while import tariffs were eliminated or reduced in others. The short period of oil market depression in the late 1970s resulted in tightening of food import taxes and import prohibition, which were later loosened when the oil market situation stabilised and overall government revenue reached N98.2 billion (NNPC, September 1978).
1981-1986 was a time of economic slump and balance-of-payments crises. Trade restraints were reinstated to address the extreme distortion. Most food imports faced massive levies or outright prohibitions.
Export restrictions and levies were also considered in order to address the primary issue of domestic inflation. To boost money for the government, centralised marketing was reinforced.
The trade liberalisation regime was first included in the 1986 budget as part of the structural adjustment programme (SAP). The regime abolished the import licencing system, reduced import restrictions, modified advance payment of import duties
overhauled customs and excise duty schedules, established a tariff review board, allowed domiciliary accounts operation, abolished export prohibition, disbanded commodity boards, and established an export development fund, guarantee scheme, insurance scheme, and export promotion zone. SAP’s key aims include the following:
1. To restructure and diversify the economy’s production base in order to lessen dependence on the oil sector and imported goods.
2. Achieve fiscal and monetary balance of payment viability throughout time.
3. Reduce the dominance of unproductive investment in the public sector, improve sector efficiency, and increase sector development potential.
The primary component of achieving SAP’s aims in Nigeria was the implementation of a realistic exchange rate regime through the use of second-tier international markets such as SFEM, FEM, IFMS Bureau de change, and so on.
The goal here was to eliminate the overvaluation of the naira using market forces of demand and supply to establish the naira’s realistic exchange rate.
Between 1975 and 1985, the naira was thought to be overvalued. In fact, the fundamental problems of foreign exchange scarcity, liquidity issues, and overinvoicing of imports may all be linked back to this overvaluation.
It was thought that achieving a realistic exchange rate would alleviate these structural problems by creating incentives for non-oil exports, discouraging capital flow, and, most importantly, resolving the balance of payments.
1.1 Introduction
The deterioration of Nigeria’s balance of payments since the late 1970s has been linked in some manner to the currency rate. This has sparked heated disputes about whether Nigeria should lower its currency, as advocated by the International Monetary Fund (IMF). The arguments revolved around the naira’s overvaluation.
The exchange rate is the price at which foreign currency (or claims to it, such as cheques and promissory notes) is purchased and sold. It is the price of one currency in relation to another currency.
In the parallel market, the naira has fallen from 116 to 165 to the dollar in less than two months, losing 49 in the process. All attempts to firm up the naira or at least stem its drop have been, at best, futile.
However, the Central Bank of Nigeria claimed that it had purposefully left Nigeria’s foreign exchange market to respond to the worldwide shock in the oil market.
Foreign currency resources are derived and consumed in the course of carrying out commercial transactions between the country’s citizens and others throughout the world. In this regard, there is a distinction between foreign exchange transactions and balance of payments.
While foreign exchange transactions indicate cash flows generated by overseas activities, the balance of payment examines the actual movement of products and services, as well as changes in financial assets and liabilities.
When adjustments are made to cash flow statements resulting from international transactions in foreign exchange, they are brought up to balance of payment standards.
The position of foreign exchange reserves has an impact on the ability to finance temporary payment difficulties. Since the downturn in oil exports began in 1981, Nigeria’s external trade transactions have faced a number of challenges.
The recession that followed the collapse of oil profits significantly curtailed activity in an economy with a high import dependency ratio. According to Central Bank records, foreign exchange inflows fell from $26 billion in 1980 to $12 billion in 1984 and as low as $7 billion in 1986 (CBN Economic and Financial Review 1987).
To exacerbate the difficulty of external trade, Nigeria has accumulated massive foreign loans with a high servicing load, resulting in strained relations with its traditional trade creditors. This has resulted in a significant reduction in foreign capital inflows.
The country’s balance of payment troubles in the late 1960s heavily influenced its trade policy in the 1970s. The programmes of the 1970s also aimed to boost domestic output and create revenue for government spending.
Prior to liberalisation (between 1970 and 1985), the commercial sector was heavily regulated. Import levies and tariffs were set high (up to 70% in 1975) to discourage imports. Import licencing was also used to impose quantitative restrictions on some food imports.
On the other hand, export policy focused on cash crops (export crops), with the primary goal of increasing revenue while also moderating farmers’ returns and domestic food prices.
The primary export policy mechanisms were export duties, sales taxes, and centralised marketing. The exchange rate was also administratively adjusted to ensure low-cost raw material imports for local manufacturing industries that substitute for imported goods.
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