NAIRA EXCHANGE RATE DEPRECIATION AND DOMESTIC INFLATION IN NIGERIA
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NAIRA EXCHANGE RATE DEPRECIATION AND DOMESTIC INFLATION IN NIGERIA
INTRODUCTION
CHAPTER ONE
1.1 BACKGROUND OF THE STUDY
The depreciation of the naira, combined with the persistent rise in the inflationary rate, has been a severe blight on Nigeria’s economy. To a layperson, inflation is a phenomenon to welcome as his income rises daily,
oblivious to the negative consequences of such an increase. The layman does not know whether there is any depreciation or improvement in the currency rate, or whether the income is nominal or real.
However, the complementing problems of naira depreciation and inflation have been a source of obesity in the hearts of Nigerians, both past and present rulers, as well as many patriotic Nigerians.
Since 1951, when the ministerial government was introduced between 1984 and 1986, the naira was quoted against the dollar and the pound as the only intervening currencies in line with the International Monetary Fund (I.M.F) demand.
IMF had previously worried that the naira exchange rate was increasing above the 2% limit. After that, the naira was devalued to 1.000 4 US dollars. Prior to her independence, Nigeria’s inflation rate was not a major issue. However, soon following the civil war, in the 1970s, Nigeria’s inflation rate took on a new dimension.
The naira’s value versus the dollar and the pound sterling began to fall; in 1970, a naira was worth 1.400 dollars and 0.584 pounds sterling. In 1971, one naira was worth 1.44 dollars and 0.582 pounds sterling. In 1973, a naira was worth 1.519 dollars and 0.614 pounds sterling.
It was 1.589 dollars and 0.675 pounds sterling to the naira in 1974, but it grew to 1.623 dollars and 0.734 pounds sterling in 1975 as a result of the Udoji pay award of 1974, which increased wage significantly. Higher salaries increased consumers’ purchasing power, causing their prices to rise.
The adoption of the Structural Adjustment Programme (SAP) and second-tier foreign exchange (SFEM) as part of one of the government’s key policy packages in 1986 aimed at making the overvalued naira more realistic and responsive to market forces. C. Anyanwu (1989) observed that the SAP/SEFEM was a disaster that was rapidly eroding the foundation of the Nigerian economy.
As a result, the naira’s exchange rate devaluation persisted (from 1.5691 naira to 1.0 dollar at the end of September 1986 to 7.8950 naira to 1.0 dollar by mid February 1990).
Also, by August 1998, the dollar was selling for 21.9960 naira on the Foreign Exchange Market (FEM), but it was selling for 45 naira on the parallel market.
Before 1990, the naira’s value had depreciated to the point where the exchange rate was less than one dollar to one naira. In 1990, one US dollar equaled 0.119 naira. By the 12 April, 2001 (CBN) 1994, it had fallen to 115.7 to the dollar. It has climbed to N130 to the US dollar by 2003.
1.2 STATEMENT OF THE PROBLEM
The ongoing depreciation of the naira has a variety of inflationary repercussions on the Nigerian economy. The consequences of this macroeconomic dilemma might be highlighted in stages.
To begin with, depreciation of a currency is intended to lessen or discourage undue reliance on a specific foreign currency or commodities.
This raises domestic pricing of such imports, which may be intermediate items, and hence tends to raise the cost of manufacture of final goods.
In another way, a deteriorating naira exchange rate could cause wage rate or demand inflation. When the naira is devalued, the price of important raw materials rises, and domestic firms may be willing to increase production while reducing competition as a result of the rise in raw material prices.
As a result, the output of the enterprises would draw high prices, requiring salary increases in order for consumers to reach their expected level of consumption or maintain their real income, which, according to Sotersten (1994), will worsen the overall situation.
Nigerians, being one of the developing nations, rely largely on imported inputs, tools, and machinery, the cost of which is typically very high due to the naira’s weak exchange rate.
This will deter potential investors because investment would result in lower national product, which is an indicator of economic stagnation or retrogression.
As a result, Obasanjo (1999) highlighted that anything may happen if regulatory authorities did not take efforts to clean up the situation, thus the researcher wishes to identify the problems and provide solutions.
1.3 SIGNIFICANCE OF THE STUDY
The researcher went above and beyond to determine the potential significances for the purposes of this study.
(i) To outline the procedure for other researchers who wish to write on this issue.
(ii) To close the inflationary or deflationary gap
(iii) To calculate the cumulative impact of broad money expansion and significant naira depreciation.
(iv) To determine the fate of the naira in relation to other domestic currencies.
(v) To make decisions about government policies.
1.4 OBJECTIVE OF THE STUDY
The following are the study’s objectives:
(i) Determine the causes of inflation and exchange rate depreciation.
(ii) Determine the extent to which the depreciation of the Nigerian naira has affected domestic inflationary rates in the country.
(iii) Evaluate the success of previously implemented government programmes.
(iv) Make suggestions and recommendations on acceptable future policies.
1.5 RESEARCH HYPOTHESIS
Because the research data was primarily obtained from secondary sources, the hypothesis used to establish the outcome will take two forms.
The alternate hypothesis and the null hypothesis. The alternative hypothesis (Hi) will be evaluated against the null hypothesis (Ho).
(a) Ho: No positive or substantial association exists.
In Nigeria, there is a relationship between currency rate depreciation and domestic inflation.
(b) Hello: A significant or positive association exists between
Nigeria is experiencing exchange rate depreciation and domestic inflation.
1.6 SCOPE AND LIMITATIONS OF THE STUDY
The study spans the years 1985 through 2000. It focuses on the trend of currency depreciation and inflation in Nigeria.
The study is confined to the era due to issues with the availability and acquisition of secondary data required for the research effort, which are attributable in part to the Nigerian economy’s degree of development.
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