THE EFFECT OF DEVALUATION OF NAIRA IN NIGERIA ECONOMY.
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THE EFFECT OF DEVALUATION OF NAIRA IN NIGERIA ECONOMY.
Chapter one
INRODUCTION
Governments and policymakers have always been concerned with the economic growth and development of their geopolitical regions. As civilization progresses and political sovereignty determines the limits of each nation or country, the need for national development as a measure of comprehensive liberation and economic sovereignty becomes the main point for all citizens.
With the birth of economics as a separate field of study and the ensuing industrial revolution in Western Europe, basic national development objectives evolved, which have since become the target of every nation.
These primary economic development objectives, which govern the course of economic policy in contemporary times for every country, including Nigeria, are:
-A stable price level.
– High-level employment.
– A favourable balance of payment
– A rapid and sustained rate of economic development.
Nigeria was always an agricultural country until petroleum was discovered there. With the discovery of petroleum, drilling and mining became a significant segment of the economy.
Since then, the sector has contributed significantly to the country’s export revenues. Agriculture, on the other hand, continues to employ a large part of the population despite a significant decline in export earnings.
Aside from the finding, the attempt to build the modern sector had a significant impact on agriculture in Nigeria. Young school leavers are targeting the modern sector.
The school’s programmes teach skills needed in the modern economy, distancing school leavers from the agriculture sector. The upshot was a decrease in agricultural output, both in terms of food and raw materials, which should have fed the modern sector.
The contemporary sector is primarily focused with the processing of raw materials and the production of a few consumer items for domestic markets. This industry formed as a result of the naira’s devaluation. Such issues include capacity utilisation, a decrease in domestic demand, and smuggling.
Devaluation is the process of lowering the value of a currency in terms of other currencies. The primary goal of devaluation in an economy operating within the existing international economic system is to sustain the local currency’s exchange rate at a rate that maintains the balance of payments in equilibrium.
Devaluation is the process of maintaining the local currency’s exchange rate at a level that maintains the balance of payments in equilibrium.
Because devaluation is concerned with maintaining a desirable exchange rate, it is prudent to investigate Nigeria’s experience with devaluation when studying exchange rate policies in Nigeria. The devaluation had a significant detrimental impact on various sectors of the economy.
Devaluation is projected to boost domestic output by increasing exports and replacing imports, resulting in more jobs. However, this is not true in Nigeria’s experience. So far, data from the execution of structural adjustment programmes (SAP) and devaluation in Nigeria has pointed to increased unemployment, despite the government’s massive investment in job creation activities.
BACKGROUND FOR THE STUDY
The drive for economic expansion and progress, however, has failed to produce the expected results in many countries due to the three accompanying challenges that have hampered this economy.
Some nations’ experiences have been unavoidable, while others have resulted from a failure to manage resource and factor endowments properly. Whatever the cause, the problems of inflation, unemployment, and poverty continue to challenge even the strongest economic policies and development plans, with little success.
Inflation, in its most basic form, is described as a significant and sustained increase in the general price of commodities and production components.
Thus, during an inflationary period, money income rises on average, as do commodity prices (Lipseyi, 1983). Changes in the price level caused by inflationary pressure in the economy have become an issue of concern for services because.
1. Assessing the consequences of inflation and hence establishing a national assessment of the harms it causes is heavily reliant on other variables such as demand, the cost level of the money supply, and others in the economy.
2. Inflation affects resource allocation by randomly altering relative prices (including relative salaries) by 10.
3. Inflation shifts wealth from lenders to borrowers.
4. Inflation lowers the living standards of persons with fixed incomes.
5. Inflation is a significant driver of arbitrary and sometimes socially damaging redistribution. The ongoing loss of the purchase power of fixed money income is devastating for those who suffer from it, and as such is one of the numerous service redistribution impacts of inflation.
Statement of the Problem
In accordance with previous trends, numerous talks about achieving full employment, price stability, and reducing poverty appear to have diverse meanings for different people. The problems that prompted me to conduct this study are summarised below:
i. The devaluation of the naira and its impact on the economy.
Ii The amount to which these problems affect the GDP (Gross Domestic Product).
Iii. Efforts to address these economic issues
Iv. The impact of depreciation on the local market.
Furthermore, one of the consequences of the naira’s devaluation is a balance of payments deficit.
Balance payments are summaries of a country’s financial transactions with the rest of the globe. It is a systematic record of all payments made to and received from foreign countries for a certain time period, often a year.
A balance of payment deficit occurs when the sum of payments and transfers to foreign countries exceeds the amount of receipts from those countries.
As a result of the balance of payment imbalance, Nigeria has faced the following challenges.
1. Poor Performance of Non-Oil Exports: Over the last 20 years, the non-oil sector, which is primarily comprised of agriculture and manufacturing, has had a very low proportion, less than 10% on average. This poor performance was largely attributable to the abandonment of the agricultural sectors of the economy in favour of non-existent white collar urban jobs.
Furthermore, most Nigerian companies have been unable to access the overseas market since they are high-cost manufacturers using crude methods and techniques of production when compared to cost-saving highly developed mass production technologies in industrialised countries.
The segmentation of Nigeria’s balance of payments into oil and non-oil sectors highlights the relative importance of crude petroleum in the Nigerian economy.
2. High debt service payments:- The oil glut of 1978 resulted in a significant drop in international oil market prices and a steep loss in government revenue, particularly foreign exchange revenues.
Inability to settle import bills, as well as a desire to expand the Nigerian economy’s productive base, prompted the government to borrow for balance of payments support and project financing, resulting in the promulgation of Decree No. 30 of 1978, which authorised the federal government to raise external loans up to a maximum of N5 billion.
However, arrangements for foreign debt demand that a percentage of export profits be set aside to pay debt commitments. This evidently constitutes a major “conduct pipe” for the outflow of scarce foreign cash, and thus a primary source of the balance of payments deficit.
3. Low levels of foreign direct investment.
Direct investment in Nigeria has remained quite low. This could be attributed to frequent changes in industrial policies, instability in foreign exchange rates and interest rates, rising inflation, and a long-delayed crisis-ridden programme of democratic governance transition, all of which combine to make the country’s investment climate hostile to foreign investment capital inflows.
In addition to the above, the following are contributing factors:
1. Technological advancements in developed countries
2. Low level of receipts from the provision of overseas services and income.
3. Import substitution and industrialization.
4. Expansionary fiscal and monetary policies.
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