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Naira Exchange Rate Depreciation And Domestic
Inflation In Nigeria
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TABLE OF CONTENTS
Title page
ii
Approval page
iii
Dedication
iv
Certification
v
Acknowledgement
vi
Abstract
vii
Table of contents
viii
CHAPTER ONE
Introduction
1
1.1
Background to the study
1
1.2
Statement of problem
3
1.3
Significance of study
5
1.4
Objective of the study
5
1.5
Research hypothesis
6
1.6
Scope of study
7
1.7
Definition of terms
7
Reference
8
2
CHAPTER TWO
Literature review
9
2.1
The concept of exchange rate
9
2.2
Exchange rate management in Nigeria
19
2.3
Inflation – a concept
28
2.4
Theories of inflation
32
2.5
Inflation in Nigeria
37
2.6
Exchange rate depreciation and inflation in Nigeria
41
2.7
Empirical evidence
43
Reference
46
CHAPTER THREE
Research methodology
48
3.1
Method of data collection and analysis
48
3.2
Theoretical framework and model specification
48
Reference
53
CHAPTER FOUR
4.1
Analysis of result
54
Presentation of result
54
3
4.2
Analysis of result
55
CHAPTER FIVE
Summary, conclusion and recommendation
57
5.1
Summary
57
5.2
Conclusion
58
5.3
Recommendation
58
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND TO THE STUDY
The naira exchange rate depreciation coupled with persist increase in the
inflationary rate has been a major bane on economy of Nigeria. To a layman
inflation is a phenomena to embrace as his income increases daily without
knowing the harmful side of such an increase. Whether there is anything like
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depreciation or an improvement in the exchange or whether is income is
nominal or real the layman do not know.
But this complementary problems so to say of naira exchange rate
depreciation and inflation has been a thought of obesity in the hearts of
Nigerians past and present governments and many patriotic Nigerians.
The pegging of, inflation in Nigeria can be said to be a direct result of
the policies of the country’s governments to stimulate a fast rate of economic
growth and development, since 1951 when the ministerial government was
introduced between 1984 and 1986, the naira was quoted against dollar and
pounds as the only intervening currencies which was in line with the
International Monetary Fund (I.M.F) demand. I.M.F had earlier complained
that naira exchange rate was rising above the stipulated 2% limit. The naira
was then devalued at 1.000 4 US dollar. The inflation rate in Nigeria was not
serious problem before her independence. But immediately after the civil war
i.e. from 1970’s, the inflation rate in Nigeria took another dimension. The
value of naira as against dollar and pounds sterling started to deteriorate, in
1970, it was a naira to 1.400 dollar and 0.584 pounds sterling. In 1971, it was
1.44 dollar and 0.582 pounds sterling to a naira. In 1973, it was 1.519 dollar
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and 0.614 pounds sterling to a naira. In 1974 it was 1.589 and 0.675 pounds
sterling to naira which increased to 1.623 dollars and 0.734 pounds sterling in
1975 as a result of Udoji salary award of 1974 increased wage extensively.
Higher wages increased the purchasing power of consumers thus, leading to
increase in their prices.
The introduction of Structural Adjustment Programme (SAP), and
second-Tier Foreign Exchange (SFEM) in 1986 on one of government’s major
policy packages, was aimed at making the over, valued naira exchange rate
more realistic and responsive to market forces. Regrettably, C. Anyanwu
(1989) observed, the SAP/SEFEM was a disaster that was fast destroying the
foundation of Nigeria economy.
There was consequent persistence of
exchange rate depreciation of the naira (from 1.5691 naira to 1.0 dollar at the
end of September 1986, 7.8950 naira to 1.0 dollar by mid February 1990).
Also by August 1998, the dollar was sold for 21.9960 naira at the Foreign
Exchange Market (FEM) while at parallel market it was sold for 45 naira. The
value of naira continued to depreciate to the extent that the exchange rate was
less than one dollar to a naira before 1990. It was 0.119 US dollar to a naira in
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1990. This depreciated to 115.7 to a dollar by the 12 April, 2001 (CBN) 1994.
By 2003, it has risen N130 to the US dollar.
1.2
STATEMENT OF PROBLEM
The depreciation of naira persistently, has various inflationary effects on
the economy of Nigeria. The effects of this macro-economic problem can be
highlighted in different stages.
In the first place, when a currency is
depreciated, it is designed to reduced or discourage the excessive dependence
on a particular foreign or some foreign commodities.
This will make domestic prices of such imports may be intermediate
goods and as a result tends to push the cost of production of final goods up.
In another way, deteriorating exchange rate of naira could bring about
inflation of increase in wage rate or demand, when the naira is devalued, the
price of important raw materials increases domestic firms may be willing to
increase production reduction on their competition as a result of like in prices
of raw materials.
Consequently, the output of the firms will attract high prices, therefore
for consumers to meet their provisions level of consumption or maintain their
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real income, calls for wages increase which according to Sotersten (1994) will
worsen the whole situation.
Nigerians as one of the developing nations that heavily depend on
imported inputs, implements and machinery, the cost of these are usually very
high due to poor exchange rate of naira.
This will discourage potential investors, how investment will lead to
reduced national product, which is an indicator of stagnancy or retrogression of
the economy.
For this reason, Obasanjo (1999) noted that any thing could happen of
regulatory authorities did not take steps to tidy up the situation, so the
researcher wants to find out the problems and suggest ways of remedying the
situation.
1.3
SIGNIFICANT OF THE STUDY
For the purpose of this study, the researcher took a step further to
determine the possible significances.
(i)
To give other researchers who which to write on this topic the
process to follow
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(ii)
To check the inflationary of deflationary gap
(iii)
To determine the cumulative impact of broad money growth and the
sizeable devaluation of the naira
(iv)
To determine the fate of naira with other internal currencies.
(v)
To determine government policies.
1.4
OBJECTIVE OF THE STUDY
The objectives of this study include the following
(i)
To identify the causes of inflation and exchange rate depreciation.
(ii)
Examine the extent to which naira exchange rate depreciation heed
affected domestic inflationary rate in Nation.
(iii)
Assess the effectiveness of government earlier introduced policies.
(iv)
Give suggestion and recommendation on appropriate policies for the
future.
1.5
RESEARCH HYPOTHESIS
Since the research data was mainly from secondary sources, the
hypothesis used will be in two forms to determine result.
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The null hypothesis and the alternative hypothesis. The null hypothesis
(Ho) will be tested against the alternative hypothesis (Hi)
(a)
Ho:
There is no positive or significant relationship
between exchange rate depreciation and domestic inflation
in Nigeria.
(b)
Hi:
There is significant or positive relationship between
exchange rate depreciation and domestic inflation in
Nigeria.
1.6
SCOPE AND LIMITATION OF THE STUDY
The study covers the period from 1985 to 2000. It concentrates on the
trend of exchange rate depreciation and inflation in Nigeria. The study is
limited to the period because of the problems associated with the availability
and collection of secondary data needed for the research work due partly to the
level of development of the Nigeria economy.
1.7
DEFINITION OF TERMS
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Exchange rate:
This is the price at which one country exchanges its
currency for other currencies.
Depreciation:
This is when exchange rate changes so that a unit of its
currency can buy fewer units of foreign currency.
Devaluation:
This is an intentional act put forward by the government of
a country with the aim of sustaining equilibrium.
Inflation:
This is substantial, sustained increase in general level of prices.
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REFERENCES
Anyanwu J. C. (1993), Monetary Economics: Theory, Policy and
institutions, Onitsha, Hybrid Publishers.
Anyanwu J. C. (1997), Structure of the Nigeria economy (1960 –
1997), Ontisha, Joance Educational Publishers.
CBN (1994) Briefs.
CBN (2001), Monetary, Credit, Foreign Trade and Exchange Policy
Guidelines 2001 Fiscal year No 35.
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