Cluster Analysis On The Effect Of Dollar Increment On The Economy Of Nigeria

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Cluster Analysis On The Effect Of Dollar Increment On The Economy Of Nigeria


Abstract


This study empirically investigates the effect of dollar increment on the economy of Nigeria using the cluster analysis method of estimation for data covering the period between 1985 and 2016. We found that All clusters from cluster 1 to cluster 33 are very far from the profile 1 which is the gross domestic product (GDP) from year 1980 to 2016 but closer to profile two which is the nominal exchange rate of the country.

Since all the clusters are very far from the GDP, but closer to the nominal exchange rate, it therefore means that the exchange rate has a significant effect on the gross domestic product of Nigeria from 1980 to 2016 that is to say that dollar increment has a negative effect on the economy as depicted by the very far values of the GDP to the clusters.
Based on the analysis using the cluster method, it was therefore concluded that dollar increment influences the economy of Nigeria and that there is a relationship between dollar increment and the economy of Nigeria.


Chapter One


Introduction

1.1 Background of the study

Overtime, a lot has been said and done about the recent continuos increment of the United States dollars and its effect on the economy. The importance of the US dollars to a mono economy and import dependent nation like that of Nigeria cannot be over emphasized in that most notable transactions that takes place in any economic process must have a direct or indirect connection with the dollars.

In the economic analysis of any developing country like that of Nigeria, the increase or decrease of the dollars has a corresponding effect on the economy and by extension influences development.

The increment of the dollars amid crisis can lead to severe economic consequences. The economic history of Nigeria has helped to buttress this fact.

Certainly, the consequences for dollar increment or devaluating the naira can have both a long and short term effect. F or a country like Nigeria for instance, an increase in currency depreciation or dollar increment would immediately hit consumer purchasing power while at the same time reduces the value of wages that was hitertho before now valuable. Since Nigeria is an import dependent Nation, purchases of foreign goods quickly fall because prices of foreign goods would geometrically rise, this would lead to lack of small and medium enterprises growth and businesses would suffer which by extension affects the speedy growth and development of the economy. The pace of economic adjustment will depend on how quickly domestic industries/companies respond toward import replacement and exporting.

The exchange rate policy is what must be discussed in the increment or decrement of the dollar in Nigeria. Exchange rate policy simply entails the value of a unit of the naira to the dollar (Obadan, 1996). Exchange rate policy is therefore a critical component in the increament of the dollar and how it influences the economy. Specifically internal balances mean the level of economic activity that is consistent with the satisfactory control of inflation. On the contrary, external or sustainable current account deficit financed on lasting basis expected capital inflow. It is important to know that economic objectives are usually the main consideration in determining the exchange control which influences the the increment of the united state dollar.

For instance from 1982 – 1983, the Nigerian currency was pegged to the US dollar on a 1.1 ration. Before then, the Nigerian naira has been devalued by 10% which had its corresponding consequences on the economy of Nigeria. Apart from this policy measures discussed above, the Central Bank of Nigeria (CBN) applied the basket of currencies approach from 1979 as the guide in determining the exchange rate was determined by the relative strength of the currencies of the country’s trading partner and the volume of trade with such countries. Specifically weights were attached to these countries with the American dollars and British pound sterling on the exchange rate mechanism (CBN, 1994). One of the objectives of the various macro – economic policies adopted under the structural adjustment programme (SPA) in July, 1986 was to establish a realistic and sustainable exchange rate for the naira, this policy was recommended in 1986 by the International Monetary Fund (IMF).

The inconsistency in policies and lack of continuity in exchange rate policies aggregated unstable nature of the naira rate against the dollar. (Gbosi, 1994:70). This has led to the economic inconsistencies in Nigeria in recent times.

When the value for the dollar increase which simultaneously devaluates the Naira, domestic firms and households can no longer afford to buy domestic goods and services, and foreigners aren’t interested in buying overpriced goods and labour. So companies go broke or cash trapped and unemployment rises because more people would be layed off. With lots of unused industrial capacity and crowds of unemployed workers, prices and wages slowly decline. More flexible labour markets with lots of room for productivity growth will adjust faster than less flexible economies like that of Nigeria.


1.2 Statement of the general problem

The dollar rate when compared with the Naira has been stable between the 1973 and 1979 which were the oil boom era. This was also the case before 1990 when Nigeria generated huge gross domestic product (GDP) from the agricultural sector unlike now where the agricultural sector has gone nearly comatose of not been able to account up to 5% of the country’s gross domestic product (GDP) owing to the discovery and development of the oil sector.

The problem of the alarming increase of the dollar when compared to the naira has been a cause for a serious concern and has led to the depreciation of the economy. Small scale enterprises has been discouraged as a result of the increment of the dollar, imports reduce significantly and having known that the small enterprises are the bedrock of any economy and for any economy to thrive, the small scale businesses must be encouraged and supported but this has regrettably not been the case in recent times.


1.3 Aims and objectives of the study

The major aim of this study is examine the effect of dollar increment on the economy of Nigeria. Other specific objectives of this study include the following;

  1. To examine the present state of the economy.
  2. To examine the relationship between dollar increment and economic development of Nigeria.
  3. To recommend ways of improving the value of the Naira against the dollar.

1.4 Research Questions

  1. What is the effect of dollar increment on the economy of Nigeria?
  2. What is the present state of the economy of Nigeria?
  3. Are there ways the economy of Nigeria can be improved?
  4. Is there a significant relationship between dollar increment and economic development of Nigeria?
  5. What are the ways the value of the naira can be improved against the dollar?

1.5 Research Hypotheses

  1. H0: Dollar increment does not influence economic development in Nigeria.
    H1: Dollar increment influences economic development in Nigeria.
  2. H0: There is no significant relationship between dollar increment and the economy of Nigeria.
    H1: There is a significant relationship between dollar increment and the economy of Nigeria.

1.6 Significance of the study

This study would be of immense importance to economic policy makers, researchers and scholars who are interested in the exchange rate policy and economy development. This study would also benefit students who are interested in the study of economic development.


1.7 Scope of the study

This study is restricted to the effect of dollar increment on the economy of Nigeria.


1.8 Limitation of the study

Financial constraint

Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint

The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.


1.9 Definition of terms

GDP:

Gross domestic product

Dollar:

A paper money, silver or cupronickel coin, and monetary unit of the United States, equal to 100 cents

Economy:

The process or system by which goods and services are produced, sold, and bought in a country or region

Policy:

The declared objectives that a government or party seeks to achieve and preserve in the interest of national community.


Chapter Five


Conclusion And Recommendation

This section of the study is sub divided into discussion of empirical findings of the study, conclusion of the study and recommendation of the study.


5.1 Discussion of finding

This study on the cluster analysis on the effect of dollar increment on the Nigeria economy was carried out to determine the effect of dollar increment on the Nigeria economy from 1985-2016. the following findings were made by the study;

All clusters from cluster 1 to cluster 33 are very far from the profile 1 which is the gross domestic product (GDP) from year 1980 to 2016 but closer to profile two which is the nominal exchange rate of the country.

Since all the clusters are very far from the GDP, but closer to the nominal exchange rate, it therefore means that the exchange rate has a significant effect on the gross domestic product of Nigeria from 1980 to 2016 that is to say that dollar increment has a negative effect on the economy as depicted by the very far values of the GDP to the clusters. Though cluster 1 is closer to profile two, cluster 7,8,9,10,11,13,14,15,16 and 17 are more closer to profile 2 (Nominal exchange rate) than other clusters. That is to say that the exchange rate from 1986 to 2016 was alarmingly high leading the indiscriminate increase of the dollar which leads to a massive reduction in the gross domestic product of the country over these years.


5.2 Conclusions

This research has been able to carry out a cluster analysis on the effect of dollar increment on the Nigeria economy ranging from 1985-2016. Justified conclusions were drawn based on the findings of the research.

Based on the analysis using the cluster method in the previous chapter, it can therefore be said that dollar increment influences the economy of Nigeria and that there is a relationship between dollar increment and the economy of Nigeria.


5.3 Recommendations

In connection to the findings of this research, the following recommendations are suggested:

  1. The monetary authorities should employ every monetary tool to minimize the level of exchange rate fluctuations in the economy.
  2. The policy of exchange rate flexibility should be maintained but with government intervention guide.
  3. It is confirmed that external reserve curbs exchange rate fluctuations and thus the federal government should through the Central Bank of Nigeria increase the foreign reserve.

Cluster Analysis On The Effect Of Dollar Increment On The Economy Of Nigeria


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