The Impact Of Persistent Depreciation Of The Naira Currency On The Growth Of Nigeria Economy

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The Impact Of Persistent Depreciation Of The Naira Currency On The Growth Of Nigeria Economy


Naira valuation is the price of one currency in terms of another currency. Naira valuations is also used to determine the level of output growth of the country. Over the years, Nigeria has faced with a constant depreciation of the Naira caused by various economic shortcomings. This research work is centered on the impact of Naira valuation on the Nigeria economic growth with special emphasis on the purchasing power of the average Nigeria and the level of international trade transaction. To do this, the classical linear regression model is applied and the ordinary least square econometric technique is also used to estimate the impact of Naira valuation on economic growth. The variables used are GDP and non-oil export as the dependent variables, real Naira valuations interest rates, inflation rate and degree of trade openness as the independent variables.

Chapter One

1.0 Introduction

1.1 Background of the Study

The currency of a nation would normally serve as a medium of exchange a standard of rate and a store of value. A close perusal of these functions would show that in a complex economy. Money is usually the only accepted medium through which a buyer pays a seller. Money is a convenient way to store wealth for use whenever it is needed. If however, the value of a currency is not stable, the value of that wealth will diminish daily. The Nigeria currency has contributed to lose value over a long period of time. Lispesy (1977) defined currency depreciation as a fall in the free market value of domestic value of domestic value of domestic currency in terms of foreign currencies. This study is centered on some specific variables the currency depreciation rate per year is the independent variable while GOP (gross domestic product). Interest rate and inflation are the dependent variables.

Adujie (2012) argued that countries like Ghana, Jamaica etc have better strength currencies and international respect compared to Nigeria. And this is not because those counties are more productive nor do they possess more robust export base in comparison with Nigeria. These counties do have comparative advantage to terms of market size or population, gross domestic product and export base in comparison to Nigeria. Depreciation of the naira has affected all the facets of the economic life of very Nigerian. This situation has been characterized by economy instituting inflationary perverse and high cost of doing business. Currency depreciation refers to a sharp fall in currency. Nigeria has been experiencing currency depreciation for a very long period of time and as years go by. This does have service consequences on the economy depreciation of the naira have been occurring from 1986 till date. GDP (grow domestic product) is the total value of all final goods and services product for the market place chairing a green year within a nation boundary. It is an aggregate measure or production equal to the sum of the gross varies added units engaged in production (plus any taxes and minus any subsidies on products not induced in the value of them output). According to Dickinson (2012) GDP is usually measured in three ways all of which should in principle give same result. These are the production (or output or value added) approach, the income approach of the expenditure approach. The most direct of the three is the production approach which sums the output of every class of enterprise to arrive at the total. One thing people want to know about their economy is whether its total outputs of goods and services is growing or sinking. GDP is measured in the currency of the country in question and Nigeria’s currency is depreciating, due to this depression of naira at will affect the measuring of GDP in Nigeria.

Interest rate as described by Burton (2008) is the rare at which interest is paid by borrower (debtor) for the use of money that they borrow from a under (creditor). Interest rate are vital tools of monetary policy and are taken onto account when dealing with variables like inflation, investment etc. it is a rate charged or paid for the use of money one to the depreciation of naira, borrowing from other countries will be difficult because the interest charged will be higher.

The problem of how to reduce inflation has been a central issue among policy markers 1970s Falaki (2010) wrote that one of the cause of nation depreciation inflation is the rate at which the general level by price of goods and service rising and subsequently, purchasing is falling. Inflation begins with money loosing its value. So therefore it is against the background or overview that this study is being centered.

1.2. Statement of Problem

The depreciation of naira persistently has various affects on the economy of, Nigeria. The instability and continuous depreciation of the naira has done a lot of damage to the economy of the nation. The effect of the economy include decline standard of living of the populace, increased cost of production cost push inflation etc.

One of the major course of naira depreciation is the balance of payment disequilibrium. Nigeria’s import become more than the export and this affected the currency because the external reserves decreased. Fiscal deficit has been a major course of naira depreciation; this has resulted to excess liquidity in the economy. The central bank has also attributed to the major course of naira depreciation to excess liquidity and it is blamed on the federal government for not yielding to its activities. On spending especially the disbursement of Nl98biIion oil wind fall to the state and local government. This was the course of naira depreciation back then in 2001, 2002 and 2003

It is against the above problem that the sandy intends to finds out.

  1. The effect of currency depreciation rate on gross domestic product.
  2. The issue of currency depreciation rate on interest rate.
  3. The impact of currency depreciation rate on inflation.

1.3. Objective of Study

The main objective of this study is to critically find out the impact of persistent depreciation of the naira currency on the growth of Nigeria economy.

Other purposes of this study are:

  1. To find out the effect of currency depreciation rate on grow domestic product (GDP)
  2. To surgically find out how currency depreciation rate affect interest rate
  3. To find out the impact of currency depreciation rate on inflation.

1.4. Research Question

To obtain a vivid understanding of these studied problems the following question will be relevant.

  1. To what extent does currency depreciation rate affect gross domestic product (GDP)?
  2. How does currency depreciation rate affect interest rate?
  3. Does currency depreciation rate have impact on inflation in Nigeria?

1.5. Research Hypothesis

The hypothesis is:

Ho1: there is no significant relationship between currency depreciation rate and gross domestic product

Ho2: there is no significant relationship between currency depreciation rate and interest rate

Ho3: there is no significant relationship between currency depreciation rate and inflation

1.6 Scope of Study

The research work was carried out in Delta state Nigeria. The study covers the period from 2000- 2013 for analyses. The scope of the study shall be restricted to the economic activities of Nigeria. Therefore this research study covers the causes or effect of the persistent depreciation of the naira. It will also show the impact of currency depreciation ad how it affect investors, businesses and the economy as a whole. The data used in this research is a secondary data and the type of secondary data employed is the time series data.

Chapter Five

Conclusion and Policy Recommendation

5.1 Conclusion

Having conducted this research in the study of Naira valuation stability on economic growth, thus there is needed to maintain a stable Naira valuation. Using time, series data from 1980-2015, I estimated the effect of exchange rate on export performance in Nigeria, our result showed that export trade performance are influenced by Naira valuation stability. The study showed that Nigeria Naira valuation stability has a positive and significant effect on export and GDP, which is, if exports are sufficiently risk averse, and increase in exchange rate raises the marginal utility of export revenue and therefore induces them to increase exports. A stable Naira valuation will curtail inflation, increase export, maintain a favourable balance of trade, and help to solve the problem of deficits and increase the external reserve of the economy.

5.2 Policy Recommendations

Sequel to the findings of this study, I specifically made the following policy recommendations to the maintenance of stable Naira valuation. To control Naira valuation, these policies have to be adopted.

  1. The government should create incentive such as loan subsidy etc, to small scale industries, thereby encouraging them to process on domestic goods into processed goods that will help boast our export.
  2. The government should encourage the export promotion strategies in order to maintain a surplus balance of trade.
  3. An effective policy should be made based on the fiscal and monetary policies which should be aimed at achieving a realistic Naira valuation for Naira.
  4. An appropriate environment and infrastructural facilities should be provided so that foreign investors will be attracted to invest in Nigeria. This will provide employment opportunities, increase the level of income and the standard of living of the people.
  5. Strict foreign exchange control polices should be adopted in order to help in determination of appropriate Naira valuation value. This will go a long way to strengthen the Naira.
  6. In the case of imports, tariffs can be placed to be very high on imported goods, thereby discouraging imports.
  7. Naira valuation liberalization is also critical in facilitating trade in any economy, we therefore advice the policy makers to ensure that Naira valuation should be determined by the forces of demand and supply.
  8. Interest rate should be at minimum, in order for the purchasing power of an average Nigeria to increase.
  9. Finally, the government should influence the foreign Naira valuation, by positive economic reforms that will reduce the adverse effect of unstable Naira valuation on the Nigerian economy with respect to trade flow and export.

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