Naira Exchange Rate Depreciation And Domestic Inflation In Nigeria

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Naira Exchange Rate Depreciation And Domestic Inflation In Nigeria


Abstract


This study is on naira exchange rate depression and domestic inflation in Nigeria. Four objectives were raised which included; to identify the causes of inflation and exchange rate depression, to examine the extent to which naira exchange rate depression affected domestic inflationary rate in Nigeria, to assess government policy that affect exchange rate and domestic inflation in Nigeria,to ascertain the relationship between naira exchange rate depression and domestic inflation in Nigeria. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff from central bank of Nigeria was selected randomly. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made up auditors, human resource managers, customer care officers and receptionists were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies.


Chapter One


Introduction

1.1 Background to the Study

The naira exchange rate depression coupled with persist increase in the inflationary rate has been a major bane on economy of Nigeria. To a layman inflation is a phenomenon to embrace as his income increases daily without knowing the harmful side of such an increase. Whether there is anything like depression or an improvement in the exchange or whether income is nominal or real the layman does not know. But this complementary problem so to say of naira exchange rate depression 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 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 Program (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 1990. This depreciated to 115.7 to a dollar by the 12 April, 2001 (CBN) 1994. By 2003, it has raised N130 to the US dollar and 2017 it has raised to 360 to the US dollar. It on this view the research wants to investigate naira exchange rate depression and domestic inflation in Nigeria


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 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.


1.2 Objective of the Study

The main objective of this study is onnaira exchange rate depression and domestic inflation in Nigeria. But for the successful completion of the study; the researcher intends to achieve the following sub-objectives;

  1. To identify the causes of inflation and exchange rate depression
  2. To examine the extent to which naira exchange rate depression affected domestic inflationary rate in Nigeria.
  3. To ascertain the relationship between exchange rate depression and economic growth in Nigeria
  4. To ascertain the relationship between naira exchange rate depression and domestic inflation in Nigeria

1.3 Reseaerch Hypotheses

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

  1. H1: there are causes of inflation and exchange rate depression in Nigeria
    H0: there are no causes of inflation and exchange rate depression in Nigeria
  2. H02: there is no significant relationship between naira exchange rate depression and domestic inflation in Nigeria
    H2: there is a significant relationship between naira exchange rate depression and domestic inflation in Nigeria

1.4 Significance of the Study

It is believed that at the completion of the study, the findings will be of benefit to Nigeria government. The study will come with good policy that will appreciate the exchange rate and stabilize Nigeria economy. The study will also be of great benefit to the researchers who intends to embark on research on similar topics as it will serve as a guide. Finally, the study will be of great importance to academia’s, lecturers, teachers, students and the general public.


1.5 Scope and Limitation of the Study

The scope of the study covers naira exchange rate depression and domestic inflation in Nigeria. The researcher encounters some constrain which limited the scope of the study;

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational Privacy:

Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.


1.6 Definition of Terms

Excahnge Rate:

In finance, an exchange rate of two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country

Domestic:

Existing or occurring inside a particular country; not foreign or international

Inflation:

In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.


1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  1. Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
  2. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
  3. Chapter three deals on the research design and methodology adopted in the study.
  4. Chapter four concentrate on the data collection and analysis and presentation of finding.
  5. Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain naira exchange rate depression and domestic inflation in Nigeria.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of naira exchange rate depression and domestic inflation in Nigeria


5.2 Summary

This study was on naira exchange rate depression and domestic inflation in Nigeria. Four objectives were raised which included; To identify the causes of inflation and exchange rate depression,to examine the extent to which naira exchange rate depression affected domestic inflationary rate in Nigeria, to ascertain government policy that affect exchange rate and domestic inflation in Nigeria,to ascertain the relationship between naira exchange rate depression and domestic inflation in Nigeria. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff from central bank of Nigeria was selected randomly. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made up auditors, human resource managers, customer care officers and receptionists were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies.


5.2 Conclusion

The results show that inflation in Nigeria is highly responsive to exchange rate depression, money supply and real GDP. A long run relationship was also found to exist between inflation and exchange rate depression, indicating that the model has a self-adjusting mechanism for correcting any deviation of the variables from equilibrium. The implication of this is that additional effort need to be put in place to increase the volume of export products to make up for the extra demand that may be created by the depression. The paper also found that inflation rate in Nigeria has a lagged cumulative effect. Although exchange rate depression may not directly control inflation, it helps to restructure the price mechanism of both import and export, such that Naira depression subtly tends to moderate prices in Nigeria, especially imported price inflation.


5.3 Recommendation

The researchers therefore recommend that the central policy makers should in addition to inflation targeting policies they employ to stabilize the real exchange rate, also adopt other macroeconomic measures such as increasing domestic production through the attraction of Foreign Direct Investment and improvement of human capital. They should also aim at intervening directly in the foreign exchange market by managing adequately the country’s foreign reserve and use it to arrest any unwanted deterioration in the Naira/Dollar exchange rate. With a good foreign reserve, a country can purchase/demand its currency in the foreign exchange market to halt its fluctuation beyond a certain level.


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