The Role Of Currency Devaluation In Developing Countries, A Case Study Of Nigeria

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The Role Of Currency Devaluation In Developing Countries, A Case Study Of Nigeria


Abstract


The main purpose of this study was to assess the Role of Currency Devaluation in Developing Countries, A Case Study of Nigeria. All the members of staff of the CBN in Nigeria were selected for the study. Three research questions guided the study with one research hypothesis.

In this study, a survey research design was adopted, the population comprises all the members of staff of the CBN in Nigeria, a simple random sampling technique was used to select 100 respondents from the population and a questionnaire was the instrument for data collection. Relevant literatures were reviewed which guided the objectives and methodology of this study. As result of the field study and analysis of results, the following findings were made: that the roles of currency devaluation in developing countries include but not limited to making exports become cheaper and more competitive to foreign buyers that there is a positive relationship between currency devaluation and economic growth. That on how has currency devaluation affects the Nigerian economy and other developing countries include that Exports has become cheaper and more competitive to foreign buyers.

Based on the findings of this study, It is recommended that naira should not be devalued further until we improve on the quality of goods being exported through industrialization so that global competitiveness will be achieved and it can have a positive effect on the balance of payment.


Chapter One


Introduction

1.1 Background to the study

According to Cooper (1971), currency devaluation is one of the most traumatic economic policy measures that a government may undertake and as a result, most governments are reluctant to devalue their currencies. However, a country can be forced into devaluation by an ominous trade deficit. Thailand, China, Mexico, Czech Republic – all devalued strongly, willingly or unwillingly, after their trade deficits exceeded 8% of the GDP. Devaluation of currency is decided by the government issuing the currency, and is the result of governmental activities. One reason a country may devalue its currency is to combat trade imbalances. Devaluation causes a country’s exports to become less expensive, making them more competitive on the global market. This in turn means that imports are more expensive, making domestic consumers less likely to purchase them. By making the domestic currency relatively cheaper (i.e devaluation), local production and exportation of commodities is thereby encouraged.

This helps to enhance the level of output growth of the economy (Aguiar, 2005) cited in (Momodu and Akani 2016:152)

Currency devaluation is a deliberate downward adjustment of the value of a country’s currency relative to another currency or standard currency (usually dollars). It is one ofthe tools of monetary policy to stabilize the economy most especially the less developed ones operating fixed exchange rate or semi-fixed exchange rate. Devaluation increases international competitiveness of domestic industries which leads to diversion of consumption of foreign goods to domestic goods (Yilkal, 2014) cited in (Osundina 2016: 1944). It is used to encourage exportation, discourage importation and to correct unfavourable balance of payment by making home goods cheaper to foreign countries and foreign goods expensive in the home country.


1.2 Statement of the problem.

The Nigerian government adopted the Nigerian pound since 1959 until 1973 where it was changed to Naira. In 1971 the Nigerian authorities chose not to devalue its Nigerian pound during the devaluation process of the American dollar and this resulted in the appreciation of the Nigerian pound dollar exchange rate $2.80 -$3.80 to the naira pound. In 1973 the naira replaced the Nigerian pound and then Nigeria devalued at the same rate with the US which caused the exchange rate to be $1.5 (Ogundipe et al 2013:234). According to (Osundina 2016:1947), currency devaluation is not a bad idea to solve the balance of payment’s economic problem in Nigeria given the fact that some other developing countries have used it as a tool. He further explained that devaluation of currency tends to favor the exporters but will cause output to fall since lower real wages will fall due to contraction of demand. It is these contradictions that spurred the interest in undertaking this study. Some theorists believe currency devaluation is good for the economy while some believe it shouldn’t be embarked on. This was also affirmed by Eromosele 2016: 26) in an argument for and against the Naira devaluation and the solutions proffered by the former minister of finance in the This day newspaper where he said the Naira is already undervalued and shouldn’t be devalued.

It is against this background that the study aims to examine the trend of currency devaluation in Nigeria and also understand the role of currency devaluation in developing countries with particular focus on Nigeria.


1.3 Objectives of the study.

The main objective of this study is to examine the role of currency devaluation in developing countries with particular focus on Nigeria. In order to achieve this objective, the following are the specific objectives:

  1. To understand currency devaluation in developing countries.
  2. To examine the Genesis and trends of currency devaluation in Nigeria.
  3. To investigate the role of currency devaluation in developing economies.
  4. To seek and determine as far as possible methods by which the risk associated with exchange rate fluctuations can be minimized.

1.4 Research Questions.

  1. What is the role of currency devaluation in developing countries.
  2. What is the relationship between currency devaluation and economic growth.
  3. How has currency devaluation affected the Nigerian economy and other developing countries.

1.5 Research Hypothesis.

  1. Currency devaluation does not significantly affect the economy
  2. Currency devaluation significantly affects the economy.

1.6 Significance of the study.

This study is very significant as it contributes to the literature and would also assist policy makers and economists in decision making as regards devaluing currency.

The study when carried out will also be of great benefit to student researchers who have interest in researching more into currency devaluation and various ways it can affect the economy. It will act like a guide to student researchers who may find the recommendations and findings of the study useful.


1.7 Scope of the study.

This study will cover currency devaluation in developing countries and how this has affected their economies. A case study of Nigeria will be looked at, and a study of currency devaluation since inception will be taken. In addition to this, a profile of Nigeria’s exchange rate development will be taken.


1.8 Limitations of the study.

During the course of this research, a number of constraints were experienced. The problem of gathering information. Also, time constraint in carrying out the study is a limitation.


1.9 Definition of terms

1.) Currency Devaluation:

This is a macro-economic fiscal policy that bothers on deliberate reduction in the value of home currency with the aim of maximizing gain in tradable items.

2.) Exchange Rate:

This is the price one country’s currency expressed in another country’s currency


Chapter Five


Summary, Conclusion and Recommendations

5.1 Summary

This study focused on the Role of Currency Devaluation in Developing Countries, A Case Study of Nigeria. The study was set to address three objectives which include:

  1. To determine the roles of currency devaluation in developing countries.
  2. To examine the relationship between currency devaluation and economic growth.
  3. To examine how currency devaluation affects the Nigerian economy and other developing countries.

Based on the above stated objectives and the study carried out, the following findings were made:

  1. That the roles of currency devaluation in developing countries include but not limited to making exports become cheaper and more competitive to foreign buyers; an improvement in the current account deficit; lead to higher rates of economic growth; a less damaging way to restore competitiveness than ‘internal devaluation’; Increase inflation and provides a boost for domestic demand and could lead to job creation in the export sector.
  2. That there is a positive relationship between currency devaluation and economic growth.
  3. That on how has currency devaluation affects the Nigerian economy and other developing countries include that exports has become cheaper and more competitive to foreign buyers. Therefore, this provides a boost for domestic demand and could lead to job creation in the export sector; A higher level of exports should lead to an improvement in the current account deficit. This is important if the country has a large current account deficit due to a lack of competitiveness; Higher exports and aggregate demand (AD) can lead to higher rates of economic growth;

Devaluation is a less damaging way to restore competitiveness than ‘internal devaluation’. Internal devaluation relies on deflationary policies to reduce prices by reducing aggregate demand. Devaluation can restore competitiveness without reducing aggregate demand and Reduces the purchasing power of citizens abroad. e.g. more expensive to go on holiday abroad.


5.2 Conclusion

The main purpose of this study was to assess the Role of Currency Devaluation in Developing Countries, A Case Study of Nigeria. All the members of staff of the CBN in Nigeria were selected for the study. Three research questions guided the study with one research hypothesis.

In this study, a survey research design was adopted, the population comprises all the members of staff of the CBN in Nigeria, a simple random sampling technique was used to select 100 respondents from the population and a questionnaire was the instrument for data collection. Relevant literatures were reviewed which guided the objectives and methodology of this study. As result of the field study and analysis of results, the following findings were made:

  1. That the roles of currency devaluation in developing countries include but not limited to making exports become cheaper and more competitive to foreign buyers; an improvement in the current account deficit; lead to higher rates of economic growth; a less damaging way to restore competitiveness than ‘internal devaluation’; Increase inflation and provides a boost for domestic demand and could lead to job creation in the export sector.
  2. That there is a positive relationship between currency devaluation and economic growth.
  3. That on how has currency devaluation affects the Nigerian economy and other developing countries include that Exports has become cheaper and more competitive to foreign buyers. Therefore, this provides a boost for domestic demand and could lead to job creation in the export sector; A higher level of exports should lead to an improvement in the current account deficit. This is important if the country has a large current account deficit due to a lack of competitiveness; Higher exports and aggregate demand (AD) can lead to higher rates of economic growth;

Devaluation is a less damaging way to restore competitiveness than ‘internal devaluation’. Internal devaluation relies on deflationary policies to reduce prices by reducing aggregate demand. Devaluation can restore competitiveness without reducing aggregate demand and Reduces the purchasing power of citizens abroad. e.g. more expensive to go on holiday abroad.


5.3 Recommendations

Based on the findings of this study, the following recommendations are made:

  1. It is recommended that naira should not be devalued further until we improve on the quality of goods being exported through industrialization so that global competitiveness will be achieved and it can have a positive effect on the balance of payment.
  2. Contractionary policies should also be put in place to curb the associated increase in inflation. There is no doubt that initially a common man in Nigeria will not enjoy it because the policy is channeled towards encouraging exportation and discouraging importation. Currency devaluation has led to inflation in many cases and Nigeria’s own may not be an exemption. Hopefully, the other policy instruments will combat inflation.
  3. This study recommends that Nigeria(ns) should strive hard and work towards diversifying our economy, because being a mono-economy affects our economy and even our currency.

The Role Of Currency Devaluation In Developing Countries, A Case Study Of Nigeria


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