ABSTRACT
The objective of this
study is to access the impact of devaluation of the naira on Nigeria’s
balance of payment. Before the dominance of the oil sector, particularly
between 1960-1970, the balance of payment was less erratic. However, since
1970, the balance of payment has swunged at one time or the other from a
position of strength to that of the weakness with a decline in foreign exchange
earnings. This has been attributed to the global glut in the petroleum industry
and the relatively high expenditure on impact by Nigeria because of work domestic
supply capability.
The major finding of
this study was various exchange regime adopted by Nigeria government so far. A review
of the effect of the different exchange rate system reviews that the fixed
exchange rate system, which characterized the military regimes in Nigeria
resulted in over-valuation of the naira relative to other currency and hence
resulted in self distortion in macro economic variables. The flexible exchange
rate system, on the other hand, was resorted to during the SAP to restore the
real value of naira. At present, the Dutch auction system is being used to
determine the exchange rate in Nigeria.
In an attempt to
correct the serious disequilibrium in the external sector of the economy, the
control system was replaced with a market based system with inception of SAP in
June, 1986. The main achievement of the new system are the elimination of
payment arrears, the increase in domestic capacity utilization due to the
increase in the local source of raw materials, elimination of the
over-valuation of the naira exchange management.
However the problems
of the dependence on the oil sector for foreign earnings, continuous
depreciation of the naira and the attendant inflationary expectation are yet to
be resolved
TABLE
OF CONTENTS
CHAPTER ONE
1.0 Historical
background of the study
1.1 Introduction
1.2 Statement
of the problems
1.3 Research
objectives
1.4 Research
hypothesis
1.5 Model
specification
1.6 Significance
of the study
1.7 Scope
and limitation of the study
1.8 Sources
of data collection
1.9 Organization
of the study
References
CHAPTER TWO: LITERATURE REVIEW
2.0 An overview of devaluation of the naira on Nigeria’s Balance of
Payment
2.1 Empirical evidence of devaluation on naira
2.2 Theoretical framework for devaluation of the naira
2.3 The implication of devaluation of the naira on Nigeria’s Balance
of Payment
2.3.1 Reasons for devaluation
2.3.2 Short-run effect of devaluation of the naira on the Nigeria’s
Balance of Payment (Influence of import Structure)
2.4 Exchange rate regimes in Nigeria economy
2.5 Exchange rate management before SAP 1980-June 1986
2.6 Management of exchange rate under SAP July 1986-1990
2.7 Appraisal of the exchange rate management
2.8 Trend and profile of Nigeria’s Balance of Payment
2.9 Approaches to Balance of Payment.
References
CHAPTER THREE:
RESEARCH METHODOLOGY AND METHOD OF DATA COLLECTION
3.0 Introduction
3.1 Sources and nature of data collection
3.2 Model specification and description of variables
3.3 Analysis of the technique
References
CHAPTER FOUR:
DATA ANALYSIS AND
INTERPRETATION OF RESULT
4.0 Introduction
4.1 Statement of hypothesis
4.2 Sources and nature of data
4.3 Specification of data
4.4 Data presentation
4.5 Model specification
4.6 Empirical result and interpretation of the regression results
4.7 Presentation of regression at a glance
CHAPTER
FIVE:
SUMMARY,
CONCLUSION AND POLICY RECOMMENDATIONS
5.0 Summary and conclusion
5.1 Major findings
5.2 Policy recommendation
Bibliography
Appendix
CHAPTER
ONE
INTRODUCTION
1.0 BACKGROUND TO THE
STUDY
Prior to 1958, when Nigeria
exported crude oil for the first time, Nigerian economy had relied on export of
cash crops for her foreign exchange. It was only in the early 1970’s when oil
boom of the mid 1970s and the resulting favourable balance of payments position
led to an era of liberal food import policy. Import restrictions were lifted in
some cases and import duties were either abolished or reduced in others. The
short spell of depression in the oil market in the late 1970s gave rise to
tightening of food import tariffs and import prohibition, which was again
relaxed as the oil market situation improved the total government revenue to
N98.2 billion (NNPC publication, September 1978).
The period 1981-1986 was one of
economic depression and balance of payment crisis. Trade controls were
reintroduced to correct the severe distortion. Huge tariffs or outright bans
were imposed on most food imports. Export bans and duties were also reviewed to
address principally the domestic inflation problem. Centralized marketing was
reinforced to increase government revenue.
The 1986 budget introduced the trade
liberalization regime as a component of the structural adjustment programme
(SAP). The regime included abolition of the import licensing system, reduction
of import restrictions, modification of advance payment of import duties,
overhauling of custom and excise duty schedules, establishment of tariff review
board, allowance of domiciliary accounts operation, abolition of export
prohibition, dissolution of commodity boards, and establishment of an export
development fund, guarantee scheme, insurance scheme and export promotion zone.
The main objectives of SAP include the following:
1.
To restructure and
diversify the productive base of the economy in order to reduce dependence on
the oil sector and imports.
2.
To achieve fiscal and
monetary balance of payment viability over the period.
3.
To lesson the
dominance of unproductive investment in the public sector, improve the sector’s
efficiency and enhance the growth potential of the sector.
The main element of accomplishing the
objectives of SAP in Nigeria
was the adoption of the realistic exchange rate regime through the adoption of
the second tier foreign market: SFEM, FEM, IFMS Bureau de change etc.
The intention here was to remove the
over valuation of the naira through the market forces of demand and supply to
determine the realistic exchange rate of the naira.
Between 1975 and 1985 the naira was
considered to be over value. In fact the structural problems of foreign
exchange scarcity, liquidity problems, over invoicing of import can be traced
back to this over valuation. It was hoped that these structural problem would
be gotten rig if a realistic exchange rate could be achieved so that incentives
can be created for non-oil exports, capital flow can be discouraged and most of
all balance of payment can be solved.
1.1 INTRODUCTION
The
deterioration of Nigeria’s
balance of payments since the late 1970’s has in one way or the other been
associated with the exchange rate. This has led to a number of heated debates
as to whether Nigeria
should devalue her currency or not as proposed by the International Monetary
Fund (IMF). The arguments have been based on the fact that the naira was over
valued (Aboyade 1982).
The
exchange rate represents the price at which purchases and sales of foreign
currency (or claims on it such as cheques and promissory notes) take place. It
is the price of one currency in term of another currency. Within a minimum
period of less than two months, the naira has cascaded from 116 to 165 to a
dollar in the parallel market, losing 49 in the process. All steps taken so far
to firm up the naira, or at least stop the slide have, at best, remained
unsuccessful. However, the Central bank of Nigeria, explained that it had
deliberately allowed the Nigeria’s
foreign exchange market to adjust to the global shock in the oil market.
Foreign
exchange resources are derived and expended in the course of effecting economic
transactions between the residents of the country and the rest of the world. In
this sense there is a line between foreign exchange transaction and the balance
of payments.
While foreign exchange transaction
reflect cash flows arising from international operations, the balance of
payment looks at the actual operations, the balance of payment looks at the
actual movement of goods, services and changes in financial assets and
liabilities. When adjustment is made to cash flow statement arising from
International transaction in foreign exchange they are brought to balance of
payment standard. The state of foreign exchange reserves has implication for
the ability to finance temporary payment difficulties. Since the down turn in oil export began in
1981, Nigeria’s
external trade transaction has been facing a lot of problems;
The recession which accompanied the
collapse of oil fortunes had considerably reduced activities in an economy with
a high import dependency ratio. Central Bank records indicate that foreign
exchange of inflow dropped from $26 billion in 1980 to $12 billion in 1984 and
to low as $7 billion in 1986 (CBN Economic and financial review 1987).
To further complicate the problem of
external trade, Nigeria
accumulates huge foreign debts servicing burden and worsened relation between
the country and its traditional trade creditors. The consequence of this is
considerably reduced inflow of foreign capital.
The balance of payment problems of the
country in the late 1960s largely dictated the trade policies in the 1970s. The
policies in the 1970s also sought to promote domestic production and generate
revenue for government expenditure. There was considerable restriction and
regulation of the trade sector before liberalization (i.e. between 1970 and
1985). Import duties and tariffs were quite high (as much as 70% in 1975) to
discourage imports. There were also quantitative restrictions on some food
imports through import licensing. On the other hand, the focus of export policy
was on cash crops (export crops), with the primary purpose being to raise
revenue and to moderate farmers’ returns and domestic food prices. Main export
policy instruments were export duties, sales taxes and centralized marketing.
Exchange rate was also administratively determined to ensure cheap imports of
raw materials for import-substituting local manufacturing industries.
Before the introduction of the Structural
adjustment Programme (SAP). The basic framework for foreign exchange management
was the exchange control act of 1962 which was reinforced by the economic
stabilization (Act of 1982). The pitfalls of this exchange control led to its
abandonment.
The SAP objectives include the
achievement of equilibrium in the balance of payment and fiscal viability among
others. Under the new dispensation, the framework for foreign exchange market
(FEM) was conceived as a mechanism for the determination of an appropriate
exchange rate for the naira in order to reduce the pressure in foreign exchange
resources and stabilize the balance of payment.
Since the inception of the FEM system
in September, 1986, the naira has undergone substantial devaluation. This
research project aims at examining the implications of the devaluation of the
naira on the Nigeria
balance of payment.
1.2
STATEMENT OF THE PROBLEM
The oil boom of the 1970’s brought
with it fundamental changes in Nigerian economy. The first is the over-dependence
of the economy on crude petroleum export as the main foreign exchange earning
and government revenue. By 1980 the oil sector which accounted for 22% of the
gross domestic product (GDP) provided 80% of the government revenue and over
96% of export earning (CBN 1987).
Secondly, the competitiveness of the
agricultural sector in the international market was eroded by the over -valued
naira exchange rate, inadequate pricing policies, rural urban migration and the
neglect arising from so called oil syndrome.
Thirdly, the structure of the policy
incentives and control encouraged import-oriented production and consumption
pattern with little incentives for non-oil exports.
From about mid-1981, the world oil
market started to collapse and with the collapse an economic crisis emerged in Nigeria. The
result decline in oil export and price was reflected in decline in foreign
exchange receipt and government revenue.
Thus external reserves fall sharply
and debt mounted in the face of rising
imports, balance of payment deficits wideness and effort at containing the adverse development
created some other serious problems such a s economic depression, rising prices
and unemployment.
1.3 RESEARCH OBJECTIVES
The aim and objectives of this
research is as follows:
1.
To examine the effects of
devaluation of the naira on Nigeria
balance of payment position.
2.
To consider the exchange rate
management in Nigeria
and its effects on the balance of payments. Particularly, before and under the
structural adjustment programmes (SAP period).
3.
To suggests way and means of
improving the balance of payment and overall economic growth and development of
the country.
1.4 RESEARCH HYPOTHESIS
Ho: There is no significant relationship between
the devaluation of naira and economic growth of the country
H1: There is significant relationship between
the devaluation of naira and the economic growth of the country.
Ho: There is no significant relationship between
the devaluation of naira and the equilibrium balance of payment.
H1: There is significant relationship between
the devaluation of naira and the equilibrium balance of payment.
Ho: There is no significant relationship between
the exchange rate and economic growth.
H1: There is a significant relationship between
the exchange rate and economic growth.
1.5 MODEL SPECIFICATION
The first and most important step an
econometrician has to take in attempting any study is to express the
relationship existing among the variables under discourse in mathematical form.
The developed estimating equation will be of assistance to know how well the
estimating equation actually describes the relationship between the variables.
In the model specified below, we intend to
investigate the relationship between balance of payment, exchange rate and
economic growth of the Nigerian economy.
MODEL ONE
Y
= b0 + b1X1 + b2X2 + b3X3
+ b4X4 + µ
Where;
Y = real
GDP
X1 = Inflation rate
X2 = Volume of exports
X3 = Volume of imports
X4 =
Exchange rate
B1, B2, B3 and B4= coefficient of
associated variables
µ = Stochastic error term
MODEL TWO
Y
= b0 + b1 X1+ b2X2+ µ
Where;
Y = Balance
of payment
X1 =
Inflation rate
X2 =
Exchange rate
MODEL THREE
Y= B0 + B1X + µ
Where;
Y
= Gross Domestic Product
X
= Exchange rate
1.6 SIGNIFICANCE OF THE STUDY
This study is important because it
will help the CBN to determine whether to continue operating the market
mechanism system with the overall economic objectives which it aims at
achieving.
These objectives are meant to maintain
a healthy balance of payment position, determine an appropriate exchange rate
of the naira and price stability. This will help to achieve a reasonable level
of economic growth.
The objectives of the exchange rate
policies as summarized by lirsch (1972) include.
a.
Adjustment
process: The adjustment process whereby
the regime should help to promote a satisfactory working of the adjustment of
payment of imbalances.
b.
Promotion of the
world trade, employment real income and economic development. This means that
exchange rate regime should help to support elimination restrictions and
maintenance of a multilateral system of payment.
c.
Support appropriate
economic and financial policies of countries such as healthy balance of payment
position, price stability, full employment and a reasonable level of economic
growth; therefore, if the above objectives are not achieved, then there is no
for the country to continue with the operation of the market mechanism system
of the exchange rate.
1.7 SCOPE AND LIMITATION OF THE STUDY
This research is limited to the
balance of payment and exchange rate management between 1983-2007. This study
therefore examined the exchange rate management in Nigeria and its effects on the
balance of payment within the period under review.
1.8 SOURCES OF DATA COLLECTION
The statistical data used for this
research will be an intensive library research. This include books, relevant
journals, newspapers, magazine, seminar papers, essential secondary data
collected from economic researches such as CBN publications, Federal Office of
Statistics (FOS), Financial and Economic Review of the CBN.
1.9 ORGANIZATION OF THE STUDY
This research is divided into five
chapters.
Chapter one is the historical
background, general introduction, the statement of problems, objectives of the
study, research hypothesis, scope and limitation; sources of data, organization
of the study are examined in this chapter.
Chapter two is the literature review
which includes the theoretical and empherical review of different approaches to
balance of payments and devaluation.
Chapter three provides the research
methodology and method of data collection. This analysis will be based on
secondary data obtain from CBN Economic and Financial Review, publications,
textbooks and journals.
Chapter four contains the method of
data analysis, data analysis and interpretations.
Chapter five being the last chapters
contains the summary, findings, policy recommendation and conclusions.
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