NAIRA DEVALUATION AND IT’S EFFECT ON NIGERIAN ECONOMY
CHAPTER ONE
- INTRODUCTION
- BACKGROUND OF THE STUDY
The early 1980s drove home a truth which had been emerging in the 1970s that the world economy was becoming increasingly unstable. The combined effects of the second oil shock, an associated recession in OECD countries, a prolonged slump in real commodity prices, the outbreak of debt crisis with all its consequences for developing economies to world saving and the erosion by non-tariff barriers of pervious trade liberalization put the balance of payment of many developing countries under great strain making imperative decisive policy responses (Kilick 1995). On the economic scene of Nigeria, ‘the oil boom (1973-74) affected not only the investment, production and consumption patterns of the country but also its socio-cultural values, political aspirations, style of economic management and policies and programmes implemented (Olaniyan 1996). Massive investments were made into infrastructure with significant capital outlay for imported components. Industries were outward-looking such that the global crisis meant for them acute shortage of essential raw materials, capacity under-utilization and factory closures. The competitiveness of the agricultural sector was eroded by the overvalued exchange rate and investment was skewed in favor of ‘short-term highly profitable ventures such as construction, commerce and services sector at the expense of such productive sectors as agricultural and manufacturing which have long-term gestation periods creating structural imbalance within the economy. There was a growing desire for imported consumer’s goods and conspicuous consumption was the order of the day among the affluent. Capital assets were neglected and maintained culture virtually died out. And all this against the background of financial misappropriation in the public sector and concerted misuse of import licenses and overloading of invoices between many Nigerian businessmen and their overseas counter part; the gross abuses and import and export tariff at many custom points; fraudulent money transfer overseas aided and abetted by many banking officials’ (Yessufu,1996:1989). The compound effect of the above was fiscal crisis, foreign exchange shortage, balance of payment and external debt crisis, high unemployment rate and negative economic growth (Olaniyan, 1996).
The global economic crisis created an awareness in the OECD Government and the International Financial (IFIs, consisting of the IMF and the world bank) that ‘many past policy interventions were aggravating rather than easing economic problems in developing countries and needed to be reformed’. The World Bank response was the opening of a structural adjustment window while the IMF introduced (or revived in the case of the Extended Fund Facilities: the EFF) the structural statement fund (ESAF) (Kiliick, 1995).
The first response of the Nigeria Government to the deterioration economic condition in the country was to introduce some stabilization, austerity and counter-trade measures between 1982 and 1984. The Economic stabilization Act (1982) imposed more stringent exchange control measures and import restrictions supported by appropriate monetary and fiscal policies. In order to secure foreign assistance to solve its balance of payments problems, the government approached IMF fro a three- year extended facility loan in 1983. In line with its new policy however, the IMF introduced some conditions that mush be met for the loan to be given the much popularized ‘IMF conditionality’s’. These were sixty per cent devaluation in the national currency, rationalization in the size of the public services, trade liberalization and removal of petroleum subsidy. The Babangida government in a bid to capture the confidence of Nigerians and thus-secure for itself legitimacy, decided to throw the matter to the generally public. By public debate involving the learned and the unlearned who knew not so much as what the IMF is and what the conditionalities really meant by various expression of public opinion encompassing both the professional and the street trader, Nigerians were to make their known whether they wanted the IMF loan with its attached conditionalities or not. Of course, the Nigerian public rejected the loan. Barely one year after, however, in July 1986, the government adopted an externally packaged structural adjustment program.
The Nigeria Structural Adjustment program was designed to fit the standard IMF – world bank structural adjustment package and meant to effectively alter and restructure the consumption and productive pattern of the Nigerian economy, as well as to eliminate price distortions and heavy dependence on the export of crude oil and import of consumer and producer goods’. (Anyanwa, 1993 p. 243). The programme was initially proposed as ‘an economic package deigned to rapidly and effectively transform the national economy’ over a period of less than two years (Yesfusu, 1966 p.91). Three factors were proposed as being the rationale for the adoption of SAP
- an excessive dependent by nation on imports, especially consumer’s goods including food.
- Almost total neglect of domestic production in all the sectors of the economy: agriculture, industry, construction, commerce and transportation.
- Almost total dependence on earnings from oil exports alone boosting government revenues as well for accumulated foreign exchange reserve.
The major negative fall-out of the above were persistent balance of payment deficit (external imbalance) and huge fiscal deficits (internal imbasignlance).
The BOP problem was identified to be a consequence of the over-devaluation of the Naira. Under the SAP therefore, the exchange rate is to reflect the scarcity value of the national currency. The devaluation of the Naira would enhance the level of non-oil exports; discourage import thus reducing the nominal value of import while increasing the value of exports.
Also inflations is proving to be a persistent problem in Nigeria with significant, impacts on individuals, firms and government, concern over resource limitations and dramatic prices increase for energy, food and other basic items are change lifestyles, with resultant impacts on the market for many goods and services. These same factors are causing economic activities to by undergo rapid transformation, a situation compound by increasing importation of foreign goods and services into the economy. in such a setting, sound economic policies and analysis have taken on greater importance in economic field.
In a country like Nigeria she tries to bring quick economic growth. She has to import machinery, equipment’s, raw material and other technological know-how. In addition to the imports both visible account also increase, while export is lag behind this will position the balance of payment become deficit i.e. unfavorable. Such a nation has to adopt both short and long term measures to correct this disequilibrium in the balance of payments. Export promotion and import restriction are the two important measures to correct the deficit of balance of payment others include fiscal policy, monetary policy. The balance of payment deficit can also be adjusted by the use of naira devaluation policy.
The challenges of facing the Nigeria economy presently require the solution the devaluation can help provide. The government can use devaluation to boost aggregate demand in the economy in an effort to fight unemployment. Also the price of foreign currency increase which makes import dearer and export cheaper. This causes expenditure to switch from foreign to domestic goods as the country’s export rise and country produces more to meet the domestic and foreign demand for goods with reduction in imports. It reduces the foreign reserve which affects the economy in long run which leads to increase in unemployment and reduces the economy growth in the economy. With al this factors in mind the research aims at finding the impact of naira devaluation on economic growth in Nigeria.
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