FEDERAL UNIVERSITY OF TECHNOLOGY OWERRI

DEPARTMENT OF ELECTRONIC ENGINEERING

NAIRA DEVALUATION AND ITS IMPACT ON THE

NIGERIAN ECONOMY

A TERM PAPER

PRESENTED IN PARTIAL FULFILMENT OF THE

REQUIREMENT FOR THE COURSE

GST 102 : USE OF ENGLISH

TO BE SUBMITTED TO

MR. CHIMA

MRS. IBE

MRS. AMADI

BY

ONWUBUALILI HAROLD OGEMDI

REG NO. 20221307363

26TH MARCH, 2024

ABSTRACT …………………………………………………………………………………3

INTRODUCTION …………………………………………………………………………..3

CURRENCY DEVALUATION IN NIGERIA: AN OVERVIEW ………………………….4

CAUSES OF NAIRA DEVALUATION ……………………………………………………5

Ineffective Fiscal Monetary Policies ………………………………………………………..5

Money Supply ………………………………………………………………………………5

Exchange Rate Movements …………………………………………………………………5

Unstable Governance ……………………………………………………………………….5

EFFECTS OF DEVALUATION OF NAIRA ………………………………………………6

Income from Oil Exports ……………………………………………………………………7

Increased Inflation …………………………………………………………………………..7

Significant Increase in Imports ……………………………………………………………..7

External Debt Burden ………………………………………………………………………7

GOVERNMENT POLICIES TO COMBAT DEVALUATION ……………………..…….8

Fiscal Discipline ……………………………………………………………………………8

Monetary Policy ……………………………………………………………………………8

Foreign Exchange Reserves ………………………………………………………………..8

Economic Diversification ………………………………………………………………….8

Trade Policies ………………………………………………………………………………8

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Investor Confidence ………………………………………………………………………8

Transparency and Governance ……………………………………………………………9

Exchange Rate Management ……………………………………………………………..9

CONCLUSION …………………………………………………………………………..9

REFERENCES …………………………………………………………………………..10

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 ABSTRACT

This paper aimed to study the effect of currency depreciation on economic growth in Nigeria.

Additionally, the study sought to provide a deeper insight on the effects of Naira depreciation

and inflation on the Nigerian economy. It began with an overview of the economic sphere of

Nigeria and then delved into a review of existing literatures.

The devaluation of the Nigerian Naira stands as a pivotal event in the country's economic

landscape, influencing various sectors and stakeholders. With Nigeria being Africa's largest

economy and heavily reliant on oil exports, the fluctuation of its national currency holds

profound implications for both domestic and international economic dynamics. This term

paper was aimed to examine the intricate impacts of Naira devaluation on the Nigerian

economy, delving into its causes, consequences, and potential pathways forward.

1. INTRODUCTION

Devaluation of a country’s currency is a condition whereby the currency of that country is

reduced when compared to the currency of other countries. Naira devaluation refers to the

drop or reduction in value of the Nigerian currency. Since the introduction of market-

determined exchange rate through the Second – Tier Foreign Exchange Market (SFEM) in

Nigeria (1986), the Naira exchange rate to dollar has exhibited the features of continuous

depreciation and instability in both the official and parallel rate of Naira to Dollar which

has moved from ₦0.5926 / $1 in 1980 to ₦4.9322 / $1 in 1988 to ₦116.0525 / $1 in 2000

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 and finally to ₦199.0050 / $1 in 2015 according to the National Bureau of Statistics

(NBS).

The drop in the value of Naira has consistently affected economic growth in Nigeria. The

depreciation of the Naira is taking its toll on inflation, the living standard of the masses

and even businesses in the country.

Hence, this research seeks to proffer answers to questions such as : What is the impact of

currency devaluation on economic growth in Nigeria? What is the effect of currency

devaluation on the trade balance in Nigeria? What are the possible factors responsible for

currency devaluation in Nigeria? While some specific questions such as; Do the exchange

rate affect economic growth in Nigeria? What are the major causes of currency

depreciation in Nigeria? Will be identified.

2. CURRENCY DEVALUATION IN NIGERIA: AN OVERVIEW

Momosu and Akani (2016) affirmed currency devaluation to be an endogenous factor

affecting economic performance generally, where the required factors to aid achieve its

positive benefits are not available. Yilkal, (2014) perceives devaluation as a deliberate

reduction in the value of the currency in a particular nation in relation to other currencies

of nations partaking international trade within the framework of the fixed exchange rate to

boost growth. Okaro (2017) currency devaluation is habitually triggered when there is a

deficit in trade balance and balance of payment (BOP/BOT) with the 2016-2017 naira

devaluation in Nigeria associated to shocks springing out from the declining oil price and

external economic and financial shocks.

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3. CAUSES OF NAIRA DEVALUATION

A currency devaluation is not influenced by the forces of demand and supply but by the

government. Here, the government decides on what basis must her currency be devalued.

A well-structured currency devaluation improves a nation’s export competitiveness and

may improve its trade deficit over time. But abrupt and sizeable currency depreciation

may scare foreign investors who fear the currency may fall further, and lead to them

pulling portfolio investments out of the country, putting further downward pressure on the

currency.

Monetary policy and high inflation are the two main causes of currency depreciation. In a

low-interest rate economy, hundreds of billions of dollars chase the highest yield.

Expected interest rate differentials can trigger a bout of currency depreciation. Inflation

can also cause currency depreciation. This is because the higher input costs for export

products made in a high inflation nation will make its exports uncompetitive in global

markets, which will widen the trade deficit and cause the currency to depreciate. Further,

inflation means too much money purchasing fewer goods in an economy. Fewer goods

imply low productivity, low productivity will result in low exports, and when there are

low exports the Balance of Payment will be unfavorable to the country. It will now result

in purchasing for more imports which will eventually lead to currency depreciation

because more of another country’s currency is been demanded.

Cook (2004) explained the underlying reasons for the devaluation of currencies by

developing countries. In emerging markets, external debt is denominated almost entirely

in large, developed country currencies such as the U.S. dollar. This liability dollarization

offers a channel through which exchange rate variation can lead to business-cycle

instability. When firms' assets are denominated in domestic currency and liabilities are

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 denominated in foreign currency, an exchange rate depreciation worsens firms' balance

sheets, which leads to higher capital costs and contractions in capital spending.

Thus, we can conclude that the Nigerian Naira is depreciating in value because of:

● Ineffective fiscal and monetary policies : Every central bank strives to maintain it's

country's currency value below inflation and above deflation. The central bank of

Nigeria (CBN) has failed since it has been unable to act fast enough to curb inflation.

CBN has employed both the tight fiscal and expansionary policies that have both

failed. By CBN being unstable, the Naira value has depreciated.

● Money supply: When CBN employed the expansionary policy, it increased the supply

of money, causing a surge in prices that causes increased wages.

● Exchange rate movements: As Naira continues losing its value, the exchange rate

keeps decreasing, which is also another major cause of inflation. When exchange rates

collapse the price of imported goods becomes too expensive so since the prices are

rising, people are buying everything they can access now before the situation gets

worse.

● Unstable governance: Politics also have a significant role in the depreciation of Naira

since it affects the state of the economy. For many years Nigeria has had civil unrest.

With an unsettled environment production goes down, so the resources produced are

not enough to meet the increased demand.

4. EFFECTS OF THE DEVALUATION OF NAIRA

The devaluation of the currency value of Naira has many implications on the economy of

the country. Although, there are some benefits, the disadvantages fat outweigh them. Let

us view of few of them in relation to our study:

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● Increase in Income from oil exports:: Nigeria is a big oil exporter, and a devalued

Naira can enhance income from oil exports. Because oil is priced in US dollars, a

weaker Naira implies the Nigerian government gets more Naira per dollar from oil

sales, possibly increasing government revenue although this is presently hinged on the

production of oil which has significantly reduced considering a number of factors

from Oil theft, illegal bunkering, security concerns which attention should be given in

order to see such growth.

● Increased inflation: A devaluation would raise inflationary trends. As the Naira's

value decreases, the cost of imported goods and raw materials rises, potentially

leading to higher consumer prices. This effect is potentially especially severe for

countries like Nigeria, which rely heavily on imports. As a result, the government

would have to provide stimuli to SMEs, such as grants and subventions, to mitigate

the consequences in the near run. Diversification has always been the solution for

governments that rely solely on one source of revenue. This massive reliance should

be transitioned to other industries such as manufacturing and agriculture.

● Significant increase in Imports: Items that are imported could get more expensive as

a result of the devaluation of Many consumer goods and capital equipment in Nigeria

are imported, and a weakening Naira can raise import prices. This may have an impact

on enterprises and customers that rely on imported goods, potentially resulting in

weaker buying power and increased production costs, which support the expected

increase in inflation stated above.

● External debt burden: Since Nigeria has large external debt denominated in foreign

currencies, devaluation can make repaying that debt more difficult. As the Naira's

value falls, the cost of servicing foreign loans in local currency rises, possibly

straining the government's resources in the short and medium run.

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5. GOVERNMENT POLICIES TO COMBAT DEVALUATION

Halting the devaluation of the Naira requires a multi-faceted approach by the government,

including:

● Fiscal Discipline: Owolabi (1992) and Obaseki and Bello (1996) advised that, to

reduce or eliminate the over-valuation of the naira, the inflation rate should be brought

down through fiscal and monetary restraint and the application of appropriate supply

increasing measures. Implementing sound fiscal policies helps in managing

government spending and reduce budget deficits, which can alleviate pressure on the

currency.

● Monetary Policy: Just as Owolabi (1992) advised, the central bank could use

monetary tools such as interest rates and reserve requirements to control money supply

and stabilize the currency.

● Foreign Exchange Reserves: Building and maintaining an adequate level of foreign

exchange reserves to intervene in the currency markets when necessary to support the

value of the Naira.

● Diversification of the Economy: Encouraging economic diversification away from

reliance on oil exports by promoting other sectors like agriculture, manufacturing, and

services, which can generate foreign exchange earnings and reduce vulnerability to oil

price fluctuations.

● Trade Policies: Implementing trade policies that promote exports and reduce imports

can help balance the current account and support the value of the Naira.

● Investor Confidence: Creating a favorable business environment to attract foreign

direct investment (FDI) and portfolio investment can increase demand for the Naira

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 and stabilize its value. Economic growth can be increased, according to Nguyen and

Nguyen (2007) through public investments.

● Transparency and Governance: Enhancing transparency, accountability, and good

governance practices can improve investor confidence and reduce capital flight, which

can contribute to currency stability.

● Exchange Rate Management: Implementing measures to curb speculation and

volatility in the foreign exchange market, such as maintaining a flexible exchange rate

regime or implementing exchange controls when necessary.

By implementing these policies and strategies effectively, the government can work towards

stabilizing the Naira and preventing further devaluation.

6. CONCLUSION

In conclusion, the devaluation of the Naira has had profound and multifaceted impacts on

the Nigerian economy. While it has improved export competitiveness and boosted foreign

exchange earnings, the negative consequences, such as inflationary pressures, decreased

consumer purchasing power, and increased import costs, outweigh the benefits. Moreover,

the uncertainty surrounding the currency's value has deterred foreign investment and

strained government finances. To mitigate these challenges and foster sustainable

economic growth, policymakers must pursue comprehensive strategies that address the

underlying structural issues, stabilize the currency, control inflation, diversify the

economy, and attract foreign investment. Additionally, prudent fiscal and monetary

policies should be implemented to mitigate the adverse effects of currency devaluation

and promote long-term economic stability and prosperity for Nigeria.

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REFERENCES

Ajayi M. O. (2023). Impact of naira devaluation. Retrieved March 25, 2024 from

https://www.linkedin.com/pulse/impact-naira-devaluation-ajayi-morakinyo-

olumoroti#:~:text=Increased%20inflation%3A%20A%20devaluation%20would,which

%20rely%20heavily%20on%20imports

Cook, D. (2004). Monetary policy in emerging markets: Can liability dollarization explain

contractionary devaluations? Journal of Monetary Economics, 51(6), pp.1155-1181.

Loto M.A. n.d. The devaluation of the Naira and the state of the Nigerian economy (an

econometric analysis). International Journal of Economics, Management and Accounting 26,

no. 2 (2018): 311-327

Momodu, A.A. & Akani, F.N. (2016). Impact of Currency Devaluation on Economic Growth

of Nigeria. International Journal of Arts and Humanities, 5(11), 151- 163.

Nguyen, T.C. & Nguyen, A.P. (2017). The linkage between public private investment and

economic growth: Evidence for the developing ASEAN and Asian countries. Journal of

Economics and Public Finance, 3(4): 580-594.

Okaro, C. S. (2017). Currency devaluation and Nigerian economic growth (2000-2015).

Owolabi A. O. (1992). Nigeria's foreign policy in a changing international environment: A

new agenda.

Social development NG-Journal of social development, VOL. 6, No. 1, February 2017

Journal: www.arabianjbmr.com/NGJSD_index.php

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What is the reason behind the depreciation of the Naira? n.d. Retrieved March 25, 2024 from

https://homework.study.com/explanation/what-is-the-real-reason-behind-the-depreciation-of-

the-naira.html

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