WHY DEVALUATION HAS NOT SUCCEEDED IN NIGERIA

WHY DEVALUATION HAS NOT SUCCEEDED IN NIGERIA

WHY DEVALUATION HAS NOT SUCCEEDED IN NIGERIA

In answering the question why devaluation has not succeeded in NigeriaDEVALUATION” Devaluation is a sudden fall in the value of a currency against other currencies.

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Strictly devaluation refers only a sharp fall in currency within a fixed exchange rate for instance agriculture, which used to be the pivot of the economy, showed greater decline since after independence. This was due to the discovery of crude oil and its importance to the whole world. The revenue generated from oil appeared to have made more effective impact towards the development of the Nigeria economy then agriculture. This led to the sudden neglect or agriculture, to the extent that its contribution to the Gross Domestic Product was Negligible. The contribution of agriculture to the Gross Domestic product fell 39.9 percent in 1970, 1971 and 1972 to 18 percent with occasional these was when the Nigeria devaluation was very high.

Reasons why devaluation has not succeeded in Nigeria, is the inherited structure by the readers that is the inability of Nigeria readers to change the inherited programmed economy, which was designed to disarticulate the Nigeria economy.

Balance of payment deficit, is one of the problem, consider a situation where a country is suffering from balance of payment deficit, not because she has no goods to export her products but because of their comparative high prices.

The high price of her goods might have emanated from some underlying macroeconomic imbalances such as high inflation, high cost of factors and over valuation of national currency. Which a country has no equilibrium in the in the more demand than supply in the money market, if there is more supply than demand in the labour market and it there is productivity of labour lags behind wages and salaries and in the foreign exchange market, if there is less demand for domestic currency by owners of foreign currencies than supply, if this kind of situation exist in a country, then it will suffer from “fundamental disequilibrium” in her balance of payment.

The balance of payment deficit which has rise resulted from high price of exported products and this in turn resulted from overvaluation of domestic currency for instance, a currency of trading patterns of a country suffering from balance of payment deficit. The solution is to bring down the exchange rate of a country’s currency as expressed into the currency of a trading patterns of the rest of the world is what is know as devaluation of national currencies. This act of bring down or reducing the exchange rate of a currency is usually performed by the monetary system.

 

CHAPTER TWO

LITERATURE REVIEW

2.1 Devaluation

According to Begg  (1984) he stated that devaluation is a reduction (increase) in the exchange rate, which the government commits itself to defend. The fixed exchange rate system operation in the twenty-five years after 1945 was sometimes called the Adjustment Peg System (APS). Although exchange rates were pagged at fixed values, occasional adjustments in these values were allowed. In his illustration he said in 1949 and 1967, the pound sterling was devalued. But the general idea was to keep exchange rate fixed for long periods if possible. Barri and Grilli (1994) opined that Devaluation as a situation of a typical country in a regime of exchange rates tied to the U.S. dollar. As suggested before a country that typically pags its exchanges rate, occasionally faces pressure to shift their rate. Consider, for example, a disturbance that tends to increase the domestic price level, relation to the Nigeria price. The disturbance could be a rapid expansion of the domestic currency or a decrease in the demand for comities real money. The central bank tends in these circumstances to lose international currency or other assets.

In response, the bank may raise the exchange rate that is, devalue the domestic currency in terms of the Naira.

According to them, a disturbance that tends to lower the domestic price level, relation to one currency price, implies gains in the central banks assets. The banks is likely to react in this case by lowering the exchange rate, that is, by appreciating the domestic currency in terms of the dollar. Economist call this change a revaluation. Barro and Civill, went ahead and said that Devaluations and valuations typically do not involve long periods during which the central bank gradually loses or gains international currency. That is because the expectation of a shift in the exchange rate leads to “speculation”, a response that tends to hasten the central banks actions. If people participate a devaluation, then, they have an incentive to act. In advance to exchange their domestic money at the central bank for international currency, which might be U.S. dollars. People react this way because they expect the domestic money to become less valuable relative to other moneys. But since the speculative decline in the demand for domestic money leads to further lose of international currency by the central bank, the Devaluation tends to occur sooner.

According to Vane and Thompson (1982) in their posited that exchanges rate policies contributed it, under fixed exchange rates country’s could attempt to remedy a balance of payment deficit by devolving it currency. Devaluation changes the relative price of home to foreign produced goods. More specifically it increases the home currency price of imports and lowers the foreign currency price of export. By making domestic goods relatively more attractive domestic demand.

 

2.2 FACTORS THAT ARE RESPONSIBLE FOR THE SHARP DEVALUATION FOR THE CURRENCY IN NIGERIA

Some of the factors are:

2.2.1 Rising Rates of Interest

2.2.2 Interest Rates of Currency

2.2.1 RISING RATES OF INTEREST

Rising is viewed as a general increase in the price of goods and services in an economy. Over the years, rising has been identified as one of the Nigeria major macro-economic problem. Rising still remain major problems in Nigeria, as case study 6.5 percent. But by 1996, it has jumped to an unprecedented high level of 93.0 percent. The major factors identified in 1982’s and 1990 included rapid growth in the money supply, fiscal deficit, Urbanization and Escalating interest and exchange rate. As I said in every inflationary economy, is very difficult for money to serve as a medium of exchange or store of value.

2.2.2 INTEREST RATES OF CURRENCY

Interest rate are usually regarded as the rental payment for the use of credit by borrower and parting with liquidity by lenders. In a way interest rate are like of her price. This is because they perform a rationing function, which serves to allocate a limited supply of credit among the competing demand for it in an economy. The primary role of interest rate is to help in the mobilization of financial resources thereby promoting rapid economic growth and development. Interest rate affect the level of consumption on the other hand the pattern of investment consequently serve an important economic function in the intermediation process.

2.3 OBJECTIVES OF DEVALUATION

According to Onwukwe (2003) he stated the objectives of Devaluation that the main objectives are correction of balance of payments deficit. Devaluation does this by:

1. Reducing the prices of exports and consequently increasing the volume of exports as well as export revenue.

2.4 THE CAUSES OF DEVALUATION IN NIGERIA

Generally, distress in Nigeria devaluation can be explained by the following factors:

  1. Balance of payment deficit
  2. Adherence
  3. Inflation
  4. Interest Rate.

2.4.1 BALANCE OF PAYMENT DEFICIT

Balance of payment is one of the major conflicts of devaluation in Nigeria consider a institution where a country is suffering from balance of payment deficit, not because she not goods to export, just because other countries doesn’t want to import their products because of their comparative high prices.

The high prices of her goes might have emanated from some underlying macroeconomic imbalance such as high inflation, high cost of factors. When a country has disequilirium in the macroeconomic aggregate, for example in the goods market, if there is more demand than supply in the money market, if there is less demand for domestic currency by owners of foreign currencies than supply.

If this kind of situation exist, and a country suffers from “fundamental disequilibrium” in her balance of payment deficit. The balance of payment deficit, which arise as a result from high prices of exported products and this in turn, resulted from over-valuation of the domestic currency.

2.4.2 ADHERENCES

Adherences are one of the major conflicts of devaluation in Nigeria. Adherence is the inherited structure by the leaders, which is the inability of Nigeria leaders to change the inherited programmed to produce largely what it cannot produce. Such as becoming substantial consumers of items like Champaign. Italian shone and bags, English, Jewelries, imported posh cars etc. the leaders failed top lay a solid foundation for true development as most other countries has done in time of fortuitous gains largely as a result of this lack of vision and continuous adherence to the old structure.

There was no provision for difficult days. The central problem in the exchange rate devaluation is that of the inability to address the fundamental problem of consuming what the country with her resources can’t produce.

2.4.3 INFLATION

Inflation is views as a generally increase in the price of goods and services in an economy. Over the years, inflation has be identifies as one of Nigeria major macroeconomic problems.

Inflation still remains a major problem in Nigeria. For example, in 1980, Nigeria’s inflation rate was 6.5 percent. But by 1985, it was jumped to an unprecedented high level of 7.5 percent. The major factor identified to be responsible for Nigeria rising rate of inflation in the 1980’s and 1990’s included rapid growth in the money supply, fiscal deficits urbanization ands escalating interest an exchange rate. As earlier mentioned, in every inflationary economy, it is difficult for money to serve as a medium of exchange.

 

2.4.4 INTEREST RATES

Interest rates are usually regarded as the rental payment for the use of credit by borrowers and return for parting with liquidity by lenders. In a way rates are like other price. This is because they perform a rationing function, which services to allocated a limited supply of credit among the competing demand for it main economy. The primary role of interest rate is to help in the mobilization of financial resource thereby promoting rapid economic growth and development.

Interest rate affect the level of consumption on the other hand and the pattern of investment on the other hand consequently, they serve an important economic function in the intermediation process. Financially, intermediation involves the process of transferring funds from surplus economic units to deficit economic units. To this effect, interest rate are usually regarded as a major tool for monetary policy. Whenever, the structure of interest rate is changed, the resulting relative rates of interest will lead to shifts on market portfolio of both the public and banks.

2.5 WHAT GOVERNMENT SHOULD DO IN OTHER TO ENSURE THE SUCCESS OF DEVALUATION OF CURRENCY

The demand for imported goods price inelastic, that devaluation will not mark effectively because the increase in price will not reduce importation in a significant magnitude, therefore government should ensure that they should be perfectly elastic of demand so that there will be no failure in demand for imported goods, there will be a better chance for the success of devaluation.

The success of devaluation depends on the responsiveness of the domestic economy to changed conditions. The immediate effort or higher import prices will be higher prices of essential imported goods and a drop in living unit higher export. Demand boost national income in long-run, it is essential in the short run that income don’t rise to compensate for higher prices and set off a cost push inflationary cycle which will undo the benefit of the devaluation.

GOVERNMENT SHOULD NOT RETALIATE

We know that in the prospect of retaliation, other countries should not retaliate, for instance, if America devaluate her currency on the imposed restriction on Nigeria goods, the intended effect of devaluation in Nigeria will be nullified. Therefore, government should make sure they don’t retaliate to other countries. It will ensure the effectiveness of devaluation if they do. Devaluation has a disastrous implicate the cost of repayment of external debt. For example, they may borrow $2.00; they would have borrowed #200. However if the exchange rate increase to #5 = $2.00 because of devaluation, they will have to pay #500. we can look at the overall implication for debt running into million of dollars therefore, for government to ensure a successful devaluation of currency they should reduce the cost of borrowing externally.

Government should introduce a fiscal and monetary policies that needed to employed, to increase elasticity of demand for import like increase in tax rate, wage freeze, increase in bank rate etc. And they should embark on effectively in order to ensure those things that could lead to social and other economic problem especially some form of hardship on the masses.

GOVERNMENT SHOULD MEASURE INFLATION

According to Ile (1999:150) price inflation is generally measured by the following three indices:

  1. The wholesale price index
  2. The consumer price index
  3. The implicit price index

Nell (1998:4), in his discussion on measurement of inflation, he said to illustrate how much better things were in the “good old days” than to compare how much things cost then and now? One can calculate the later purchasing power of money in different years. How realistically the resulting numbers reflect the relative purchasing power can’t be compared directly. Source exist that can give readers of history and historical fiction a good idea of the worth of amounts of currency.

Generally, the further apart the years being compared, the les valid it is to use relatives price of goods in those years to measure the standard of living. Many variable affect the price of goods: supply and demand new technology, among others Gordon explains the factors involved in an entertaining and enlightening article “the problems of money (currency) and time” American heritage May/June 1989: 57-65).

And ask anyone in the 90’s many things besides currencies contribute to the quality of life. Changes in the nature of most goods and services are less dramatic between years closer together. Still, some good and services specially those affected by developments in technology can specially those affected by developments in technology can change radically in a short time.

2.6     REASONS WHY DEVALUATION HAS NOT SUCCEEDED IN NIGERIA

  1. Nigeria foreign demand for our products appears to be inelastic because alternative sources may easily found by such foreign counties.
  2. The export of our commodity such as crude oil. This put our country in a position of mono product economy.
  3. Nigeria demand for import is very inelastic because most of the raw materials. Spare parts and components needed by our industries are still sourced for abroad.
  4. Since the introduction of the structural adjustment programme (SAP) devaluation has gone to extended of high inflation and his country thereby making the exercise ineffective.
  5. The Nigeria supply of our imports is inelastic since then foreign countries, finding it difficult to dispose of such products may resort dumping.

 

2.7 THE EFFORT OF GOVERNMENT TOWARDS THE CONTROL OF DEVALUATION

Researches have revealed that Government is trying as mush as possible in controlling Devaluation by introducing some theories such as:

2.7.1 CONVERSION AND TRANSFER POLICIES     Government introduced conversion and transfer policies though the GON retained the official exchange rate of Naira 22 to the dollar for official government transactions, the central Bank of Nigeria (CBN) no longer conducts an auction of foreign exchange (forex). In its place, the central Bank of Nigeria has introduced a new autonomous foreign exchange market (AFEM). Under the new forex regime, government parastatals, and oil production, exploration, and service companies, as well as recipients of foreign loans are required to maintain forex account with the CBN. In addition to a budget amount, the CBN uses the dollars to intervene in the market at the prevailing autonomous rate for all others, forex is available on the autonomous market.

2.7.2 FREE TRADE ZONES/ WAREHOUSES

Government introduced free trade zones/ warehouse in an effort to attract foreign investment, the Nigeria government is developing an expert-processing zone near the city of caliber in Eastern Nigeria. If the zone is completed as planned, it will allow investors duty free importation of raw materials and semi-finished products for manufacturer and export. As in other parts of the country.

2.7.3 OIL SECTOR

The Nigeria government has introduced Oil Sector. The oil Sector Contracted by 6.0 percent in 1994 after 2.6 percent drops in 1993. Petroleum revenue declined by 1.2 percent as a result of a 10.0 percent decline in the average realized price for Nigeria crude and the fall in export volume during the nine-week oil workers Stick. Although a paltry 4.7 percent of GDP, non-oil revenue increased by 36 percent.

2.7.4 BANKING SECTOR

With the adoption of the structural adjustment programme (SAP) in 1986 the licensing of new bank was liberalized and more non-bank financial institutions were created. In accordance with this policy stance, the number of banks (commercial and merchant) rose shaping from 40 in 1985 to 120 at the end of 1993. The banking sector, which was already under considerable strain in 1994, faced additional instability due to the GON’s fixing of interest and foreign exchange rates. In relation to the 57.2 percent 1994 annual inflation rate, real deposit and lending rate were significantly, negative. As a result, banks found it unprofitable to lend at the official interest rate ceiling of 21 percent, and de facto breaches of the relevant guideline were common. These factors, plus poor management and inside abuse, led to report of a number of distressed banks.

Furthermore, instability in the fixed 22 Naira to the dollar exchange rate in 1994 put excessive pressure on the limited supply of foreign exchange. (as a result, the parallel market premium reached over 274 percent in 1994). With minor modification the fixed interest rate regime of 1994 has been continued in 1995. banks and other institutions are allowed to maximum spread of 71/2 percent between their deposit and lending rates, subject to a maximum lending rate of 21 percent.

2.7.5 COMMERCIAL ENVIRONMENT: Government introduced commercial environment been that Nigeria is Africa’s most populous nation and the United State’s fifth largest oil supplier. If offers investors a low-cost labor pool, and the largest domestic market in Sub-Saharan Africa. These advantages must be weighted against inadequate infrastructure, confusing and inconsistent regulations, and endemic corruption. In Light of GON’S attempt to make an economic about-face in 1995, Nigeria –watchers have expressed guarded optiminism about the nations economic prospects. The recent repeal of the enterprise promotion Degree of 1989 allows foreigners to take a greater ownership structure remains unclear, pending the release of government guidelines. Although “down playing” its privatization program, the GON has said that it will endeavor to lease enterprise, such as all suger, paper, steel, fertilizer, patrol-chemical and oil refineries, as well as the national carrier Nigeria’s Airways, to both local GON has also committed to pursuing full commercialization of the Nigeria Telecommunications, Electric, Postal and transport (Airport and Railways)

CHAPTER THREE

3.1 SUMMARY OF FINDING:

Researches have revealed some reasons why devaluation has not succeeded in Nigeria which a followed.

(1) The Inherited Structure. By the leaders, that is the inability of Nigeria Leaders to change the Inherited Programmed economy, which was designed to disarticulate the Nigeria economy.

(2) Balance of Payment Deficit. Is the problem, consider a situation where a country is suffering from balance of payment deficit, not because she has not goods to export her product but because of heir comparative high prices.

(3) The high price of goods contributed to it. Institution where by macro economic imbalance such as high inflation of national currency.

(4) Inflation is viewed as a general increase in the price of goods and services and inflation still remain a major problem in Nigeria for example, in 1980, Nigeria, inflation rate was 6.5 percent while 1985, it has jumped to an unprecedented high level of 7.5 percent. The major factor identified to be responsible for Nigeria rising rate of inflation is rapid growth in the money supply, fiscal deficits Urbanization and exchange rate.

3.2  RECOMMENDATION

What government should do in other ensure the success of devaluation in Nigeria.

(1)     Government should ensure that they should be perfectly elastic of demand so that they will be no failure in demand for imported goods; there will be a better chance for the success of devaluation in Nigeria.

(2)     Government should introduce fiscal and monetary policies that have needed to employ, to increase elasticity of demand for import like increase in tax rate, bank rate. They should embark on effectively in other to ensure those things that could not lead to social and other economic problems especially some form of hardship on the mass.

3.3  CONCLUSION

From the findings, it can be deducted that if appropriate measures are not taken to stabilize the value of our Naira, it will adversely affect the Nigerian economy in so many ways which include among others the following: cause inflation, it will affect fixed income earner and it will discourage investors form investing. So the government and all the stake holder should ensure that adequate policies are made to liberate the Nigerian economy from the shackles of devaluation.

WHY DEVALUATION HAS NOT SUCCEEDED IN NIGERIA

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