THE INFLUENCE OF THE
REDUCTION IN OIL PRICE AND THE DEVALUATION OF NAIRA ON THE NIGERIA ECONOMIC
GROWTH
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Nigeria, the most populous black nation situated in
western Africa is popularly known for her dominant source of revenue; Crude
oil. Thus, Nigeria became increasingly dependent on oil revenue, which in the
last few decades has experienced fall in its price per barrel and production.
With oil revenue as the main stay of the Nigerian economy, variation in oil
prices are definitely of prime interest to economists in order to predict the
effects of a drastic change- decrease in oil price, on the Nigerian economy as
a whole. Oil fall can be described as a sudden, unexpected reduction in oil
price or production which has inevitably affected the value of naira (Ozumba,
2009). This study, however, focuses on the influence of the reduction in oil price
and the devaluation of naira on economic growth in Nigeria.
The
naira devaluation will lead to a chain of reactions, many of which may not have
the appropriate results, because the Nigerian economy mainly depends on oil.
The devalued naira will drive export of local products, which do not exist in
the required volume for now, but will create an additional burden on the
populace, the reason being that the cost of consumables, across the board, will
escalate. As the direct consequence of the raise in the base lending rate the
cost of loanable funds would have risen. In such case the development will be
counterproductive, and against the thrust of the government’s touted plan to
create jobs (Cooper, 1999).
There
is the expectation that the government’s revenue, in terms of naira will move
up, because of the wide exchange rate disparity between the dollar and the
local currency. But the point must be made that this expectation may be
unrealisable of two variables – the falling oil prices and lower crude
production aggregate. In the developed nation’s when currencies are devalued,
it is to encourage exports, because the prices of local products serve as an
incentive and a toast for foreign buyers. In the process, they earn foreign
exchange, increase production and create additional jobs. Unfortunately, that
is not the position with Nigeria.
Devaluation is a reduction in the value of a
currency with respect to those goods, services or other monetary units with
which that currency can be exchanged. It also means official lowering of the
value of a country’s currency within a fixed exchange rate system, by which the
monetary authority formally sets a new fixed rate with respect to a foreign
reference currency (Dornbusch et al, 2011). Devaluation is a monetary policy
tool of countries that have a fixed exchange rate or semi-fixed exchange rate.
This definition is by no means exhaustive of the term. A concept which is
closely related to devaluation and which is sometimes confused with devaluation
of a currency is depreciation. Depreciation and devaluation are sometimes
incorrectly used interchangeably although they both refer to values in terms of
other currencies. More recently, the Monetary Policy Committee (MPC) of the
Central Bank of Nigeria (CBN) took a decision to devalue the Naira to N198 from
N160 to the American Dollar.
However due to the ongoing global fall in oil
price, crude oil prices in the international market fell significantly from the
all-time high at $141 per barrel by the end of July2008 to $45 per barrel by
the end of January 2009. This has forced the federal government to review the
budget bench mark down ward from $65 to $45. This will reduced government expenditure
and in turn affect the provisions of goods and services in the year 2015. But
considering that a soaring oil price in the last sixteen years made no
appreciable impact on the economy, some think that a fall in the price of crude
oil could be a blessing in disguise to Nigeria. Government would be forced to
look inwards and be more judicious in spending. As we operate a bubble economy,
which cannot withstand pressure.
1.2 STATEMENT OF THE PROBLEM
Crude
oil accounts for about 95 of Nigeria’s foreign exchange receipts. The hardest
hit has been countries whose economies depend largely on oil for appreciable
percentage of their foreign exchange earnings. The International Monetary Fund
(I.M.F.) allows countries to devalue their currency in order to correct
“fundamental disequilibrium” in their balance of payments to
stimulate economic growth. Great Britain devalued her currency in 1967. The U.
S. devalued in 1973 and France did same in 1969 followed by her 14 Francophone
African countries. Devaluation thus is not a new concept and should not be seen
as an outlandish and terrible act; it is a permissible method of fixing the
exchange value of a currency in light of new supply and demand reality. While
devaluating a currency due to fall in oil price can seem like an attractive
option, it can have negative consequences. By making imports more expensive, it
protects domestic industries who may then become less efficient without the
pressure of competition. Higher exports relative to imports can also increase
aggregate demand, which can lead to inflation. Whether deliberate or as a
result of fall in oil price, currency devaluation reduces the price of a
country’s domestic output. This has the potential to benefit the economic
growth by helping to increase its export volume.
1.3 OBJECTIVES OF THE STUDY
The
following are the objectives of this study:
1. To
examine the influence of oil price reduction on Nigeria economic growth.
2. To
examine the influence of devaluation of naira on Nigeria economic growth.
3. To
identify factors that can stimulate economic growth in Nigeria.
1.4 RESEARCH
QUESTIONS
1. What
is the influence of oil price reduction on Nigeria economic growth?
2. What
is the influence of devaluation of naira on Nigeria economic growth?
3. What
are the factors that can stimulate economic growth in Nigeria?
1.6 SIGNIFICANCE
OF THE STUDY
The
following are the significance of this study:
1. The
outcome of this study will educate the general public and the stakeholders in
the financial sector the influence of fall on oil price and depreciation of
naira on the Nigeria economic growth.
2. The
findings from this study will be a useful guide for the government of Nigeria
and policy makers on the relationship between the oil price fall, depreciation
of naira and economic growth with the view of ensuring their effective
management.
3. This research will also serve as a
resource base to other scholars and researchers interested in carrying out further
research in this field subsequently, if applied will go to an extent to provide
new explanation to the topic
1.7 SCOPE/LIMITATIONS OF THE STUDY
This
study will cover the issue of reduction in oil price, depreciation of naira and
economic development of Nigeria.
LIMITATION OF STUDY
Financial constraint– Insufficient fund tends to impede the
efficiency of the researcher in sourcing for the relevant materials, literature
or information and in the process of data collection (internet, questionnaire
and interview).
Time constraint– The researcher will simultaneously engage in this
study with other academic work. This consequently will cut down on the time
devoted for the research work.
REFERENCES
Cooper,
R.N. (1999). International Finance. Penguin Publishers. pp. 25–37.
Dornbusch,
Rüdiger; Fisher, Stanley; Startz, Richard (2011). Macroeconomics (Eleventhed.).
New York: McGraw-Hill/Irwin. ISBN 978-0-07-337592-2.
Journal of
Economic and Sustainable Development ISSN 2222 – 1700 (Paper) ISSN, Vol. 3, No.
2, 2002. Accessed on www.iiste.org
Ozumba C.C.
“Devaluation and Balance of payments in ECOWAS countries: A study of Nigeria’,
Exchange Rate Policy” Central Bank of Nigeria, Economic and Final Review Vol16,
No.2008
www.sunnewsonline.com
Accessed on December 8, 2014