ABSTRACT
The research work critically
examined the extent to which naira exchange rate depreciation had affected
domestic inflationary rate in Nigeria
between 1985 – 2000.
Therefore,
in this study, the researcher examined the trend of inflation and exchange and
the relationship between the two variables.
A model was specified to show the relationship between both variables. Also interest rate was included in the model
as one of the variables that affect inflation.
The model was then estimated
using multiple regression method and variable statistical tests where carried
out on the regression equation.
The result was analyzed
accordingly. Moreover, the result of the statistical test shows that exchange
rate depreciation of Naira is significant in explaining variation in the rate
of inflation.
Finally, the data for the project
work was collected from most recent years in order to make finding, adequate in
explaining the cause of inflation in recent times.
TABLE OF CONTENTS
Title page ii
Approval page iii
Dedication iv
Certification v
Acknowledgement vi
Abstract vii
Table of contents viii
CHAPTER ONE
Introduction 1
1.1
Background
to the study 1
1.2
Statement
of problem 3
1.3
Significance
of study 5
1.4
Objective
of the study 5
1.5
Research
hypothesis 6
1.6
Scope
of study 7
1.7
Definition
of terms 7
Reference 8
CHAPTER TWO
Literature review 9
2.1
The
concept of exchange rate 9
2.2
Exchange
rate management in Nigeria
19
2.3
Inflation
– a concept 28
2.4
Theories
of inflation 32
2.5
Inflation
in Nigeria 37
2.6
Exchange
rate depreciation and inflation in Nigeria 41
2.7
Empirical
evidence 43
Reference 46
CHAPTER THREE
Research methodology 48
3.1
Method
of data collection and analysis 48
3.2
Theoretical
framework and model specification 48
Reference 53
CHAPTER FOUR
Analysis of result 54
4.1
Presentation
of result 54
4.2
Analysis
of result 55
CHAPTER FIVE
Summary, conclusion and
recommendation 57
5.1
Summary 57
5.2
Conclusion 58
5.3
Recommendation 58
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND TO THE STUDY
The naira
exchange rate depreciation coupled with persist increase in the inflationary
rate has been a major bane on economy of Nigeria. To a layman inflation is a phenomena to
embrace as his income increases daily without knowing the harmful side of such
an increase. Whether there is anything
like depreciation or an improvement in the exchange or whether is income is
nominal or real the layman do not know.
But this
complementary problems so to say of naira exchange rate depreciation and
inflation has been a thought of obesity in the hearts of Nigerians past and
present governments and many patriotic Nigerians.
The pegging
of, inflation in Nigeria can be said to be a direct result of the policies of
the country’s governments to stimulate a fast rate of economic growth and
development, since 1951 when the ministerial government was introduced between
1984 and 1986, the naira was quoted against dollar and pounds as the only
intervening currencies which was in line with the International Monetary Fund (I.M.F)
demand. I.M.F had earlier complained
that naira exchange rate was rising above the stipulated 2% limit. The naira was then devalued at 1.000 4 US
dollar. The inflation rate in Nigeria
was not serious problem before her independence. But immediately after the civil war i.e. from
1970’s, the inflation rate in Nigeria
took another dimension. The value of
naira as against dollar and pounds sterling started to deteriorate, in 1970, it
was a naira to 1.400 dollar and 0.584 pounds sterling. In 1971, it was 1.44 dollar and 0.582 pounds
sterling to a naira. In 1973, it was
1.519 dollar and 0.614 pounds sterling to a naira. In 1974 it was 1.589 and 0.675 pounds
sterling to naira which increased to 1.623 dollars and 0.734 pounds sterling in
1975 as a result of Udoji salary award of 1974 increased wage extensively. Higher wages increased the purchasing power
of consumers thus, leading to increase in their prices.
The
introduction of Structural Adjustment Programme (SAP), and second-Tier Foreign
Exchange (SFEM) in 1986 on one of government’s major policy packages, was aimed
at making the over, valued naira exchange rate more realistic and responsive to
market forces. Regrettably, C. Anyanwu
(1989) observed, the SAP/SEFEM was a disaster that was fast destroying the
foundation of Nigeria
economy. There was consequent
persistence of exchange rate depreciation of the naira (from 1.5691 naira to
1.0 dollar at the end of September 1986, 7.8950 naira to 1.0 dollar by mid
February 1990). Also by August 1998, the
dollar was sold for 21.9960 naira at the Foreign Exchange Market (FEM) while at
parallel market it was sold for 45 naira.
The value of naira continued to depreciate to the extent that the
exchange rate was less than one dollar to a naira before 1990. It was 0.119 US dollar to a naira in
1990. This depreciated to 115.7 to a
dollar by the 12 April, 2001
(CBN) 1994. By 2003, it has risen N130
to the US dollar.
1.2
STATEMENT OF PROBLEM
The
depreciation of naira persistently, has various inflationary effects on the
economy of Nigeria. The effects of this macro-economic problem
can be highlighted in different stages.
In the first place, when a currency is depreciated, it is designed to
reduced or discourage the excessive dependence on a particular foreign or some
foreign commodities.
This will
make domestic prices of such imports may be intermediate goods and as a result
tends to push the cost of production of final goods up.
In another
way, deteriorating exchange rate of naira could bring about inflation of
increase in wage rate or demand, when the naira is devalued, the price of
important raw materials increases domestic firms may be willing to increase
production reduction on their competition as a result of like in prices of raw
materials.
Consequently,
the output of the firms will attract high prices, therefore for consumers to
meet their provisions level of consumption or maintain their real income, calls
for wages increase which according to Sotersten (1994) will worsen the whole
situation.
Nigerians
as one of the developing nations that heavily depend on imported inputs,
implements and machinery, the cost of these are usually very high due to poor
exchange rate of naira.
This will
discourage potential investors, how investment will lead to reduced national
product, which is an indicator of stagnancy or retrogression of the economy.
For this
reason, Obasanjo (1999) noted that any thing could happen of regulatory
authorities did not take steps to tidy up the situation, so the researcher
wants to find out the problems and suggest ways of remedying the situation.
1.3
SIGNIFICANT OF THE STUDY
For the
purpose of this study, the researcher took a step further to determine the
possible significances.
(i)
To give other researchers who which to write on this
topic the process to follow
(ii)
To check the inflationary of deflationary gap
(iii)
To determine the cumulative impact of broad money
growth and the sizeable devaluation of the naira
(iv)
To determine the fate of naira with other internal
currencies.
(v)
To determine government policies.
1.4
OBJECTIVE OF THE STUDY
The objectives
of this study include the following
(i)
To identify the causes of inflation and exchange rate
depreciation.
(ii)
Examine the extent to which naira exchange rate
depreciation heed affected domestic inflationary rate in Nation.
(iii)
Assess the effectiveness of government earlier
introduced policies.
(iv)
Give suggestion and recommendation on appropriate
policies for the future.
1.5
RESEARCH HYPOTHESIS
Since the
research data was mainly from secondary sources, the hypothesis used will be in
two forms to determine result.
The null
hypothesis and the alternative hypothesis.
The null hypothesis (Ho) will be tested against the alternative
hypothesis (Hi)
(a) Ho: There is no positive or significant
relationship
between
exchange rate depreciation and domestic inflation in Nigeria.
(b) Hi: There
is significant or positive relationship between
exchange
rate depreciation and domestic inflation in Nigeria.
1.6
SCOPE AND LIMITATION OF THE STUDY
The study
covers the period from 1985 to 2000. It
concentrates on the trend of exchange rate depreciation and inflation in Nigeria. The study is limited to the period because of
the problems associated with the availability and collection of secondary data
needed for the research work due partly to the level of development of the Nigeria
economy.
1.7
DEFINITION OF TERMS
Exchange
rate: This is the price
at which one country exchanges its currency for other currencies.
Depreciation: This is when exchange rate changes so
that a unit of its currency can buy fewer units of foreign currency.
Devaluation: This is an intentional act put forward
by the government of a country with the aim of sustaining equilibrium.
Inflation: This is substantial, sustained increase in
general level of prices.
REFERENCES
Anyanwu
J. C. (1993), Monetary Economics: Theory, Policy and
institutions,
Onitsha, Hybrid
Publishers.
Anyanwu J.
C. (1997), Structure of the Nigeria
economy (1960 –
1997),
Ontisha, Joance Educational Publishers.
CBN (1994)
Briefs.
CBN (2001),
Monetary, Credit, Foreign Trade and Exchange Policy
Guidelines
2001 Fiscal year No 35.
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