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

---

---