CHAPTER ONE
INTRODUCTION
- Background of the study
Overtime, a lot has been said and done about the recent continuos
increment of the United States dollars and its effect on the economy.
The importance of the US dollars to a mono economy and import dependent
nation like that of Nigeria cannot be over emphasized in that most
notable transactions that takes place in any economic process must have a
direct or indirect connection with the dollars.
In the economic analysis of any developing country like that of
Nigeria, the increase or decrease of the dollars has a corresponding
effect on the economy and by extension influences development.
The increment of the dollars amid crisis can lead to severe economic
consequences. The economic history of Nigeria has helped to buttress
this fact.
Certainly, the consequences for dollar increment or devaluating the
naira can have both a long and short term effect. F or a country like
Nigeria for instance, an increase in currency depreciation or dollar
increment would immediately hit consumer purchasing power while at the
same time reduces the value of wages that was hitertho before now
valuable. Since Nigeria is an import dependent Nation, purchases of
foreign goods quickly fall because prices of foreign goods would
geometrically rise, this would lead to lack of small and medium
enterprises growth and businesses would suffer which by extension
affects the speedy growth and development of the economy. The pace of
economic adjustment will depend on how quickly domestic
industries/companies respond toward import replacement and exporting.
The exchange rate policy is what must be discussed in the increment
or decrement of the dollar in Nigeria. Exchange rate policy simply
entails the value of a unit of the naira to the dollar (Obadan, 1996).
Exchange rate policy is therefore a critical component in the increament
of the dollar and how it influences the economy. Specifically internal
balances mean the level of economic activity that is consistent with the
satisfactory control of inflation. On the contrary, external or
sustainable current account deficit financed on lasting basis expected
capital inflow. It is important to know that economic objectives are
usually the main consideration in determining the exchange control which
influences the the increment of the united state dollar. For instance
from 1982 – 1983, the Nigerian currency was pegged to the US dollar on a
1.1 ration. Before then, the Nigerian naira has been devalued by 10%
which had its corresponding consequences on the economy of Nigeria.
Apart from this policy measures discussed above, the Central Bank of
Nigeria (CBN) applied the basket of currencies approach from 1979 as the
guide in determining the exchange rate was determined by the relative
strength of the currencies of the country’s trading partner and the
volume of trade with such countries. Specifically weights were attached
to these countries with the American dollars and British pound sterling
on the exchange rate mechanism (CBN, 1994). One of the objectives of the
various macro – economic policies adopted under the structural
adjustment programme (SPA) in July, 1986 was to establish a realistic
and sustainable exchange rate for the naira, this policy was recommended
in 1986 by the International Monetary Fund (IMF).
The inconsistency in policies and lack of continuity in exchange rate
policies aggregated unstable nature of the naira rate against the
dollar. (Gbosi, 1994:70). This has led to the economic inconsistencies
in Nigeria in recent times.
When the value for the dollar increase which simultaneously
devaluates the Naira, domestic firms and households can no longer afford
to buy domestic goods and services, and foreigners aren't interested in
buying overpriced goods and labour. So companies go broke or cash
trapped and unemployment rises because more people would be layed off.
With lots of unused industrial capacity and crowds of unemployed
workers, prices and wages slowly decline. More flexible labour markets
with lots of room for productivity growth will adjust faster than less
flexible economies like that of Nigeria.
- Statement of the general problem
The dollar rate when compared with the Naira has been stable between
the 1973 and 1979 which were the oil boom era. This was also the case
before 1990 when Nigeria generated huge gross domestic product (GDP)
from the agricultural sector unlike now where the agricultural sector
has gone nearly comatose of not been able to account up to 5% of the
country’s gross domestic product (GDP) owing to the discovery and
development of the oil sector.
The problem of the alarming increase of the dollar when compared to
the naira has been a cause for a serious concern and has led to the
depreciation of the economy. Small scale enterprises has been
discouraged as a result of the increment of the dollar, imports reduce
significantly and having known that the small enterprises are the
bedrock of any economy and for any economy to thrive, the small scale
businesses must be encouraged and supported but this has regrettably not
been the case in recent times.
- Aims and objectives of the study
The major aim of this study is examine the effect of dollar increment
on the economy of Nigeria. Other specific objectives of this study
include the following;
- To examine the present state of the economy.
- To examine the relationship between dollar increment and economic development of Nigeria.
- To recommend ways of improving the value of the Naira against the dollar.
- Research Questions
- What is the effect of dollar increment on the economy of Nigeria?
- What is the present state of the economy of Nigeria?
- Are there ways the economy of Nigeria can be improved?
- Is there a significant relationship between dollar increment and economic development of Nigeria?
- What are the ways the value of the naira can be improved against the dollar?
- Research Hypotheses
H0: Dollar increment does not influence economic development in Nigeria.
H1: Dollar increment influences economic development in Nigeria.
H0: There is no significant relationship between dollar increment and the economy of Nigeria.
H0: There is a significant relationship between dollar increment and the economy of Nigeria.
- Significance of the study
This study would be of immense importance to economic policy makers,
researchers and scholars who are interested in the exchange rate policy
and economy development. This study would also benefit students who are
interested in the study of economic development.
- Scope of the study
This study is restricted to the effect of dollar increment on the economy of Nigeria.
- Limitation of the 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.
- Definition of terms
GDP: gross domestic product
DOLLAR: a paper money, silver or cupronickel coin, and monetary unit of the United States, equal to 100 cents
ECONOMY: the process or system by which goods and services are produced, sold, and bought in a country or region
POLICY: The declared objectives that a government or party seeks to achieve and preserve in the interest of national community.