ABSTRACT
The objective of this study is to access the impact of devaluation of the naira on Nigeria’s balance of payment. Before the dominance of the oil sector, particularly between 1960-1970, the balance of payment was less erratic. However, since 1970, the balance of payment has swunged at one time or the other from a position of strength to that of the weakness with a decline in foreign exchange earnings. This has been attributed to the global glut in the petroleum industry and the relatively high expenditure on impact by Nigeria because of work domestic supply capability.
The major finding of this study was various exchange regime adopted by Nigeria government so far. A review of the effect of the different exchange rate system reviews that the fixed exchange rate system, which characterized the military regimes in Nigeria resulted in over-valuation of the naira relative to other currency and hence resulted in self distortion in macro economic variables. The flexible exchange rate system, on the other hand, was resorted to during the SAP to restore the real value of naira. At present, the Dutch auction system is being used to determine the exchange rate in Nigeria.
In an attempt to correct the serious disequilibrium in the external sector of the economy, the control system was replaced with a market based system with inception of SAP in June, 1986. The main achievement of the new system are the elimination of payment arrears, the increase in domestic capacity utilization due to the increase in the local source of raw materials, elimination of the over-valuation of the naira exchange management.
However the problems of the dependence on the oil sector for foreign earnings, continuous depreciation of the naira and the attendant inflationary expectation are yet to be resolved
CHAPTER ONE
INTRODUCTION
1.0 BACKGROUND TO THE STUDY
Prior to 1958, when Nigeria exported crude oil for the first time, Nigerian economy had relied on export of cash crops for her foreign exchange. It was only in the early 1970’s when oil boom of the mid 1970s and the resulting favourable balance of payments position led to an era of liberal food import policy. Import restrictions were lifted in some cases and import duties were either abolished or reduced in others. The short spell of depression in the oil market in the late 1970s gave rise to tightening of food import tariffs and import prohibition, which was again relaxed as the oil market situation improved the total government revenue to N98.2 billion (NNPC publication, September 1978).
The period 1981-1986 was one of economic depression and balance of payment crisis. Trade controls were reintroduced to correct the severe distortion. Huge tariffs or outright bans were imposed on most food imports. Export bans and duties were also reviewed to address principally the domestic inflation problem. Centralized marketing was reinforced to increase government revenue.
The 1986 budget introduced the trade liberalization regime as a component of the structural adjustment programme (SAP). The regime included abolition of the import licensing system, reduction of import restrictions, modification of advance payment of import duties, overhauling of custom and excise duty schedules, establishment of tariff review board, allowance of domiciliary accounts operation, abolition of export prohibition, dissolution of commodity boards, and establishment of an export development fund, guarantee scheme, insurance scheme and export promotion zone. The main objectives of SAP include the following:
1. To restructure and diversify the productive base of the economy in order to reduce dependence on the oil sector and imports.
2. To achieve fiscal and monetary balance of payment viability over the period.
3. To lesson the dominance of unproductive investment in the public sector, improve the sector’s efficiency and enhance the growth potential of the sector.
The main element of accomplishing the objectives of SAP in Nigeria was the adoption of the realistic exchange rate regime through the adoption of the second tier foreign market: SFEM, FEM, IFMS Bureau de change etc.
The intention here was to remove the over valuation of the naira through the market forces of demand and supply to determine the realistic exchange rate of the naira.
Between 1975 and 1985 the naira was considered to be over value. In fact the structural problems of foreign exchange scarcity, liquidity problems, over invoicing of import can be traced back to this over valuation. It was hoped that these structural problem would be gotten rig if a realistic exchange rate could be achieved so that incentives can be created for non-oil exports, capital flow can be discouraged and most of all balance of payment can be solved.
1.1 INTRODUCTION
The deterioration of Nigeria’s balance of payments since the late 1970’s has in one way or the other been associated with the exchange rate. This has led to a number of heated debates as to whether Nigeria should devalue her currency or not as proposed by the International Monetary Fund (IMF). The arguments have been based on the fact that the naira was over valued (Aboyade 1982).
The exchange rate represents the price at which purchases and sales of foreign currency (or claims on it such as cheques and promissory notes) take place. It is the price of one currency in term of another currency. Within a minimum period of less than two months, the naira has cascaded from 116 to 165 to a dollar in the parallel market, losing 49 in the process. All steps taken so far to firm up the naira, or at least stop the slide have, at best, remained unsuccessful. However, the Central bank of Nigeria, explained that it had deliberately allowed the Nigeria’s foreign exchange market to adjust to the global shock in the oil market.
Foreign exchange resources are derived and expended in the course of effecting economic transactions between the residents of the country and the rest of the world. In this sense there is a line between foreign exchange transaction and the balance of payments.
While foreign exchange transaction reflect cash flows arising from international operations, the balance of payment looks at the actual operations, the balance of payment looks at the actual movement of goods, services and changes in financial assets and liabilities. When adjustment is made to cash flow statement arising from International transaction in foreign exchange they are brought to balance of payment standard. The state of foreign exchange reserves has implication for the ability to finance temporary payment difficulties. Since the down turn in oil export began in 1981, Nigeria’s external trade transaction has been facing a lot of problems;
The recession which accompanied the collapse of oil fortunes had considerably reduced activities in an economy with a high import dependency ratio. Central Bank records indicate that foreign exchange of inflow dropped from $26 billion in 1980 to $12 billion in 1984 and to low as $7 billion in 1986 (CBN Economic and financial review 1987).
To further complicate the problem of external trade, Nigeria accumulates huge foreign debts servicing burden and worsened relation between the country and its traditional trade creditors. The consequence of this is considerably reduced inflow of foreign capital.
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