1.1 Introduction
The persistent depreciation of the Naira, Nigeria's currency, has been a major concern for the country's economic policymakers, businesses, and citizens. Currency depreciation refers to the decline in the value of a nation's currency relative to other currencies. This phenomenon can have profound effects on various aspects of an economy, influencing everything from inflation rates and foreign direct investment (FDI) to the cost of imports and exports.
Adeniran et al., (2014) asserted that, Nigeria has experienced significant fluctuations in the value of the Naira, often attributed to a combination of internal and external factors. Internal factors include political instability, inconsistent economic policies, and structural weaknesses within the economy. External factors encompass global oil prices, as Nigeria's economy is heavily reliant on oil exports, and shifts in the global economic landscape (Adeniran et al., 2014).
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Limitation of the study and Definition of technical terms.
1.2 Background of Study
Since gaining independence in 1960, Nigeria has grappled with managing its currency amidst external shocks and internal economic dynamics. The Naira, introduced in 1973 to replace the British pound, initially maintained a relatively stable exchange rate. However, subsequent decades saw fluctuations influenced by global oil price volatility, which remains a critical factor due to Nigeria's heavy reliance on oil exports (Onwioduokit & Asagba, 2018).
Throughout the 1980s and 1990s, Nigeria faced economic challenges characterized by periods of currency devaluation. These periods were often precipitated by external debt crises, structural adjustment programs, and fiscal imbalances. The devaluations aimed to address trade deficits and promote export competitiveness but also underscored vulnerabilities in the economy's dependence on oil revenues (Adegbite, 2001).
The currency of a nation would normally serve as a medium of exchange a standard of rate and a store of value. A close perusal of these functions would show that in a complex economy. Money is usually the only accepted medium through which a buyer pays a seller. Money is a convenient way to store wealth for use whenever it is needed. If however, the value of a currency is not stable, the value of that wealth will diminish daily. The Nigeria currency has contributed to lose value over a long period of time.
Adujie (2012) argued that countries like Ghana, Jamaica etc have better strength currencies and international respect compared to Nigeria. And this is not because those counties are more productive nor do they possess more robust export base in comparison with Nigeria. These counties do have comparative advantage to terms of market size or population, gross domestic product and export base in comparison to Nigeria. Depreciation of the naira has affected all the facets of the economic life of very Nigerian. This situation has been characterized by economy instituting inflationary perverse and high cost of doing business. Currency depreciation refers to a sharp fall in currency. Nigeria has been experiencing currency depreciation for a very long period of time and as years go by. This does have service consequences on the economy depreciation of the naira have been occurring from 1986 till date. GDP (grow domestic product) is the total value of all final goods and services product for the market place chairing a green year within a nation boundary. It is an aggregate measure or production equal to the sum of the gross varies added units engaged in production.
According to Dickinson (2012) GDP is usually measured in three ways all of which should in principle give same result. These are the production (or output or value added) approach, the income approach of the expenditure approach. The most direct of the three is the production approach which sums the output of every class of enterprise to arrive at the total. One thing people want to know about their economy is whether its total outputs of goods and services is growing or sinking. GDP is measured in the currency of the country in question and Nigeria’s currency is depreciating, due to this depression of naira at will affect the measuring of GDP in Nigeria.
Interest rate as described by Burton (2008) is the rare at which interest is paid by borrower (debtor) for the use of money that they borrow from a under (creditor). Interest rate are vital tools of monetary policy and are taken onto account when dealing with variables like inflation, investment etc. it is a rate charged or paid for the use of money one to the depreciation of naira, borrowing from other countries will be difficult because the interest charged will be higher.
The problem of how to reduce inflation has been a central issue among policy markers 1970s Falaki (2010) wrote that one of the cause of nation depreciation inflation is the rate at which the general level by price of goods and service rising and subsequently, purchasing is falling. Inflation begins with money loosing its value. So therefore it is against the background or overview that this study is being centered.
1.3 Statement of Problem
Investigation revealed that the persistent depreciation of the Naira poses several critical problems for Nigeria's economic growth and stability. One of the foremost issues is the heightened inflationary pressure. As the Naira loses value, the cost of importing goods and services rises, leading to higher prices for consumers. This inflation erodes the purchasing power of households, reducing their real income and standard of living (Adeniran, Yusuf, & Adeyemi, 2014).
Another significant problem is the negative impact on foreign direct investment (FDI). A consistently depreciating currency creates an environment of uncertainty and risk, deterring foreign investors who fear potential losses from unfavorable exchange rate movements. This reduction in foreign direct investment can stymie economic growth, as foreign investments are vital for infrastructure development, job creation, and technological advancement (Aluko & Ajayi, 2018).
Furthermore, the persistent depreciation of the Naira undermines economic stability and confidence. A volatile currency can lead to speculative attacks and capital flight, further depleting foreign exchange reserves and exacerbating economic instability. This volatility can also disrupt economic planning and policy implementation, making it difficult for the government to achieve its economic objectives (Aliyu, 2009).
Businesses in Nigeria also face substantial challenges due to the depreciation of the Naira. Companies that rely on imported raw materials, machinery, and technology must contend with increased costs, which can squeeze profit margins and hinder expansion efforts. This situation diminishes the competitiveness of Nigerian businesses in both local and international markets, affecting overall economic performance (Adenikinju & Falobi, 2020). It is against the backdrop that this study seeks to address these problems by exploring the underlying causes and multifaceted effects of the persistent depreciation of the Naira on Nigeria's economic growth.
1.4 Aim and Objectives of Study
The aim of the study is to critically find out the impact of persistent depreciation of the Naira currency on the growth of Nigeria economy. In achieving this aim, the following objectives of study were laid out as follows:
- To analyze the historical trends of the Naira’s exchange rate and identify the key factors contributing to its persistent depreciation;
- To investigate the broader implications of currency depreciation on Nigeria’s overall economic stability and growth;
- To assess the impact of Naira depreciation on inflation and the purchasing power of Nigerian households; and
- To provide policy recommendations aimed at stabilizing the Naira and enhancing the resilience of the Nigerian economy against future currency fluctuations.
1.5 Research Questions
The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:
- What are the historical trends of the Naira’s exchange rate, and what key factors have contributed to its persistent depreciation?
- How has the depreciation of the Naira impacted inflation rates and the purchasing power of Nigerian households?
- What are the broader implications of Naira depreciation on Nigeria's overall economic stability and growth?
- What effects has the persistent depreciation of the Naira had on foreign direct investment (FDI) inflows into Nigeria?
- How does the depreciation of the Naira influence the cost structure and competitiveness of Nigerian businesses, especially those dependent on imported raw materials and technology?
1.6 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
Hypothesis One
- H0: There is a negative relationship between the persistent depreciation of the Naira and the purchasing power of Nigerian households.
- H1: There is a positive relationship between the persistent depreciation of the Naira and the purchasing power of Nigerian households.
Hypothesis Two
- H0: The persistent depreciation of the Naira has a significant negative correlation with rising inflation rates in Nigeria.
- H1: The persistent depreciation of the Naira has a significant positive correlation with rising inflation rates in Nigeria.
Hypothesis Three
- H0: The persistent depreciation of the Naira does not increase the operational costs and decreases the competitiveness of Nigerian businesses reliant on imported inputs
- H1: The persistent depreciation of the Naira increases the operational costs and decreases the competitiveness of Nigerian businesses reliant on imported inputs
1.7 Significance of Study
The significance of studying the impact of persistent depreciation of the Naira on the growth of Nigeria's economy can be viewed through the lens of various stakeholders:
- Policy Makers and Government Officials: Understanding the causes and effects of Naira depreciation is essential for developing effective monetary and fiscal policies. Insights from this study can guide the creation of strategies to stabilize the currency, control inflation, and foster a conducive environment for sustainable economic growth.
- Businesses and Entrepreneurs: For businesses, particularly those reliant on imported inputs, currency depreciation significantly impacts operational costs and competitiveness. This research provides valuable information that can help businesses develop strategies to mitigate the adverse effects of currency fluctuations and maintain their competitive edge in both domestic and international markets.
- Investors and Financial Institutions: Both local and international investors require a stable economic environment to make informed investment decisions. The findings of this study can help investors assess the risks associated with currency depreciation and guide financial institutions in creating investment products that hedge against exchange rate volatility.
- Households and Consumers: Currency depreciation affects the cost of living by driving up prices of imported goods and services, thereby eroding purchasing power. Insights from this study can inform social policies aimed at protecting household incomes and ensuring economic stability for consumers.
- Academia and Researchers: This study contributes to the existing body of knowledge on exchange rate dynamics and their macroeconomic impacts. Researchers and academics can use the findings to further explore related economic phenomena, develop new theories, and provide recommendations for addressing currency depreciation in developing economies.
1.8 Scope of the Study
The scope of this research is focused on the Impact of Persistent Depreciation of the Naira Currency on the Growth of Nigeria Economy. The scope of the study shall be restricted to the economic activities of Nigeria.
Therefore this research study covers the causes or effect of the persistent depreciation of the naira. It will also show the impact of currency depreciation ad how it affect investors, businesses and the economy as a whole. The data used in this research is a secondary data and the type of secondary data employed is the time series data.
1.9 Limitations of the Study
During the course of this study, many things militated against its completion, some of which are:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- 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).
1.10 Definition of Terms
Currency Depreciation:
Currency depreciation refers to a decrease in the value of one currency relative to another in the foreign exchange market. It can result from various factors such as economic instability, changes in interest rates, and fluctuations in global markets. In the context of this study, it specifically pertains to the decline in the value of the Naira relative to other major currencies (Krugman, Obstfeld, & Melitz, 2018).
Inflation:
Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power over time. It is often measured by the Consumer Price Index (CPI). Currency depreciation can lead to imported inflation, where the cost of imported goods increases, subsequently raising the overall price level (Blanchard, 2017).
Foreign Direct Investment (FDI):
FDI involves investment by a firm or individual in one country into business interests located in another country. FDI can be crucial for economic growth as it brings capital, technology, and expertise. A depreciating currency can deter FDI by increasing exchange rate risks (Dunning & Lundan, 2008).
Purchasing Power:
Purchasing power refers to the quantity of goods and services that can be bought with a unit of currency. When a currency depreciates, its purchasing power decreases, meaning consumers can buy less with the same amount of money. This concept is central to understanding the impact of Naira depreciation on household welfare (Mankiw, 2019).
Exchange Rate:
The exchange rate is the value of one currency for the purpose of conversion to another. It can fluctuate based on economic conditions, market speculation, and geopolitical events. The exchange rate of the Naira against other currencies is a key indicator of its depreciation (Pilbeam, 2013).
