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;
i. To examine the present state of the economy.
ii. To examine the relationship between dollar increment and economic development
of Nigeria.
iii. To recommend ways of improving the value of the Naira against the dollar.
Research Questions
i. What is the effect of dollar increment on the economy of Nigeria?
ii. What is the present state of the economy of Nigeria?
iii. Are there ways the economy of Nigeria can be improved?
iv. Is there a significant relationship between dollar increment and economic
development of Nigeria?
v. 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.