Shipping Trade And It’s Impact On Economic Growth In Nigeria

Introduction

1.1 Background of the Study

Economic growth and development universally play host to three core fundamentals of short and long-run economic targets for the achievement of a stable and sustainable growth, employment, and a bare minimum inflation rate with a favourable trade point. The realizations of the above economic targets and profitability have propelled, nations over time to adopt monetary and fiscal policies to regulate the shift in the aggregated demand curve. Empirical research bare and recognized an economic world that in her earlier epoch witness economic depressions in 1910 and 1930s herein refer to as the “Great Economic Depression” which negatively impacted on the global economy with particular effect on domestic currencies. Which, therefore, propel nations to adopt devaluation as the last resort and as a key to economic lift.

In the contemporary era, devaluation has been contained in line with the traditionalist argument as a macroeconomic policy tool for most developing economies of the world. The International Monetary Fund (IMF) and World Bank clinching to currency devaluation as a medium to domestic firms protection against external competition and increase net export boost (Genye, as cited in Ayen, 2014 p.103). Nations in conjunction with economic theories and in line with the traditionalist argument consensually cuddle devaluation as a fiscal policy and as a medium of domestic economic enhancement in the long-run by means of net export stimulation to economic diversification, increase domestic international competitiveness, trade balance expansion, employment generation and balance of payment alleviation so long as the MarshallLerner conditions are gratified.

The Marshall-Lerner condition holds that; devaluation enhances expansion where the sum of price elasticity of demand for export and the price elasticity of demand for imports is greater than unity (>1) (Acar as cited in Ayen 2014 p.103). The Nigerian economy over the decade has been recognized to be a mono-cultural and oil-driven. With oil funding 95 percent of foreign earnings, 80 percent to GDP, an above 90 percent of total export valued at $47.8 billion consequently placing Nigeria as the 49th largest exporter and import at $39.5 billion placing Nigeria as the 53rd largest importer universally (Observer of Economic Complicity, 2015). Nigeria in the modern era is not immune from global economic and financial crisis. Nigeria, therefore, is currently trapped in the web of exchange rate volatility driving the adoption of devaluation as a feasible way out of the financial and economic quagmire (Akindiyo and Olawole 2015).

Currency devaluation clinches to the fiscal policy which focal point on a calculated cutback in the value of the domestic currency to maximize gains in trade (Aiya, 2014). Cooper, as cited in Momodu and Akani (2016) currency devaluation, is likewise reflected to be a shocking policy embraced by the government. Hence, most governments reject devaluation in line with their economic pattern. Devaluation occurs where there are trade and payment deficits. With Thailand, China, Mexico, Czech Republic devaluing strongly, willingly or unwillingly, due to deficits in trade exceeding 8% of GDP (Momodu and Akani 2016). Nigeria in 1973 cuddles her first currency devaluation at 10% in response to U.S. devaluation of the same year at foreign exchange reserves growth at 773.5% in 1974.

According to International Monetary Fund, report 2015 (IMF) nations can devalue their currency to correct “elementary disequilibrium” in trade and balance of payments. Todaro in 1982 augured that “devaluation is unhealthy for economic development since valued currency equally worsens trade and balance of payment. Momodu and Akani (2016) instituted that, the monetarists economists argued the non-existence of devaluation effect on real variables in the long run with the view that exchange rate devaluation affects real trade balance only in the short run without any effect on real variables on the long run in relation to, Purchasing Power Parity (PPP) assumption, which states that increase in exchange rate in the short run leads to increase in output and balance of payments. While devaluation effect, in the long run, neutralize increase in output and a favourable balance of payment by way of the price increase. The arguments above are debatable in nature, which therefore forms the basics to further empirically investigate the effect of devaluation of naira in Nigeria economy.

1.2 Statement of the Problem

Devaluation increases international competitiveness of domestic industries which leads to diversion of consumption of foreign goods to domestic goods (Yilkal, 2014). It is used to encourage exportation, discourage importation and to correct unfavourable balance of payment by making home goods cheaper to foreign countries and foreign goods expensive in the home country. Examining the economy of Estonia, Parts (2013) observed that external devaluation was not going to work for the economy rather, internal devaluation was adopted coupled with other fiscal policy measures and that is why she had a quick recovery from the recent recession and its economy is in better shape than before the crisis. Estonian exports grew 22 percent in 2010 and 25 percent in 2011. This is a result of the rapid increase of high value-added exports by the manufacturing sector, which has also been the main job creator since the crisis. Indeed, export growth has been the main driver of the Estonian economic recovery (Parts, 2013). China achieved its “miraculous” growth as a result of blatant currency manipulation that effectively stole growth from many of its trading partners. Between 1978 and 1993, China’s government pushed down the value of the renminbi by nearly two-thirds. In his book, “Devaluing to Prosperity”, Berry says the value of the currency then nearly halved again between 1994 and 2011 (Berry, 2012).

Nigeria’s GDP was recently rebased with the result placing the country as Africa’s largest economy with an annual GDP of $510 billion. Nigeria’s population and the size of the market has remained an attraction for FDI inflow with the current population estimate projected at 183 million people in 2015 (growing at a projected growth rate of 2.82%). The country is currently ranked the 7th most populous country in the world and has enjoyed a positive GDP growth rate in the last 10 years and a relatively stable exchange rate regime. Between the first quarter of 2013 and the last quarter of 2014 Nigeria posted an average GDP growth rate of 5.8%, a single digit inflation of 8.2% in the last quarter of 2014 and a relatively stable exchange rate regime. The country is now in dilemma of the effect of further devaluation of naira as the former CBN governor, Sanusi Lamido and some other renowned Nigerian economists are clamoring for it while others like Tella, Teriba and Utomi see this as no solution to the economic problem facing the country. This study seeks to contribute to literature by empirically testing the effect of Naira devaluation in Nigeria which is import driven and only exports crude oil and a few raw materials with low value added. A recent review of crude oil price shows a sharp decline of about 48.5 per cent between 2014 and 2015.

1.3 Objectives of the Study

The major objective of this research is to determine the effect of devaluation of naira in Nigeria economy. The study will specifically seek to investigate the correlation between Naira devaluation and Nigerian economy.

1.4 Research Questions

What is the effect of Naira devaluation on the growth of Nigeria economy?

1.5 Research Hypotheses

H0: Naira devaluation have no significant impact on the of Nigeria economy.

Ha: Naira devaluation have a significant impact on the of Nigeria economy.

1.6 Significance of the Study

The study is significant as it would add to existing literature on Naira devaluation and exchange rate and how it affects economic growth in Nigeria. It will serve as a guide to further research, academic work and as a self-help study material for those who might wish to firsthand knowledge about Naira devaluation.

It is also hoped that Nigeria policy makers will find it’s a helpful material in the formulation and implementation of policies on devaluation of Naira and how it facilities growth in Nigeria.

1.7 Scope of the Study

The study covers the the effect of devaluation of naira in Nigeria economy. The study covers the period 1985-2015.

1.8 Limitation of the Study

Like in every human endeavour, the researcher encountered slight constraints while carrying out the study. Insufficient funds tend to impede the efficiency of the researcher in sourcing for the relevant materials, literature, or information and in the process of data collection, which is why the researcher resorted to a limited choice of sample size. More so, the researcher simultaneously engaged in this study with other academic work. As a result, the amount of time spent on research will be reduced.

1.9 Definition of Terms

Naira:

The Currency of Nigeria.

Devaluation:

Devaluation on modern monetary policy 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.

Exchange Rate:

An exchange rate between two currencies is the rate at which one currency will be exchanged for another.

Import:

An import is a good brought into a jurisdiction, especially across a national border, from an external source

Export:

The term export means shipping the goods and services out of the port of a country. The seller of such goods and services is referred to as an “exporter” and is based in the country of export whereas the overseas based buyer is referred to as an “importer

Balance of Payment:

The balance of payments (BOP) of a country is the record of all economic transactions between the residents of a country and the rest of the world in a particular period (over a quarter of a year or more commonly over a year).

CBN:

Central Bank of Nigeria

E-Commerce:

Electronic commerce, commonly known as E-commerce or e- Commerce, is trading in products or services using computer networks, such as the Internet.

1.10 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, definition of terms etc.

Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature.

Chapter three deals on the research design and methodology adopted in the study.

Chapter four concentrate on the data collection and analysis and presentation of finding.

Chapter five gives summary, conclusion, and recommendations made of the study.