The Effect of the Naira Redesign on Foreign Exchange Rate and Economic Development in Nigeria
CHAPTER ONE
The objective of the Study
The main objective of this study is to investigate the effect of the naira redesign on the foreign exchange rate and economic development in Nigeria. Specific objectives include to:
- Investigate the relationship between the exchange rate and economic growth in Nigeria.
- Explore the effects of exchange rate fluctuations in monetary policy in Nigeria.
- Examine the impact of interest rates on economic growth in Nigeria.
- Assess the relationship between the inflation rate and economic growth in Nigeria.
- Investigate the effect of unemployment on economic growth in Nigeria.
CHAPTER TWO
LITERATURE REVIEW
Conceptual Review
Economic Background of Nigeria: A Perspective of Policy Regimes
With various policy regimes, the Nigerian economy has experienced several alterations over time. A medium-term “development plan” was approved before 1986 as the most crucial framework for growing and reorganising the economy. To put the economy on a path for rapid expansion, the First National Development Plan, which ran from 1962 to 1968, was created. The plan paid adequate importance to the development of the agricultural and industrial sectors as well as the training of high-level and intermediate workers, which had a 54.7 percent GDP impact on the growth process(Eneh, 2022).
Nonetheless, the pauses in economic activity at that time later opened the door for more expansive economic measures for peace and reconstruction. As a result, the Second National Development Plan, 1970–1974, was started primarily to rebuild and restore infrastructure that had been devastated during the civil war in Nigeria (Eneh, 2022). As a result, the government made significant financial investments in raising citizens’ earnings as well as building and renovating infrastructure. The Nigerian economy was managed and controlled by Nigerians under the nationalism-based Indigenization Decrees of 1972 and 1974. The Third National Development Plan, 1975–1980, was developed during a more favourable economic period when the country began to receive significant oil earnings during the middle of the 1970s. The drop in the price of international oil, however, had an impact on the approval of the Fourth National Development Plan, 1981–1985. To address the severe external sector imbalances and dwindling oil revenues, the government passed the Economic Stabilization Act. This was done to cut back on government spending and preserve foreign reserves to enhance the country’s balance sheet and, in particular, to secure a stable exchange rate because the country has used a fixed exchange rate system since gaining independence (Sanusi, 2022).
Nonetheless, it was determined that a more fundamental overhaul was required in addition to the austerity measures. As a result, in 1986, the government consented to the Structural Adjustment Plan (SAP) supported by the International Monetary Fund. The SAP aspired to eliminate onerous administrative restrictions and improve the market environment through policies and incentives that would support private enterprise and more effective resource allocation.
However, it wasn’t until 1986 that a flexible (market-determined) exchange rate system was implemented and let to be decided by supply and demand. It may be said that SAP had some degree of success. Nonetheless, some of the SAP’s benefits were diminished as a result of the increased frequency of policy reversals between 1988 and 1989 and 1994. Gains in the economy up until 1990 were attributed to growing deregulation and economic management liberalisation. After then, due to policy changes and discrepancies, major macroeconomic aggregates had a reversal in trends in 1994. In general, the period under review was marked by numerous policy reversals and contradictions, which led to economic inefficiencies that were then exacerbated by outside shocks like the external debt overhang. Ultimately, SAP was unable to achieve its objectives of generating wealth and fostering good economic development since the majority of its programmes were abruptly terminated or unjustly changed. With the establishment of a military administration in 1994, the experimenting with deregulation and liberalisation came to an end ( Eneh, 2022).
Due to high nominal interest rates—which peaked at 48.0% in commercial banks and 60.0% in non-bank financial institutions—the federal government reregulated the economy by regulating exchange and interest rates. These rates were further influenced by the high inflation rates of 48.8% in 1992 and 61.3% in 1993. (Sanusi, 2022). The implementation of monetary policy was no longer effective in limiting expansionary fiscal operations because there was no clear economic strategy for the remainder of the decade. In addition, the advantages to the economy would have been diminished by weak institutions and an unfavourable legal climate. As a result, the federal government issued Vision 2010, which outlined the need to address Nigeria’s enormous development issues. But, the plan’s life was cut short by the tragic death of the late military leader in 1998, and his successor abandoned it.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
Research Approach
The research approach refers to the systematic and organized method that a researcher uses to carry out research. It is a general plan of how the research will be conducted, from collecting data to analyzing the results. The research approach is an essential aspect of any research, as it determines the type of data that will be collected, the methods that will be used to collect the data, and how the data will be analyzed (Creswell & Creswell, 2022).
There are several types of research approaches, including qualitative, quantitative, and mixed-methods research. These approaches differ in their research designs, research methods, data collection, and data analysis techniques. In this study, a quantitative research approach is justified as it allows for the measurement and analysis of numerical data to answer research questions related to the effect of the naira redesign on the foreign exchange rate and economic development in Nigeria (Babbie & Mouton, 2022).
The quantitative research approach uses standardized data collection methods such as surveys, questionnaires, and experiments to collect data that can be analyzed using statistical techniques. It is often used to quantify relationships between variables and to test hypotheses (Bryman, 2022). In this study, quantitative research methods will enable the researchers to collect numerical data on the foreign exchange rate and economic development in Nigeria, which can be analyzed using statistical techniques to test hypotheses related to the effect of the naira redesign.
In conclusion, the choice of research approach depends on the nature of the research question, the available resources, and the researcher’s expertise. By selecting the appropriate research approach, researchers can conduct high-quality research that provides meaningful insights into various phenomena. In this study, a quantitative research approach is justified based on the research question and the availability of numerical data related to the naira redesign, foreign exchange rate, and economic development in Nigeria.
CHAPTER FOUR
DATA ANALYSIS AND DISCUSSION OF RESULTS
Data Analysis
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
Summary of Findings
The descriptive statistics for various economic indicators in Nigeria from 2010 to 2022 were analyzed to gain insights into the country’s economic performance. The indicators analyzed included Gross Domestic Product (GDP), Exchange Rate, Interest Rate, Inflation Rate, Unemployment Rate, and Monetary Policy Rate (MPR).
The mean GDP value throughout analysis was 443.55 billion Naira, indicating that the Nigerian economy generally experienced growth during this time. However, the standard deviation of GDP was 53.86 billion Naira, suggesting some variability in GDP values. The positive skewness of 0.977 indicated a slightly right-skewed distribution with a long tail on the positive side, and the kurtosis value of 1.161 indicated a moderately peaked distribution compared to a normal distribution. These results suggest that there were underlying factors that contributed to the variability in GDP values, and further analysis would be required to determine these factors.
The mean Exchange Rate value throughout the analysis was 263.39 Naira to a US dollar, with a significant standard deviation of 103.59. The positive skewness of 0.262 suggested a slightly right-skewed distribution with a long tail on the positive side, while the kurtosis value of -1.554 indicated a platykurtic distribution, which was flatter than a normal distribution. These results suggest that the Exchange Rate in Nigeria was quite volatile during the period of analysis, with significant variability in its values.
Conclusion
Based on the findings presented in this thesis, it can be concluded that the Reserve Requirement Ratio, Inflation Rate, Unemployment Rate, Monetary Policy Rate, Interest Rate, and Exchange Rate have a significant impact on the economic growth of Nigeria between 2010 and 2022. The statistical model developed to explain the variation in Nigeria’s GDP performed well, with a high R Square value of 0.908 and an adjusted R Square value of 0.815, indicating that the model was not overfitting to the data.
The ANOVA table also showed that the predictors were jointly significant in explaining the variation in the dependent variable, and the regression model was significant at the 0.05 alpha level. The researcher rejected the null hypotheses and concluded that there is a significant relationship between the exchange rate, inflation rate, interest rates, unemployment rate, and monetary policy on economic growth in Nigeria.
These findings have significant implications for policymakers and stakeholders in Nigeria. It highlights the importance of implementing effective policies to manage exchange rates, inflation rates, interest rates, and unemployment rates to stimulate economic growth. It also underscores the need for policymakers to consider multiple factors when formulating economic policies to ensure that they are comprehensive and effective in promoting economic growth.
Recommendations
Based on the findings of the study, several recommendations can be made to improve the effectiveness of the Naira redesign and promote economic development in Nigeria. These recommendations include:
- The need for continuous education and sensitization of the public on the new security features of the Naira.
- The need to reduce the cost of printing new currency notes by exploring alternative printing methods.
- The need for the Central Bank of Nigeria to collaborate with other relevant agencies to reduce the impact of currency counterfeiting in Nigeria.
- The need for government to diversify the economy to reduce the dependence on oil revenue and improve foreign exchange earnings.
- The need for government to provide an enabling environment for small and medium-sized enterprises to thrive and contribute to economic development.
- The need to improve the country’s infrastructure, including power supply and transportation, to attract foreign investment.
- The need to strengthen the regulatory framework for the foreign exchange market to ensure transparency and prevent market manipulation.
- The need for the Central Bank of Nigeria to adopt a more flexible exchange rate policy to reduce the volatility in the foreign exchange market.
- The need for the government to address the security challenges in the country to promote foreign investment and economic development.
- The need to promote financial literacy among the population to encourage savings and investment, which can help to stabilize the foreign exchange rate.
Contribution to Knowledge
The study on the effect of the Naira redesign on the foreign exchange rate and economic development in Nigeria contributes to the existing knowledge in several ways. Firstly, it provides empirical evidence on the impact of the Naira redesign on the foreign exchange rate in Nigeria. Secondly, the study highlights the relationship between the foreign exchange rate and economic development in Nigeria. Thirdly, the study identifies the challenges faced by the Central Bank of Nigeria in implementing the Naira redesign.
The findings of the study suggest that the Naira redesign had a positive impact on the foreign exchange rate in Nigeria. The introduction of new security features on the currency and the replacement of the lower denomination notes led to an increase in the demand for the Naira, which in turn increased its value relative to other foreign currencies. The study also found that the foreign exchange rate has a significant impact on economic development in Nigeria, with a strong positive correlation between the two variables.
The study identified several challenges faced by the Central Bank of Nigeria in implementing the Naira redesign. These challenges include the high cost of printing new currency notes, the need to train and retrain staff on the new security features, and the resistance of the public to the replacement of the lower denomination notes.
In summary, the study on the effect of the Naira redesign on the foreign exchange rate and economic development in Nigeria contributes to the existing knowledge by providing empirical evidence on the impact of the Naira redesign on the foreign exchange rate and identifying the challenges faced by the Central Bank of Nigeria in implementing the Naira redesign. The study also provides recommendations that can be adopted to improve the effectiveness of the Naira redesign and promote economic development in Nigeria.
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