THE ROLE OF CURRENCY DEVALUATION IN DEVELOPING COUNTRIES, A CASE STUDY OF NIGERIA

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CHAPTER ONE
INTRODUCTION

1.1       Background to the study.

According to Cooper (1971), currency devaluation is one of the most traumatic economic policy measures that a government may undertake and as a result, most governments are reluctant to devalue their currencies. However, a country can be forced into devaluation by an ominous trade deficit. Thailand, China, Mexico, Czech Republic – all devalued strongly, willingly or unwillingly, after their trade deficits exceeded 8% of the GDP. Devaluation of currency is decided by the government issuing the currency, and is the result of governmental activities. One reason a country may devalue its currency is to combat trade imbalances. Devaluation causes a country’s exports to become less expensive, making them more competitive on the global market. This in turn means that imports are more expensive, making domestic consumers less  likely to purchase them. By making the domestic currency relatively cheaper (i.e devaluation), local production and exportation of commodities is thereby encouraged.

This helps to enhance the level of output growth of the economy (Aguiar, 2005) cited in (Momodu and Akani 2016:152)

Currency devaluation is a deliberate downward adjustment of the value of a country’s currency relative to another currency or standard currency (usually dollars). It is one ofthe tools of monetary policy to stabilize the economy most especially the less developed ones operating fixed exchange rate or semi-fixed exchange rate.Devaluation increases international competitiveness  of domestic industries which leads to diversion of consumption of foreign goods to domestic goods (Yilkal, 2014) cited in (Osundina 2016: 1944). 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.

1.1  Statement of the problem.

The Nigerian government adopted the Nigerian pound since 1959 until 1973 where it was changed to Naira. In 1971 the Nigerian authorities chose not to devalue its Nigerian pound during the devaluation process of the American dollar and this resulted in the appreciation of the Nigerian pound  dollar exchange rate $2.80 -$3.80 to the naira pound. In 1973 the naira replaced the Nigerian pound and then Nigeria devalued at the same rate with the US which caused the exchange rate to be $1.5 (Ogundipe et al 2013:234). According to (Osundina 2016:1947), currency devaluation is not a bad idea to solve the balance of payment’s economic problem in Nigeria given the fact that some other developing countries have used it as a tool. He further explained that devaluation of currency tends to favor the exporters but will cause output to fall since lower real wages will fall due to contraction of demand. It is these contradictions that spurred the interest in undertaking this study. Some theorists believe currency devaluation is good for the economy while some believe it shouldn’t be embarked on. This was also affirmed by Eromosele 2016: 26) in an argument for and against the Naira devaluation and the solutions proffered by the former minister of finance in the This day newspaper where he said the Naira is already undervalued and shouldn’t be devalued.

It is against this background that the study aims to examine the trend of currency devaluation in Nigeria and also understand the role of currency devaluation in developing countries with particular focus on Nigeria.

1.2  Objectives of the study

The main objective of this study is to examine the role of currency devaluation in developing countries with particular focus on Nigeria. In order to achieve this objective, the following are the specific objectives:

1.) To understand currency devaluation in developing countries.

2.) To examine the Genesis and trends of currency devaluation in Nigeria.

3.) To investigate the role of currency devaluation in developing economies.

4.) To seek and determine as far as possible methods by which the risk associated with exchange rate fluctuations can be minimized.

1.3  Research Questions.

1.) What is the role of currency devaluation in developing countries.

2.) What is the relationship between currency devaluation and economic growth.

3.) How has currency devaluation affected the Nigerian economy and other developing countries.

1.4  Research Hypothesis.

1.) Currency devaluation does not significantly affect the economy

2.) Currency devaluation significantly affects the economy.

1.5  Significance of the study.

This study is very significant as it contributes to the literature and would also assist policy makers and economists in decision making as regards devaluing currency.

The study when carried out will also be of great benefit to student researchers who have interest in researching more into currency devaluation and various ways it can affect the economy. It will act like a guide to student researchers who may find the recommendations and findings of the study useful.

1.6   Scope of the study.

This study will cover currency devaluation in developing countries and how this has affected their economies. A case study of Nigeria will be looked at, and a study of currency devaluation since inception will be taken. In addition to this, a profile of Nigeria’s exchange rate development will be taken.

1.7   Limitations of the study.

During the course of this research, a number of constraints were experienced. The problem of gathering information. Also,  time constraint in carrying out the study is a limitation.

 .8   Definition of terms

1.) Currency Devaluation: this is a macro-economic fiscal policy that bothers on deliberate reduction in the value of home currency with the aim of maximizing gain in tradable items.

2.) Exchange Rate: This is the price one country’s currency expressed in another country’s currency

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