CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Just as Africa seemed to be recovering from the impact of the COVID-19 pandemic, it faced a series of internal and external shocks in 2022. These shocks included adverse weather conditions and the Russian invasion of Ukraine, which further exacerbated the already high inflation rates and borrowing costs in the region. Although Africa's direct trade and financial connections with Russia and Ukraine are relatively small, there is evidence to show that the war has negatively affected the continent's economies by driving up commodity prices, as well as food, fuel, and overall inflation.
Despite these challenges, Africa remains home to some of the world's fastest-growing economies. According to the recent World Economic Outlook by the International Monetary Fund (IMF), Angola, Ethiopia, Nigeria, Kenya, and South Africa are among the five economies with the highest growth rates (Africannews, 2023).
Nigeria, in particular, has one of the largest economies in Africa, boasting a GDP surpassing USD 500 billion. The country has a thriving formal sector and a significant informal sector that employs over 60% of the working population (International Labour Organisation, 2021). Although Nigeria's economic prospects appear promising, it continues to grapple with chronic economic and political mismanagement, evident from the failures of previous attempts at economic reforms.
The remarkable growth of Nigeria's economy is perplexing considering its unique complexities as a developing country. From 2002 onwards, the annual growth levels averaged 7%, reaching a peak of 12.7% in 2012 and 14% in 2015 (World Bank, 2018; National Bureau of Statistic [NBS], 2014a; NBS, 2014b; NBS, 2019). However, this growth cannot be solely attributed to sound economic management by the government, especially considering that Nigeria's economy is still predominantly agrarian. The main contributing factor could be developments in the extractive sector, particularly oil and gas exploration, which accounted for over 70% of government revenues and more than 40% of GDP (Awoyemi et al., 2019).
Nigeria holds the position of being Africa's leading oil and gas producer, boasting the continent's largest reserves in these resources (World Bank, 2020). Additionally, it ranks as the fifth-largest net exporter of Liquefied Natural Gas (LNG) globally. Nonetheless, the country has faced numerous economic challenges over the years, including inflation, unemployment, fiscal deficits, and foreign exchange instability. One significant event that has affected Nigeria's economic stability is the decision by the Central Bank of Nigeria (CBN) to float the Naira.
A floating or flexible exchange rate system means that the exchange rate is determined by the forces of supply and demand in the foreign exchange market. In this scenario, the monetary authorities rely on the market to establish the exchange rate, rather than fixing it themselves (Central Bank of Nigeria, 2021). Therefore, the floatation of the Naira refers to the CBN's choice to allow the market forces to determine the value of the Nigerian currency. Consequently, with a floating exchange rate, participants in the official foreign exchange market can quote rates that they find suitable (Akinnibi, 2023).
Before the floatation of the Naira, Nigeria operated under a fixed exchange rate system where the Central Bank of Nigeria (CBN) established an official exchange rate for the Naira against major foreign currencies (Paul, 2023). However, with the country facing a combination of low oil prices, recession, and a global pandemic, the Naira came under significant pressure, leading to the emergence of a black market with significantly different exchange rates (Paul, 2023).
To address these challenges, the CBN made the decision to adopt a floatation policy for the Naira. The aim of this floatation was to establish a more realistic and market-driven exchange rate that accurately reflected the true value of the Naira in relation to other currencies. By allowing market forces to determine the exchange rate, the CBN hoped to eliminate the divergence between the official and parallel market rates (Aliyu, 2023).
However, the floatation of the Naira did not come without controversies and risks. Experts have taken opposing stances on the matter. Some argue that it would enable the currency to adjust to changing economic conditions, promoting competitiveness, balancing trade imbalances, attracting foreign investment, and responding to global market shifts. On the other hand, others believe that the exchange rate will become more volatile and susceptible to fluctuations, which can have both positive and negative implications for the economy (Aliyu, 2023).
Therefore, it is essential to assess the impact of the Naira floatation on the economic stability of Nigeria, with a specific focus on the operations of the CBN Enugu branch.
1.2 Statement of the Problem
The Nigerian economy has experienced significant challenges in recent years, including inflation, foreign exchange scarcity, and a declining value of the Naira. These issues have negatively affected the economic stability of the country, leading to reduced investor confidence and sluggish economic growth. The floatation of the Naira was implemented as a measure to address these problems. However, the effectiveness of this policy and its impact on the economic stability of Nigeria remains unclear. Therefore, this study seeks to fill this knowledge gap and provide insights into to assess the impact of the Naira floatation on the economic stability of Nigeria, with a specific focus on the operations of the CBN Enugu branch.
1.3 Aim of the Study
The aim of this study is to assess the impact of the Naira floatation on the economic stability of Nigeria, specifically focusing on the operations of the CBN Enugu branch.
1.4 Research Objectives
The specific objectives of this study are as follows:
- To examine the factors that led to the decision of the CBN to float the Naira.
- To assess the impact of Naira floatation on inflation rates in Nigeria, indicating its impact on economic stability in Nigeria.
- To analyze the impact of Naira floatation on foreign exchange reserves, indicating its impact on economic stability in Nigeria.
- To evaluate the impact of Naira floatation on level of exchange rate volatility, indicating its impact on economic stability in Nigeria.
- To assess the impact of Naira floatation on Nigeria's trade balance as a result of the Naira floatation, indicating its impact on economic stability in Nigeria.
- To analyze the effect of Naira floatation on Gross Domestic Product (GDP) growth in Nigeria, indicating its impact on economic stability in Nigeria.
1.5 Research Questions
To achieve the stated objectives, this study will address the following research questions:
- What were the key factors that influenced the decision of the CBN to float the Naira?
- How has the floatation of the Naira affected inflation rates in Nigeria, and what is the relationship between Naira floatation and economic stability?
- What are the implications of changes in foreign exchange reserves following the Naira floatation for economic stability in Nigeria?
- To what extent has exchange rate volatility impacted economic stability in Nigeria after the floatation of the Naira?
- How have changes in Nigeria's trade balance been influenced by the floatation of the Naira, and what is the effect on economic stability?
1.6 Research Hypothesis
H1: There is no significant impact of Naira floatation on inflation rates in Nigeria, and therefore, it has no significant impact on economic stability in Nigeria.
H2: There is no significant relationship between Naira floatation and changes in foreign exchange reserves, and therefore, it has no significant impact on economic stability in Nigeria.
H3: There is no significant relationship between Naira floatation and the level of exchange rate volatility, and therefore, it has no significant impact on economic stability in Nigeria.
H4: There is no significant impact of Naira floatation on Nigeria's trade balance, and therefore, it has no significant impact on economic stability in Nigeria.
1.7 Justification of the Study
This study is justified by the need to understand the consequences of the Naira floatation policy on economic stability in Nigeria. The decision to float the Naira was a significant policy shift, and its effects on inflation, foreign exchange reserves, exchange rate volatility, trade balance, and GDP growth have important implications for economic stability. This study aims to contribute to the existing knowledge on the subject, provide insights for policymakers and stakeholders, and facilitate evidence-based decision-making.
1.8 Scope of the Study
This study focuses on assessing the impact of Naira floatation on economic stability in Nigeria. The analysis will consider factors that led to the decision to float the Naira, as well as its effects on inflation rates, foreign exchange reserves, exchange rate volatility, trade balance, and GDP growth. The study will primarily rely on data and information from the period following the Naira floatation policy up until the present, while the study will primarily focus on the Enugu branch of the CBN.
