Impact of Currency Devaluation on Economic Growth of Nigeria

Abstract

The primary aim of the study is to estimate the long run relationship between economic growth (RGDP) and currency devaluation. This study investigated the impact of currency devaluation on economic growth of Nigeria. This was achieved through a review of literature and a test of hypothesis. In order to generate the necessary data for this study, the Central Bank of Nigeria Statistical Bulletin of and publications of the National Bureau of Statistics were used for the period of 1986 to 2012. The Johansen Cointegration method was used for this analysis because the study involves the use of multivariate estimations. The result from the multivariate cointegration test shows that there is at least one cointegrating vector in the relationship between economic growth and the independent variables. This implies that a long run relationship exists among these variables. The autoregressive distributed lags (ARDL) approach is used for the ECM. The error correction mechanism result indicates that short term changes in economic growth may actually be sufficiently explained by currency devaluation and other factors selected in the model. Thus, we cannot reject the hypothesis of a significant short term relationship between economic growth and currency devaluation. The study shows that in the short run currency devaluation leads to increase in output and improves the balance of payments but in the long run the monetary consequence of the devaluation ensures that the increase in output and improvement in the balance of payment is neutralized by the rise in prices. Our study therefore supports the monetarists’ view of currency devaluation. Based on the above it is recommended that the monetary authorities should do what they can to reduce the temporary increase in prices lest it become permanent. Timing at this point becomes very crucial. More so, the Nigerian government should consider devaluation of currency as the last resort to the economic imbalance.