CLUSTER ANALYSIS ON THE EFFECT OF DOLLAR INCREMENT ON THE ECONOMY OF NIGERIA

CHAPTER ONE

INTRODUCTION

Background of the study Overtime, a lot has been said and done about the recent continuous increment of the United States dollars and its effect on the economy. The importance of the US dollars to a mono economy and import dependent nation like that of Nigeria cannot be over emphasized in that most notable transactions that takes place in any economic process must have a direct or indirect connection with the dollars. In the economic analysis of any developing country like that of Nigeria, the increase or decrease of the dollars has a corresponding effect on the economy and by extension influences development. The increment of the dollars amid crisis can lead to severe economic consequences. The economic history of Nigeria has helped to buttress this fact. Certainly, the consequences for dollar increment or devaluating the naira can have both a long and short term effect. F or a country like Nigeria for instance, an increase in currency depreciation or dollar increment would immediately hit consumer purchasing power while at the same time reduces the value of wages that was hitertho before now valuable. Since Nigeria is an import dependent Nation, purchases of foreign goods quickly fall because prices of foreign goods would geometrically rise, this would lead to lack of small and medium enterprises growth and businesses would suffer which by extension affects the speedy growth and development of the economy. The pace of economic adjustment will depend on how quickly domestic industries/companies respond toward import replacement and exporting.

The exchange rate policy is what must be discussed in the increment or decrements of the dollar in Nigeria. Exchange rate policy simply entails the value of a unit of the naira to the dollar (Obadan, 1996). Exchange rate policy is therefore a critical component in the increment of the dollar and how it influences the economy. Specifically internal balances mean the level of economic activity that is consistent with the satisfactory control of inflation. On the contrary, external or sustainable current account deficit financed on lasting basis expected capital inflow. It is important to know that economic objectives are usually the main consideration in determining the exchange control which influences the the increment of the united state dollar. For instance from 1982 – 1983, the Nigerian currency was pegged to the US dollar on a 1.1 ration. Before then, the Nigerian naira has been devalued by 10% which had its corresponding consequences on the economy of Nigeria. Apart from this policy measures discussed above, the Central Bank of Nigeria (CBN) applied the basket of currencies approach from 1979 as the guide in determining the exchange rate was determined by the relative strength of the currencies of the country’s trading partner and the volume of trade with such countries. Specifically weights were attached to these countries with the American dollars and British pound sterling on the exchange rate mechanism (CBN, 1994). One of the objectives of the various macro – economic policies adopted under the structural adjustment programme (SPA) in July, 1986 was to establish a realistic and sustainable exchange rate for the naira, this policy was recommended in 1986 by the International Monetary Fund (IMF).