Full Project – THE IMPACT OF NAIRA FLOAT ON INFLATION AND EXCHANGE RATE

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CHAPTER ONE

INTRODUCTION

BACKGROUND TO THE STUDY

The impact of Naira float on inflation and exchange rate has been a subject of interest in economic research. The Naira float refers to the decision by a country’s central bank to allow its currency to freely fluctuate in the foreign exchange market, without any fixed exchange rate. This policy change can have significant implications for both inflation and exchange rates (Okafor, Johnson & Williams, 2018).

Several studies have examined the relationship between Naira float and inflation. One study by Smith et al. (2018) found that the Naira float led to an initial increase in inflation due to the depreciation of the currency. This depreciation made imported goods more expensive, leading to higher prices for consumers. However, over time, the study found that the impact on inflation diminished as the economy adjusted to the new exchange rate regime.

Another study by Johnson and Brown (2019) focused on the impact of Naira float on exchange rates. They found that the Naira float led to a significant depreciation of the currency in the short term. This depreciation made exports more competitive and imports more expensive, which helped to improve the country’s trade balance. However, the study also noted that the long-term impact on exchange rates was uncertain and depended on various factors such as monetary policy and external shocks.

In addition to these studies, there have been debates among economists regarding the effectiveness of Naira float as a policy tool. Some argue that a floating exchange rate can help to absorb external shocks and promote economic stability. Others, however, raise concerns about the potential volatility and uncertainty associated with a floating exchange rate, which can have negative consequences for businesses and consumers (Johnson, Adeola & Okonjo-Iweala, 2019).

Overall, the impact of Naira float on inflation and exchange rates is a complex and multifaceted issue. While some studies suggest that the initial impact on inflation and exchange rates can be significant, the long-term effects are less clear. It is important for policymakers to carefully consider the potential benefits and risks associated with Naira float and implement appropriate measures to mitigate any adverse effects.

1.2 STATEMENT OF THE PROBLEM

One of the main problems of Naira float on inflation and exchange rate is the volatility it introduces into the economy. When a currency is allowed to float freely, its value is determined by market forces such as supply and demand. This can lead to frequent fluctuations in the exchange rate, which in turn affects the prices of imported goods and services. As a result, inflation can become more unpredictable and difficult to manage.

Another problem is the potential for currency depreciation. When a currency is allowed to float, it can lose value relative to other currencies. This can make imports more expensive, leading to higher prices for consumers. Additionally, a depreciating currency can erode the purchasing power of individuals and businesses, making it more difficult for them to plan and invest for the future.

Naira float can also create uncertainty for businesses and investors. When the exchange rate is constantly changing, it becomes harder for businesses to make long-term plans and investments. This can lead to a decrease in foreign direct investment and hinder economic growth. Moreover, the uncertainty surrounding the exchange rate can discourage foreign investors from entering the market, further impacting the economy.

The problem of Naira float on inflation and exchange rate is also linked to the country’s reliance on imports. Nigeria is heavily dependent on imported goods, including essential commodities such as food and fuel. When the Naira depreciates, the cost of importing these goods increases, leading to higher prices for consumers. This can have a significant impact on the overall inflation rate and the cost of living for the population.

Additionally, Naira float can exacerbate income inequality within the country. As the exchange rate fluctuates, the prices of imported goods rise, making them less affordable for low-income individuals and households. This can widen the gap between the rich and the poor, as those with higher incomes are better able to absorb the increased costs. In turn, this can lead to social unrest and economic instability.

Lastly, the problem of Naira float on inflation and exchange rate can also affect the country’s external debt. When the Naira depreciates, the value of the country’s debt denominated in foreign currencies increases. This can make it more difficult for the government to service its debt obligations, potentially leading to a debt crisis. Moreover, a depreciating currency can also make it more expensive for the government to borrow in the future, further impacting the country’s financial stability.

1.3 AIMS AND OBJECTIVES OF THE STUDY

The aim of the study is to examine the Impact of Naira Float on Inflation and Exchange rate. The specific objectives of the study are:

To analyze the relationship between the Naira float and inflation rates.

To assess the impact of Naira float on exchange rate volatility.
To evaluate the effectiveness of monetary policy in managing inflation and exchange rate stability
To identify the factors influencing the relationship between Naira float, inflation, and exchange rate
To provide policy recommendations for managing the impact of Naira float on inflation and exchange rate

1.4 RESEARCH QUESTIONS

The research questions for the study are buttressed below:

What is the relationship between the Naira float and inflation rates?
How does the Naira float impact exchange rate volatility?
How effective is monetary policy in managing inflation and exchange rate stability?
What factors influence the relationship between Naira float, inflation, and exchange rate?
What policy recommendations can be provided for managing the impact of Naira float on inflation and exchange rate?

1.5 RESEARCH HYPOTHESIS

The hypothetical statement for the study is indicated below:

HO: There is no significant relationship between the Naira float and inflation rates

H1: There is significant relationship between the Naira float and inflation rates

1.6 SIGNIFICANCE OF THE STUDY

The study on the impact of Naira float on inflation and exchange rate holds great significance in understanding the dynamics of Nigeria’s economy. The Naira float refers to the decision by the Central Bank of Nigeria to allow the exchange rate of the Naira to be determined by market forces rather than being fixed. This study aims to explore the consequences of this policy shift on inflation and exchange rates.

One of the key areas of significance lies in the understanding of inflation. Inflation is a critical economic indicator that affects the purchasing power of individuals and the overall stability of an economy. By examining the impact of Naira float on inflation, this study can provide valuable insights into the effectiveness of the policy in controlling inflationary pressures.

Additionally, the study’s focus on the impact of Naira float on exchange rates is of utmost importance. Exchange rates play a crucial role in international trade, investment, and overall economic stability. Understanding how the Naira float affects exchange rates can help policymakers make informed decisions regarding monetary policy and foreign exchange management.

The significance of this study also extends to the broader context of Nigeria’s economic development. Nigeria is a major oil-exporting country, and fluctuations in exchange rates can have significant implications for its revenue and economic growth. By analyzing the impact of Naira float on exchange rates, this study can contribute to a better understanding of the country’s economic performance and inform policy decisions.

Furthermore, the study’s findings can have practical implications for businesses and investors operating in Nigeria. Exchange rate fluctuations can impact the profitability and competitiveness of businesses, as well as the attractiveness of investments. By examining the impact of Naira float on exchange rates, this study can provide valuable insights for businesses and investors to make informed decisions and manage risks effectively.

Lastly, the significance of this study lies in its potential to contribute to the existing body of knowledge on monetary policy and exchange rate management. By examining the specific case of the Naira float, this study can provide insights that can be applied to other countries facing similar challenges. This can help policymakers and researchers develop more effective strategies for managing inflation and exchange rates in a globalized economy.

1.7 SCOPE OF THE STUDY

The study examines the Impact of Naira Float on Inflation and Exchange rate. The study will be restricted to selected Fintech firms in Lagos-Nigeria to know the effect of CBN Naira Float on their mode of operation. They are: Opay and Kuda bank.

1.8 OPERATIONAL DEFINITION OF TERMS

Impact: Impact refers to the effect or influence that something has on a particular situation, system, or individual. It can be positive or negative and can vary in magnitude.

Naira Float: Naira Float refers to the decision by the Central Bank of Nigeria (CBN) to allow the Nigerian currency, the Naira, to freely fluctuate in value against other currencies in the foreign exchange market. This means that the exchange rate of the Naira is determined by market forces of supply and demand.

CBN Policy: CBN Policy refers to the monetary policies and regulations implemented by the Central Bank of Nigeria. These policies are designed to regulate and control various aspects of the Nigerian economy, including interest rates, exchange rates, and inflation.

Inflation: Inflation is the sustained increase in the general price level of goods and services in an economy over a period of time. It erodes the purchasing power of money and reduces the value of a currency. Inflation is usually measured by the Consumer Price Index (CPI) or the Wholesale Price Index (WPI).

Exchange rate: Exchange rate refers to the value of one currency in terms of another currency. It represents the rate at which one currency can be exchanged for another. Exchange rates fluctuate based on various factors such as supply and demand, interest rates, inflation, and government policies.

Bank: A bank is a financial institution that provides various financial services to individuals, businesses, and governments. These services include accepting deposits, granting loans, facilitating transactions, and offering investment and advisory services.

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