Country Study: Nigeria Part1 - College of Business | … we can see there has been a steep depreciation of the Naira over the last decade. (Appendix 1) The lower value of the Naira

Country Study: Nigeria Part1

By Allen Whipple

Econ 463 2-25-2008

Nigeria has a very interesting economy, one that has seen huge inflation, large transfers,

and high levels of exports. In the last ten years the country has seen huge changes in their

exchange rate with the U.S. dollar. In the mid-nineties the direct exchange rate was .008 to the

dollar. The Naira (Nigerian currency) is better thought of in its indirect exchange rate, as when

thought of in the terms of 32.53 Naira to the Dollar in the 1995, and 196.90Naira to the dollar in

2006. As we can see there has been a steep depreciation of the Naira over the last decade.

(Appendix 1)

The lower value of the Naira has also cause a high level of exports. Due to the low value

of the Naira the export sector of the country has grown from 3001.4(million) in 1985 to 32770.1

(million) in 2007 (appendix 2). This high level of export has to do with the world insatiable

appetite for oil. Being able to produce low sulfur crude oil, the countries oil market is its largest

export sector. As low sulfur crude is “better” for the environment. So, the demand for which is

much higher than that of other oil producing nations. Over all Nigeria have positive trade

balance, as Nigeria import very little due to a relatively weak currency. The Nigerians have been

facing high levels of inflation over the last four years this unsteady inflation rate can cause

internal problems as well as external. These high levels of inflation make their cost of foreign

goods increase and with the devaluation of the Naira means imports will be low if not

nonexistent.

The inflation rate in Nigeria since 2003 has had highs and recent lows. In 2003 the rate of

inflation was over 20 percent. Over the next few years the Nigerian central bank has taken stride

in order to quell the high rates of inflation. They have lowered rates as of 2007 6.6 percent.

(appendix3) While high by U.S. standards it is a far cry better than it was a mere four years ago.

The inflation rate is only to get better with smart fiscal planning. With the overall better rate of

inflation Nigeria has seen higher rates of transfers as well. These transfers have ballooned over

the last five years to 3329 (in millions) in 2006. (Appendix 4) But with these transfer payments

Nigeria has been having steady growth within their GDP over the last decade.

While in the mid to late nineties Nigeria enjoyed higher GDP then today toping out in

1997 at almost 100 billion USD. While the GDP did drop to almost a forth of what it was in the

mid-late nineties to 24 billion USD in 1999 it has bounced back to 67 billion USD in 2006.

(Appendix 5)

Nigeria is in an interesting position. They are seeing leveling in the amount of inflation,

high net exports, and depreciation of the Naira. Nigeria has begun to rebound after an economic

slump in the late nineties that provided the country with high levels of transfers and increased

production in the oil. This increase in the export sector will in time balance out. As we see in

appendix 2 the gap between imports and exports are beginning to close.

As we can see in appendix 6 the current and financial accounts are in opposition. The

finance sector of the economy is running huge deficits that are being made up largely by the

current account and only slightly in the capital account. This is not a capital abundant nation. The

percent of capital to GDP is relatively low and ineffectual when compared to the current and

financial accounts. There seems to be almost no financing going on in the country possibly due

to Nigeria’s recent high rates of inflation and low value of the Naira. All things considered the

BOP as a percent of GDP graph (appendix6) shows a very clear picture as to the nature and state

of the economy of Nigeria. If we break down the current account in to its parts Goods and

services we get the graphs in appendix 7.

Appendix 7 shows a very clear picture of the state of the economy of Nigeria. In

Nigeria’s goods department we see high levels of goods being exported and low levels of

imports. Where as in the service sector we see the same with high levels of exported services and

low levels of services imported. This is a third world nation that has is becoming industrialized

and as such we see lots of goods being produced and exported to the rest o the world as well as

services and as this country continues to grow we will start to see a balancing of trade and

current and financial accounts that are closer in overall accounting with greater levels of capital

being a part of the GDP.

Work cited:

1. Atlapedia Online. 15 Feb. 2008

<http://www.atlapedia.com/online/countries/nigeria.htm>.

2. "Data & Statistics." Central Bank of Nigeria. 15 Feb. 2008

<http://www.cenbank.org/supervision/framework.asp>.

3. "Inflation Rates." Central Bank of Nigeria. 15 Feb. 2008

<http://www.cenbank.org/rates/inflrates.asp?year=2007>.

4.

Appendix 1

Naira per USD Year Rate

1995 32.5340 1996 31.4710 1997 29.5300 1998 30.8160 1999 134.4370 2000 142.7340 2001 141.9480 2002 171.8430 2003 202.8350 2004 205.5410 2005 184.3760 2006 192.9690

0.0000

50.0000

100.0000

150.0000

200.0000

250.0000

1994 1996 1998 2000 2002 2004 2006 2008

Rat

e

Year

Exchange Rate (Naira per USD)

Appendix 2 Trade (millions of USD) Year Exports Imports

1985 3001.4 675.71986 2530.3 408.81987 3573.5 295.21988 3278.6 356.81989 5283.9 496.31990 5982.1 553.21991 5168 831.41992 5102.4 1001.11993 5301.4 894.71994 4429.9 5091995 4930.5 602.91996 5978.3 818.41997 6349.4 8131998 4194 816.71999 4385.1 627.92000 10537.6 721.92001 8774.9 955.12002 5954.3 1057.72003 10393.6 1016.92004 16248.5 1554.32005 24239.4 1621.22006 27863.1 2233.52007 32770.2 2786.7

0

5000

10000

15000

20000

25000

30000

35000

1980 1985 1990 1995 2000 2005 2010

USD

(in

mill

ions

)

Year

Trade: Nigeria

Exports Imports

Appendix 3 Year % inflation

2003 23.8 2004 10 2005 11.6 2006 8.5 2007 6.6

0

5

10

15

20

25

2003 2004 2005 2006 2007

Nigerian Inflation Rate 2003‐2007

Inflation Rate

Percentage

Year

Appendix 4

Transfers (Rec) Transfers (P) UT

804 -5 809947 -2 949

1920 -4 19241574 -5 15791301 -9 13101637 -8 16451373 -6 13791422 -9 14311063 -12 10752273 -21 22943329 -18 3347

-5000

5001000150020002500300035004000

1990 1995 2000 2005 2010

USD

(in

mill

ions

)

Year

Current Account Transfers

Transfers (Rec) Transfers (P) UT

Appendix 5 Year GDP in USD

1995 60,797,934.47

1996 89,733,405.36

1997 99,559,769.73

1998 93,490,394.60

1999 24,703,020.75

2000 34,897,081.28

2001 34,266,069.26

2002 32,605,343.25

2003 35,452,461.36

2004 41,612,135.78

2005 67,253,872.52

Appendix 6

-40.0000%-30.0000%-20.0000%-10.0000%

0.0000%10.0000%20.0000%30.0000%40.0000%50.0000%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006Perc

ent

Year

BOP as % of GDP

Current % of GDP Capital % of GDP Financial % of GDP

Appendix 7

-30000-20000-10000

0100002000030000400005000060000

1990 1995 2000 2005 2010USD

(in

mill

ions

)

Year

Current Account Merchandise

Goods (X) Goods (I) Trade Bal

-10000

-5000

0

5000

10000

15000

1990 1995 2000 2005 2010

USD

(in

mill

ions

)

Year

Current Account Services

Services (X) Services (I) BOS

CoutP

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By: AE

try StuPart 2igeria

Allen WhippEcon 463 3-20-08

udy

a

ple

1. In the following graphs we can see as the annual lending rate increasesin Nigeria the US

Nigerian exchange rate changes also appreciates that is to say the Nigerian currency

becomes cheaper. We also see that when it the rate drops the currency appreciates against

the dollar.

This is also true for the consumer price index. As the rate of inflation increases we see the value

of the Nigeraian curency, (Naira) fall in vaue when compared against the dollar. We do see a

0

5

10

15

20

25

30

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Percen

tage

R‐R*

Annual lending rates ‐% interest rate

0.0000

50.0000

100.0000

150.0000

200.0000

250.0000

1994 1996 1998 2000 2002 2004 2006 2008

Rat

e

Year

Exchange Rate (Naira per USD)

leveling affect in the exchange rate as the inflation rate comes under control. We even see as

stated above that when the inflation rate drops there is an appreciation in the value of the Naira in

regard to the exchange rate with the dolloar.

Both the inlfation rate and the annual interest rate seem to show effects on the exchange rate of

the Nigerian Naira. As both due effect the exchange rate, and one is composed of the other. The

annual interet rate is based on in part the inflation rate. As the nominal inflation rate is The

inflation rate plus the real interest rate. As we can seein the last graph where I have ploted

inflation and the annual lending rate in the same graph.

0

10

20

30

40

50

60

70

80

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Percen

tage

Pi‐Pi*

Annual rates of inflation ‐ % growth

2. Within the futures currency market for the Nigerian Naira the bid price for the Naira is 118.50

naira to the dollar and the ask price is 119.39. While I could not find information as to future

expected rates in money markets such as those of forward contracts there is a small market for

trading Nigerian currency as they do export a lot of goods and trade in the comodities markets

with presiouse stones and oil.

3. I was unable to find any current information as to the futures market. I was however able to

find some dated information on the futures market of the Nigerian oil. In the article it stated that

in March of 2007 the price per barrel of oil in Nigeria had increased above 63 dollars per barrel

and were projected to be nearly 64 dollars per barrel the next year. As it was currently trading at

63.17 and was projected to be at $64 dollars by the end of December.

4. The inflation rate in Nigeria over the last ten years has been declining. It was not till 2001 that

we see a real increase in the amount of inflation. While on a whole Nigeria has a high inflation

rate that is in the double digits for most of the last ten years. It has been getting better and we

0102030405060708090

100

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Percen

tage

Nigerian Inflation and Price Shifts

Annual lending rates ‐% interest rate

Annual rates of inflation ‐ % growth

have also observed these factors having an effect on the currency exchange as well as their

exports. With this high rate of inflation Nigeria has been for the last decade experiencing trade

surpluses with other nation namely those of Europe and U.S. as they produce low sulfur crude

oil, a commodity that the world as of late have been wanting in ever higher quantities. Only time

will tell if Nigerian officials can continue to bring down their inflation rate and the effects it will

have on their economy as a world player.

0

10

20

30

40

50

60

70

80

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Percen

tage

Pi‐Pi*

Annual rates of inflation ‐ % growth

Work Cited: 1. "Statistics." GMID - Global Market Information Database. 3 Mar. 2008 <http://0-www.portal.euromonitor.com.innopac.library.unr.edu/portal/server.pt?control=SetCommunity&CommunityID=207&PageID=720&cached=false&space=CommunityPage>. 2. Ayankola, Martin. "Arts and Review Banking and Finance Business and Economy Editorial Features Education Energy, Oil and Gas Entertainment Lagos Life Letters Opinion Politics Religion Science and Technology Sports Tourism." Nigerian Tribune (2007). 18 Mar. 2008. 3. "USD to NGN (USDNGN=X)." Yahoo Finance. 18 Mar. 2008 <http://finance.yahoo.com/q?s=USDNGN=X>. 4. Ayankola, Martin. "Why Crude Oil Prices are Shooting Up Again." Nigerian Tribune. 30 Mar. 2007. 18 Mar. 2008 <http://www.tribune.com.ng/30032007/eog.html>.

CoutP

N

By: AE

try StuPart 3igeria

Allen WhippEcon 463 4-21-08

udy

a

ple

The Nigerian money supply was growing throughout the nineties. It peaked in 2000 and

slowly declined thereafter, as we can see in the graph below. The Nigerian central bank

increased the money supply gradually at first, with moderate changes in the amount of money in

circulation. Then, in between 1998 and 2000, we see massive growth. After that it appears the

central bank stopped. They put a halt to the massive money growth, reducing it to around 25%.

While this is no small amount, in comparison to the prior year we see money growth of some

60%. Then in the following years the monetary supply has grown at a flatter, steadier rate.

With total monetary growth in 2005 of roughly 16%, now if we take the graph and look at it in

comparison to the inflation rate we see some peculiar results.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

%Change

Nigerian Money Supply Growth

If we compare the growth of the money supply to the inflation rate, we see that as the

money supply increases the rate of inflation decreases. Did the Nigerian central bank increase

the money supply in order to decrease the inflation rate? This would seem odd, as usually when

a central bank increases the money supply the inflation rate increases as a direct result, but this

did not happen. This might be due to Nigeria facing a lot of growth over the last few years. The

increase in productivity might have made the monetary expansion necessary.

However, if we look more closely at the inflation graph we see a small blip on the screen

in 2001. We see an increase in the inflation rate, which is probably due to the Nigerian central

bank being too aggressive with the monetary expansion. This might be the reason why we see

the monetary growth in 2001 decrease by some forty percent. After the inflation increase in

2001, the inflation rate seems to mirror the rate of monetary growth as we would expect to

happen. This would only make sense as the rate of inflation and monetary growth are directly

correlated, that is in most circumstances. There are, however, special circumstances when the

inflation rate actually decreases as the money supply increases as we see in the period from 1995

to 1999. Now, if we look at the rate of money growth and Nigerian GDP (expressed in US

dollars) some even more interesting things come to light.

0

20

40

60

80

100

1994 1996 1998 2000 2002 2004 2006

Percen

tage

Nigerian Inflation and Price Shifts

Annual lending rates ‐% interest rate

Annual rates of inflation ‐ % growth

As the monetary supply increased in the nineties we see a gradual increase in Nigerian

GDP. This would make sense, as the more money the central bank puts out, the more jobs there

will be in an economy. With this increase in money supply, we can assume that part of the

money that the central bank was printing was used for investment in plant and equipment. A

point of interest in the GDP graph is in 1998 we see a large drop in the GDP.

If we look at the inflation graph and the money supply graph we can see a few things

going on. There was a large increase of the money supply and also a spike of inflation. It

appears there was an economic down turn that could have started for various reasons, including

the over expansion of the money supply. This being said, we can see in the years after the GDP

increasing, and slower money growth within the Nigerian economy. There is also good cause to

look at the exchange rate, as its graph almost moves in unison with the GDP and money supply.

‐

20,000,000,000.00 

40,000,000,000.00 

60,000,000,000.00 

80,000,000,000.00 

100,000,000,000.00 

120,000,000,000.00 

GDP IN US DOLLARS

Nigerian GDPNigerian GDP

The Nigerian Exchange rate (Naira per USD) flows like the money supply graph. The

Nigerian exchange rate increases in comparison to the U.S. dollar for the first five years as the

rate of money supply increases. Then it takes a sharp dive in between 1998 and 1999. It is

possible that the exchange rate went south so quickly do to the vast increases in the money

supply. This low exchange rate is continued today, as the exchange rate has not been under 150

naira per dollar for several years now and we can see the rate increasing and decreasing in

opposition to the monetary supply growth.

0.0000

50.0000

100.0000

150.0000

200.0000

250.0000

1994 1996 1998 2000 2002 2004 2006 2008

Rat

e

Year

Exchange Rate (Naira per USD)

Work Cited:

1. Market Sizes • Historic • NGN mn • Value at Current Prices. Online. 15 Apr 2007. <www.portal.euromonitor.com.innopac.library.unr.edu/portal/server.pt?control=SetCommunity&CommunityID=207&PageID=720&cached=false&space=CommunityPage" CLASS="sourceLink" TARGET="_blank">http://0-www.portal.euromonitor.com.innopac.library.unr.edu/portal/server.pt?control=SetCommunity&CommunityID=207&PageID=720&cached=false&space=CommunityPage>.