An Empirical Assessment of the Real Exchange Rate and Poverty in Nigeria: IntroductionThe increased awareness of the need to tackle poverty in Nigeria has directed attention towards the role of macroeconomic policy in achieving social as well as macroeconomic objectives. The preservation of macroeconomic stability is important not as an end in itself, but a necessary precondition for sustained economic growth which is the single most important factor influencing poverty reduction (Greg, 2006).
Macroeconomic policies are those that directly or indirectly impact on key variables such as the real exchange rate (RER), inflation rate, current account balance, fiscal deficit and the level of international reserves. Over the years, frequent exogenous shocks, including volatility of terms of trade and resource flows as well as capricious weather conditions have taken a heavy toll on the internal and external balances of many developing countries and as a result some of these counties, particularly those in Africa adopted Structural Adjustment Programmes (Oumar, 2007).
In Nigeria, the Structural Adjustment Programme (SAP) was adopted in 1986. Changes in the exchange rate change the relative price of goods in two countries. However, the nominal exchange rate is not the only variable that affects the relative price of goods in two countries. The price levels in each country matter as well. Thus, an increase in q is known as a depreciation of the RER (foreign goods become more expensive) and a decrease in q is an appreciation of the RER (foreign goods become cheaper). However, nominal exchange rate appreciation can cause RER appreciation, all things remaining equal; also changes in prices can cause the RER to fluctuate without changes in the nominal exchange rate. In the dependant economy model, clearing internal and external imbalances requires an increase of the RER which implies depreciation and a reduction in domestic absorption. Policies aimed at reducing fiscal deficits and privatizing state owned enterprises are therefore supposed to contain domestic absorption, while measures gearing towards promoting trade, such as slashing of tariff on exports are expected to depreciate the RER.
In Nigeria, the real purchasing power of household incomes has been reduced due to the worsening economic situation compounded by the complete removal of kerosene and diesel subsidies and the partial removal of subsidies on petroleum motor spirit (PMS) without basic infrastructures. Although depreciation of the RER is expected to enhance export competitiveness and raise the local currency income of exporters, this is not necessarily so because of the high cost of imported inputs and consumables as well as the high cost of infrastructures. The increased cost of imported inputs (medicines, machines, books, raw materials, laboratory equipment, etc.) may have worsened the poverty level in Nigeria. Thus, the changes in the RER have a price raising effects which has been detrimental to the Nigerian economy. The worsening state of poverty in Nigeria has been attributed to various factors which include, amongst others: poor and inconsistent macroeconomic policies, weak diversification of the productive base, gross economic mismanagement, weak inter-sectoral linkages, persistence of structural bottlenecks in the economy, high import dependence and heavy reliance on crude oil exports (Greg, 2006). Others include unemployment, inadequate access to assets such as land and capital by the poor, inadequate access to markets due to bad road and communication networks, low level of human capital development and paucity of health and sanitation facilities. read more