An Economic Analysis of the Welfare Effects of Higher Import Price Induced by Naira Devaluation

Abstract

The study examines the effects of the devaluation of naira on the household welfares. What does the recent devaluation of naira mean for the Nigerians, whose their economy depends on mono-product, has been the subject of debate among people of the Federal Republic of Nigeria. The objective of the study is to empirically provide the answer. This study made use of time series secondary data from 2010 to 2016 on monthly basis. The data were obtained from World Bank database, Central Bank of Nigeria Statistical Bulletin, Nigerian National Bureau of Statistics, etc. and the significant relationship was tested between the consumer price index as dependent variable and the exchange rate, total import, urban price index, rural price index, money supply, and inflation rate as independent variables using Microfit statistical package. The results of the analysis lead to a conclusion that the welfare loss due to the devaluation of currency was 6.4%. The main reason for this is a rise in the inflation rate as the price of the goods rise while incomes remain the same. Consequently, to correct negative effects of the naira devaluation on the citizens, the government should develop appropriate policy to restructure and diversify the productive base of the economy in order to reduce dependence on oil and import.

Keywords: Import Price, Naira Devaluation, Mono-product