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JAMB Economics 1985 Question 37

Question 37

Balance of Payments and Exchange Rates

Devaluation of the naira as a condition for the International Monetary Fund 'loan' is considered inadvisable because

  1. A.it would allow for more money to be spent on luxuries
  2. B.the interest rate on the loan would increase
  3. C.it would decrease the demand for Nigeria's exports
  4. D.it would worsen Nigeria's foreign exchange situation
  5. E.Nigeria's oil would sell for less in the world market.
Show the answer and explanation

Answer: D (it would worsen Nigeria's foreign exchange situation)

Explanation

Nigeria's main export, oil, is priced in dollars and its demand does not rise when the naira falls, while imports needed by industry become dearer, so devaluation would worsen the foreign exchange position.