An Analysis of the Persistent Depreciation of the Naira in the Foreign Exchange Markets

An Analysis of the Persistent Depreciation of the Naira in the Foreign Exchange Markets Causes, Effects, and Solutions

PROPOSAL

This work is a titled analysis of the persistent depreciation of the Naira in the foreign exchange market:

Causes, effects, and solutions. Captures the performance of Nigeria’s economy in the face of the continuous depreciation of the Naira.

The major objective of the study is to determine the effects of depreciation on Nigeria’s growth.

The data to be used for this work is the secondary source of data due to the nature of the research.

The constraints that will be encountered in the course of this study include the high cost of textbooks, transportation costs, and the time factor refusal of officials to offer their full support and cooperation.
Findings also will show that some causes of the depreciation of the Naira value include undue dependence on the oil sector and deficit spending by the government.

It is therefore to be recommended that there should be strict adherence to CBN’S monetary policy guidelines by both the private and public sectors. The monetary authorities should intervene periodically in the foreign exchange market to achieve strategic objectives.

TABLE OF CONTENT

Cover page
Title page
Approval page
Dedication
Acknowledgment
Proposal
Table of content
CHAPTER ONE
INTRODUCTION
1.1 Background of the study
1.2 Statement of the problem
1.3 Purpose of study
1.4 Research questions
1.5 Statement of hypothesis
1.6 Significant of the study
1.7 Scope and limitation of the study
1.8 Definition of terms.
CHAPTER TWO
REVIEW OF RELATED LITERATURE.
2.1 Nominal and real exchange rates.
2.2 The foreign exchange market in Nigeria since 1986.
2.3 Causes of the persistent depreciation of the naira.
2.4 Effects of the depreciation of the naira on the economy.
2.5 Measures to strengthen the value of the naira.
CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
3.1 Area of study
3.2 Instruments of data collection
3.3 Validation of an instrument
3.4 Method of data analysis
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
CHAPTER FIVE.
FINDINGS, CONCLUSION, AND RECOMMENDATION
5.1 Summary of findings
5.2 Conclusion
5.3 Recommendations
BIBLIOGRAPHY
APPENDIX.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Foreign exchange is the means of payment for international transactions and it is made up of convertible currencies that are generally acceptable for the settlement of international trade and other external obligations.

The foreign exchange market is an arrangement or medium of interaction between the sellers and buyers of foreign exchange in a bid to negotiate a mutually acceptable price for the settlement of international transactions (file 1999: 325)

Afolabi (1999) defined the exchange rate as the price of one currency in terms of the other. In other words, it is the rate at which one currency will exchange for another.

In the pre-Babangida administration years, the Nigeria currency was above the dollar and on par with the pound. However the naira has depreciated to a great extent since 1986 with the introduction of the structural adjustment program (SAP), under the Babangida administration since the introduction of SAP in 1986, exchange management has been at the core of macroeconomic policy. The overriding objective has been to have a realistic and stable exchange rate consistent with the internal rate of the Naira and to reduce the economy’s dependence on the external sector.

Before 1986, one official foreign exchange market existed in Nigeria, and exchange rates were officially fixed by the CBN. Then in September 1986, the foreign exchange market was divided into two: the first-tier foreign market and the second–tier foreign exchange market (STEM). The major aspect of the SFEM was that the prices of foreign currencies against the naira were determined through competitive bidding with the prices settling at points. Where the available supply of the currencies is cleared the bidding was in terms of one currency. Us dollar, against the naira, and the rates for other currencies were correspondingly determined after the determination of the dollar rate. (Essien 1990: 129).

With the establishment of SFEM, the rate of naira depreciation by the central bank gathered momentum. With the view of merging the first and second-tier markets within the shortest possible time, which was about one year. In July 1987, the first and second-tier foreign exchange markets were merged and called the foreign exchange market (FEM). On March 20 1987 the central bank introduced the Dutch auction system which was intended to inject more caution in the bidding sessions since dealers who bid above the marginal rate would be made to buy at that rate the Dutch auction system was expected to control the sharp depreciation of the naira.

In 1994 a natural merger of the official market and the parallel market occurred. The parallel market gradually marginalized the official market. The foreign exchange market was liberalized in 1995 with the introduction of the autonomous foreign exchange market (AFEM) for the privately sourced fund at market-determined exchange rates(CBN Annual Report 2001).

In 1995, the foreign exchange market was split into three tiers. It the administratively fixed through the manipulation of the market mechanism, and the parallel market. Still, there was greater depreciation of the naira. There was also an introduction of a dual exchange rate regime in 1995 which was a mixture of both the fixed and the market-determined rate. The dual exchange rate regime was restricted in 1997 with the official selling rate fixed at #21.9960 to us$1for selected priority government transactions. The stability of the nominal exchange rate achieved in 1995 and 1996 at the AFEM was generally sustained in 1997.