Banking & Finance

An Assessment of Exchange Rate Policy Measures in Nigeria

An Assessment of Exchange Rate Policy Measures in Nigeria

Chapter one

1.0 Introduction

The exchange rate is the price of the unit of one country quoted in terms of another country’s currency i.e. it is the mathematical or quantitative expression of one country’s currency in terms of another’s.

The exchange rate is a very vital price mechanism that directs the movement of other prices in the domestic economy and tries to equilibrate the balance of payment. It is also the variable that affects the economic activities in a country through the impact on investment, output, and inflation among others. This eventually leads to the depreciation of a country’s currency.

The inadequate foreign exchange earnings. A derivation of the steep fall incurred oil prices exploring the inflation in 1984 which stood at almost 40% as a result of an acute shortage of imported goods and services.

SAP was adopted in July 1986 to among other things get the price right using the foreign exchange rate reform as its century tool. In pursuit, the second-tier foreign exchange market was introduced in late September 1986 and since that time the naira has depreciated sharply against the us dollar and other major currencies the development shows that a depreciation of the naira has a role to play in Nigeria’s recent inflation trend.

1.1 Background of the Study

During the period of an independent exchange rate management policy the naira was pegged to other than us dollar or the British pounds, a policy of gradual appreciation of the naira was pursued. The persistent external surplus in the balance of payment supported the appreciation of naira from crude oil export.

This cheapens import of competing for food items agro-based and industrial raw materials to the detriment of local products of similar goods. When it because obvious that aggregate import has outstripped total foreign exchange import trade restriction was introduced. In 1976 there was a deliberate measure to depreciate the naira. In September 1986 the fixed exchange rate had to be discovered and a flexible exchange rate was introduced following the adoption of SAP. The foreign exchange was subjected to market forces under an auction system and now the naira become undervalued. Exchange rate depreciation has since resulted in a domestic increase in the naira price of import and the is export to discourage importation and the naira cost of imported items have also risen the dismal performance of the economy as the end of 1994 compelled the authorities to re-introduce the market-based approach under the autonomous foreign exchange market (AFEM) from January 1995 until October 1999. The exchange rate which depreciated from the fixed rate of N21.8881: US$1.00  In 1995, further depreciated to N128.75 between 2002 and 205. However, relative stability was achieved from 2003 with the rate appreciating between 2005 and 2008.

1.2 Statement of the Problem

Evidence OF exchange rate depreciation has dominated Nigeria’s exchange rate structure, for the period, 1976-to 2004. The depreciation would normally be expected to bring about a positive change in Nigeria’s balance of trade. But the depreciation has resulted in the reduction of the value of the country’s exports causing deterioration in the balance of trade.

In a continued effort to establish the exchange rate, as well as ensure a single exchange rate for the naira, numerous variations of market-determined rates have been adopted since 1986.

1. The second-tier foreign exchange market (SFEM) was introduced in 1986.

2. First and second-tier markets were merged into an enlarged foreign exchange market (FEM) in 1987.

3. Inter-bank foreign exchange market (IFEM) in January 1987.

Despite these policies, the exchange rate of the Naira has remained unstable since the deregulation period. The need to investigate the impact of this fluctuating exchange rate is important for the economy. For an import-dependent country, the stability of its exchange rate is important for credit allocation (Adebiyi, 2006). It is therefore important to examine how the level of volatility of the exchange rate affects the performance of the industry.

1.3 Objective of the Study

The main objective of the exchange rate policy in Nigeria is to present the value of the domestic economy, maintain the external resource position and ensure external balance without compromising the need for internal balance and overall goals of macroeconomic stability.

The primary objective of this research is to find amongst others the following:-

1. To analysis describe the past policy and measures of exchange rate adopted by the federal government of Nigeria.

2. To analyze the current dispensation and the possible direction that could be followed in the future.

3. To find out problems associated with managing foreign exchange by the CBN for the benefit of development.

4. To make recommendations to the CBN, commercial banks, and other financial transactions regarding exchange rates.

1.4 Research Hypothesis

The following hypothesis has been made to test the validity of the database on the statement of the general problems.

a. Null hypothesis

Ho: The intervention of the CBN in the Nigeria foreign exchange market has not stabilized the exchange rate of the Naira.

b. Alternative hypothesis

H1: The intervention of the CBN in the Nigeria foreign relatively made the exchange rate of the Naira stable.

1.5 Significance of the Study

This study will assist the CBN and other financial bodies in ensuring vital policy measures of exchange rate vis-à-vis the prevailing economic condition.

The study will also be a great help to manufacturers, and importers in strategic industries conserving and making effective utilization of foreign exchange at their disposal.

Finally, the study is the writer’s contribution to research by making available materials for any researcher to undertake a similar study.

Furthermore, the study will serve as a guide toward achieving an effective exchange rate which will lead to an increase in the country’s foreign reserves and the stability of the naira in the economy.

1.6 Scopes of the Study

The study is specially carried out on the policy measure of the exchange rate in Nigeria between 2009 to 2012. The research is carried out at the Central Bank of Nigeria Kaduna branch, after which we realized the impact and uses of the exchange rate policy used over the years.

1.7 Historical Background of the Case Study

The quest for an apex bank to regulate the monetary and financial policies of Nigeria’s economy was inevitable and permanent, however, the economy which was set up in 1912, performed some of the functions of the CBN before the setting up of the CBN. It was primarily responsible for issuing legal tender currency. The WACB was kept at a fixed parity with the British monetary management to promote the growth of the financial market. To rectify this, the CBN was set up on the 17th of March 1959 with an initial capital of N million. The CBN Act of 1959 has undergone various amendments and currently, the legal banking of the CBN is the execution of its functions bounded by the CBN decree No. 24 of June 1991 (which supersedes that of the CBN Act of 1959 and its various amendments) the bank and other financial industries (BOI) decree No. 25 of 30th June 1991.

Section 4 (1) split out the principal objective of the CBN as:

1. To Issue legal currency in the county.

2. To maintain external reserves.

3. To safeguard the international value of the country’s currency.

4. To promote monetary stability and sound finances.

5. To act as the banker and financial adviser to the federal government of Nigeria.

6. To act as the banker to other banks in the country.

The head office of CBN is situated in Abuja, the country’s capital. It has four zonal offices, twenty-one branches, and six currency centers throughout the country. The bank is under the control of the board of directors. The board comprises the governor as the chairman of the board, five deputy governors, and four full-time executive directors all of whom are appointed by the federal government for five years. (in the case of the governor, deputy governor, and four executive directors) and then a term of three years for other directors.

Therefore, the primary objectives of monetary policy in 2003/2006 are the maintenance of price and exchange rate stability. Especially the policy shall seek to maintain a single-digit inflation rate during the period through effective control of the growth of monetary aggregates. In conclusion, sustained effort will be made to address the persistent problem of excess liquidity in the banking system and its adverse effects on inflation and exchange rate.

In addition, the central bank of Nigeria will continue to ensure banking soundness and financial sector stability to enhance the efficiency of the payments systems and effective transmission of monetary policy to the real sector.

Furthermore, the CBN shall seek to ensure effective enforcement of the market rules to engender the right market expectations. As in the previous years, the broad measures of money supply (m2) shall continue to be the intermediate target of monetary policy. Thus, during the two years, average growth in M2 of 16.25% shall be maintained which relates to a maximum increase of 16.0% in 2009 and 16.5% in 2010/2011.

1.8 Definition of terms

1. Foreign exchange: The system of exchanging the money of one country for that of another country the place when money is exchanged.

2. Exchange rate: The process of changing an amount of one country for an equal value of another.

3. Inflation: A continuous rise in the price of goods and services as a result of the large value of money in the calculation used in the exchange of the few available goods and services.

4. Monetary policy: it was excessively giving rise to high demand pressure in foreign exchange markets and persistent depreciation of the naira segments of the market.

5. Autonomous foreign exchange market: (AFEM): it is a land of market established for foreign exchange but operated without government intervention.

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