Foreign exchange is the means
of payment for international transaction. It is made up of convertible
currencies that are generally accepted for the settlement of international
trade and other external obligation. Just like every other commodity, a market
is established which works more like any other market having a supply curve, a
demand curve and an equilibrium price and quantity. There are also conditions
which are held constant (creteris paribus). When these conditions change, the
curve shift and there is a change in the equilibrium price quantity. This
market for currencies is known as the foreign exchange market.
The foreign exchange market according to the central bank of Nigeria is the
medium of interaction between the sellers and buyers of foreign exchange. The
seller of foreign exchange constitutes the supply while the buyers of foreign
exchange constitutes its demand. The supply of foreign exchange is derived from
oil exports, non-oil export, expenditure of foreign tourist in Nigeria, capital
repatriation by Nigerians resident abroad etc.
The demand for foreign exchange on the other hand consist of payments for
imports, financial commitments to international organizations, external debt
service obligations etc.
Before 1958, when the central bank was established and the enactment of the
exchange control act of 1962, foreign exchange was earned by the private
sectors and held in balances abroad by commercial banks which acted as agents
for local exporters. Another feature of this period was that agriculture
exports contributed the bulk of foreign exchange receipts. The fact that the
British pound sterling was at par with the Nigerian pound sterling with easy
convertibility delayed the establishment of an active foreign exchange market.
However by 1958, when the central bank was established and subsequent
centralization of foreign exchange authority. In banks, the need for a local
foreign exchange market is paramount. Other factors that led to the evolution of
the foreign exchange market in Nigeria include:
The changing pattern of
international trade institutional changes in the economy. structural shift in
By the early 1970’s, the official exchange receipt was enhanced following the
sharp rise in prices and demand for crude oil exports which had by now
displaced agricultural exports. The foreign exchange market experienced a boom
during this period and there became a need for the management of foreign
exchange resources. However, it was not until 1982 that comprehensive exchange
controls were applied.
The exchange control system failed to evolve an appropriate mechanism for
foreign exchange allocation. This led to the development of a dual exchange
rate system, comprising of the first and second tier foreign exchange market
which was adopted in September 1986. The first tier was managed while the
second tier was subjected to market forces. Not only has there been a
metamorphosis of the institutional frame work from second tier foreign exchange
market (SFEM) to foreign exchange market (FEM) to inter bank foreign exchange
market (IFEM) to Autonomous Foreign Exchange market (AFEM) etc, there have been
frequent changes in operational guidelines and procedures. Various pricing
methods, marginal and weighted average exchange rates determinations and the
Dutch Auction System (DAS) among other have also been adopted.
All those aimed at ensuring more efficient allocation and utilization of scarce
foreign exchange resources, to enhance the flow of capital into the country,
stimulates domestic industrial production, promote export, increase revenue to
the government, help reschedule our foreign debt at more profitable terms etc.
When there are fluctuations in foreign exchange rates, various economic
activities are usually affected such as the purchasing power, balance of
payment, prices of goods and services, import structure, export earning,
government revenue, external reserves among others.
These prevailing instability in exchange rates and its effects on various
economic variables, will be the areas of concentration of the research work.
STATEMENT OF THE PROBLEM
Since September 1986, when the
market determined exchange rate system was introduced via the second tier
foreign exchange market, the naira exchange rate has exhibited the features of
continuous depreciation and instability.
This instability and continued depreciation of the naira in the foreign
exchange market has resulted in declines in the standard of living of the
populace, increased cost of production which also leads to cost push inflation.
It has also tended to undermine the international competitiveness of non-oil
exports and make planning and projections difficult at both micro and macro
levels of the economy. A good number of small and medium scale enterprises have
been strangled out as a result of low dollar/ naira exchange rate and so many
other problems resulting from fluctuations in exchange rates can also be
This movement of the exchange rate along the path of depreciation since 1986
has raised a lot of questions on the impact of exchange rate policies on the
OBJECTIVES OF THE STUDY
Objectives of the study
To find out the impact of exchange rate fluctuation on economic growth of
To examine the nature of the relationship between exchange rate fluctuations
and economic growth in Nigeria.
To offer some recommendations based on the findings of the study.
FORMULATION OF HYPOTHESES
For meaningful findings,
conclusions and recommendations, a set of testable hypothesis based on
available data will be necessary. In the course of this research work, the
following hypothesis would be tested.
Hi: Exchange rate fluctuations
has no significant impact on Nigeria Economy.
Hi: Exchange rate fluctuations
has significant impact on Nigeria Economy.
SIGNIFICANCE OF THE STUDY
The study would identify the
strengths and weakness of exchange rate policy and management, identify those
economic variables that are mostly affected by instability in exchange rate and
provide the general public with the awareness on the foreign exchange
transaction and its impact on the economy.
The various findings of this
would enable the government and financial authorizes to device, modify and
adopt a better foreign exchange transaction for the economy.
DEFINITION OF TERMS :
1. Foreign Exchange
Foreign exchange is a means of
payment for international transactions. It is made up of currencies of other
countries that are freely acceptable in settling international transactions.
2. Foreign exchange market :
This is a medium of
interaction among buyers and sellers of foreign- exchange with a view of
negotiating acceptable prices for settling international transaction.
Exchange rate – This is the price of one currency in terms of another
SEMI- Second tier foreign exchange market. Under this system the exchange rate
is largely determined by market forces.
AFEM – Autonomous foreign exchange market. This exchange rate under this
system are being determined essentially through market forces.
IFEM – Inter bank foreign exchange market.
Dutch auction system (DAS) – this is a method of exchange rate determination
through action where the bidders pay last bid rate that clears the market.
Dual exchange rate regime- This situation exist when two exchange rates are in
existence in an economy.
Marginal pricing method: This is the method in which bid rates are arranged in
a descending order of magnitude. The last bid rate at which available foreign
exchange is exhausted (marginal rate) is the applicable exchange rate.
10. Exchange control –
This is a foreign exchange arrangement in which the government purchase all
incoming foreign exchange and is the only source from which foreign exchange
can be purchased legally.
TERMS AND CONDITIONS APPLY
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