ABSTRACT
The
foreign exchange management policy of an economy serves as one of the major
factor that contributes to the economic development of such nation. To the
federal government, FOREX is a very crucial resource for conducting
international transaction; therefore, the government felt once earned should be
judiciously managed.
The
extent of the effective management of exchange rate on import and export is
what the project really examined. There came different era of, changes of
foreign exchange management policies ranging from pre SAP period, SAP period
and post SAP period with each having different effects on import and export
trade. The project tends to answer how these different policies really affected
the import and export trade of the Nigerian economy. The procedure for
analyzing the collected data was transformed into a linear regression equation
using the least square method and other hypothesis were carried out, in order
to achieve the objective of the study.
Following
the outcome of the analysis and hypothesis tested, it shows that there is a
direct relationship between foreign exchange rate policies and net export; it
also shows that import and export trade of a developing economy depended
greatly on the foreign exchange management policies at any particular period of
focus.
However,
the conclusion reached was that, at any point, in time, increase in the export
as a result of foreign exchange rate
management policies has been able to promote economic growth and development,
reduce inflation and also stabilize the exchange rate in the economy.
1.1 BACKGROUND OF THE STUDY
Economies
are confronted with one problem or the other, and governments are constantly
locked in effort and actions to alleviate them from the economic point of view,
there is the gap between the potential Gross Domestic Product (GDP) and the
actual, which is referred to as the employment gap, or the GDP gap. This gap
has to be reduced to the minimum. In order to achieve this, the government or
its agencies take various actions, referred technically as policies.
The
natures of economic problems differ from a recession/depression with high
levels of unemployment or at the extreme rampaging inflation, currency,
depreciation and balance of payments deficits. Since the 1970's, it has been
recognized that rather than the existence of a trade-off between inflation and
unemployment, a country could be experiencing stagflation- a combination, of
stagnating outputs as well as high levels of inflation at the same time
(Samuelson and Nordhaus 1989: 204: 206). This situation calls for a combination
of policies to address them.
Policies
available to any government in managing its economy by tackling the problems
identified above exist in. a menu; from monetary and exchange rate through
fiscal, trade, commercial, Income among others. Consequently, the government
often uses these in combination or singly, depending on the problem at hand and
the philosophy of the regime in power. A rightist philosophy is inherently
anti-policy activists and when necessary will prefer monetary to fiscal
policies. However, he reality of economic malaise confronting an economy. These
policies are used in packages.
1.2 DEFINITION OF FOREIGN EXCHANGE
Foreign
exchange has been variously, defined by different works of study but all
tending towards the same meaning. Foreign exchange is a means of effecting
payments for international transactions. It can be acquired by a country
through, the export-of goods and services, direct investment in-flow, draw down
on external loans, aids and grants and it can be expended to settle
international obligations.
Foreign
exchange in Nigerian context is defined as any currency other than the Nigerian
currency which as at anytime been legal tender in any territory outside
Nigerian. Exchange rate policy is. intractably tied up with the management of a
country's foreign exchange; it refers to the manipulation of some crucial
variables so as to ensure that the country's exchange rate contributes to the
attainment of external (or payment viability and general economic prosperity.
Foreign
exchange transaction is carried out in the foreign exchange market, this market
is a market for the sale or purchase of foreign provides a frame work and
opportunity to trade in deal in, off load or produce foreign currencies for
effecting or closing international transaction. In case where foreign
expenditures is lower than foreign receipts, the surplus is added to reserves,
these reserves which are also savings from foreign exchange transactions are
held by the authorities to finance shortfalls in foreign exchange receipts and
to safeguard the international valve of the domestic currency.
Foreign
exchange earrings from international trade transactions and external aids are
great important for economic development of less developed counties (LDCs).
This is as a result of the fact that resource form the sources can induce
increase in factors supplies and promote the development of technical skills
and knowledge, all of which should enhance domestic capital formation and
economic growth.
Nigeria
like other developing nations had chosen to determine her exchange rate through
basket of currencies; naira was pegged to the U.S dollar and to the pounds on a
bid to ensure that he rate have some bearing with the factors of the balance of
payment and domestic economy .
The
Nigerian economic history reveals that, Nigerian initially operated affixed
exchange rate regime from independence in 1960-1986 before switching to a
flexible rate regime. These changes where anchored as a result of the types of
disturbance to which economies are exposed the structural characteristics of the
economy and the commonality of the risks to which they are subject and the
objectives they pursue (Guitan 1994) Agbevlic eta., 1991, frankel 1992.
In this
connection, the consideration are that where the problems are external shocks
and domestic real stocks, such as imbalance in the goods market as the country
experienced in the 1980's then the best policy regimes becomes flexible rate
because shocks to domestic demand will lead to change in the rate that will
bring about off-setting movement in foreign demand so that domestic output is
not severely affected" ceteris paribus (Guitan 4: 19).
For the
purpose of analysis, the period under review will include:
-
Review of monetary policy.
1.3 STATEMENT OF PROBLEMS
-
The rationale for various macro-economic policies adopted under the structural
Adjustment Programme (SAP) have failed to impact on the Nigerian export and
import and therefore affect our foreign reserves.
-
Why the various foreign exchange regimes (policies) have not been able to
impact significantly on the macro economic variable as balance of payment,
employment, inflation etc.
-
The extent on which the exchange rate can be managed through the effective
management of the country export index and external reserves.
-
The extent to which other macro- economic indices depend on the exchange rates
1.4 OBJECTIVES OF THE STUDY
Although,
the objectives of exchange rates management policies to achieve macro-economic
goals. This study strives to ascertain;
-
To what extent are these objectives been achieved
-
To determine how such objectives as been achieved in the past, current
dispensation on and the possible direction that could be followed in the
future.
-
To investigate the possible problems and constraint and proffer suggestion to
factors that militates against effective management of foreign exchange in
Nigeria.
-
To review the monetary policies and various measures used in achieving its
objectives.
1.5 RESEARCH QUESTION & HYPOTHESIS
This
study is centered on findings out the effect of foreign exchange rate
management policies on developing economy, taking Nigeria as a case study. The
following question will be considered in order to achieve of the study.
-
Is there a link between exchange rate and monetary policy in Nigeria?
-
To what extent do the instruction of SAP and other economic reforms impact on
the foreign exchange management in Nigeria? To review the monetary, policies
and various measures used in achieving its objectives.
-
What is the relationship between demand and supply of foreign exchange to
various users?
The
hypothesis will be testes as follows;
Ho:
Foreign exchange rate do not contribute to Net Export
Hi:
Foreign exchange rate contributes to Net Export.
1.6 SCOPE AND LIMITATION OF THE STUDY
This
study is confined on the effectiveness of foreign exchange management policies
and conducts of monetary policies in a developing economy. This research work
is also limited to Nigerian economy as a case study of a developing economy.
1.7 SIGNIFICANT OF STUDY
The
result of this research work would be relevant to academicians, investors,
financial institutions as well as the government who may wish to avail
themselves of the data and information therein. It will particularly assist
student of finance on their study of foreign exchange on economy and will also
enlighten the public on how foreign exchange management policies affect their
daily business and governance. It will also serve as a dimension for future
research and recommend direction for necessary amendments.
1.8 DEFINITION OF UNFAMILIAR TERMS
1)
Direct
Investment: This inv investment enterprises of a domestic firm in a
foreign country as a subsidiary of the parent business enterprises.
2)
First-Tier
Foreign Exchange Market: This is a market for
government reservation in transaction, where valves of naira are pegged and
remain relatively stronger.
3)
Fiscal
policy: It is use of measure such as taxation, government
expenditures budgetary variables in order to achieve desired economic
objectives.
4) Fixed Rate Regime: This is a period where
administrative fixing of the value of national currency are employed in
relation to major currencies by the monetary authorities.
5) Floating Rate Regime: This is the period where
national currency was allowed to fluctuate in response to the forces of demand
and supply in the foreign exchange market.
6) Inflation: It is a persistent
increase in price or a fall in the value of money.
7) Legal Tender: This is any commodity
that is generally accepted as a means of exchange and setting debt.
8) Over Value Exchange Rate: This implies
artificially high valued currency which makes imports cheaper relative to
exports.
9) Second-Tier Foreign Exchange Market:
This is a market where the determination or value of the naira exchange rate
was made to reflect the market force of demand and supply.
10) Under-valued Exchange Rate: This implies
artificially low valued currency which makes imports costly relative to export.
11) Bureau de Change: Is a non bank
financial institution licensed by Central Bank of Nigeria to operate in FOREX
market in order to improve access to FOREX especially, for small users. Over
240 bureau de change. has been licensed and supervised by Central Bank of
Nigerian.
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