IMPACT OF FOREIGN EXCHANGE MANAGEMENT ON ECONOMIC GROWTH FROM 1997-2017

2,500.003,000.00 (-17%)

Sold By: Brilliantng

In stock

Report Abuse
Help us Grow
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  

Chapter 1

INTRODUCTION

1.1 The Background of the Study

This research is on Impact of foreign exchange management on economic growth from 1997-2017. Research on exchange rate management continues to be of great interest to economists. The reason being that, exchange rate is a key variable in the general economic policy formation of a country, as its depreciation or appreciation affects the performance of major macroeconomic variables. An exchange rate movement has been acknowledged as one of the endogenous factors, which affect the performance of an economy. According to Cottani et al. (1990), the poor economic performance of Asia, Africa and Latin America over the years can be attributed to real exchange rate behavior. The exchange rate is not only an important relative price that allows the interactions of local and international market; it is also as an indication of the strength of the currency of a country as compared to the rest of the world. It can therefore be said that a good exchange rate framework is an important determinant of a sound economic growth.  

The revenue from the agricultural sector was said to account for over 70 percent of the GDP in Nigeria from the 1960s and up to the early 1970s. However, due to the oil-boom in the 1970s the revenue from the agricultural sector declined significantly as crude oil became the mainstay of the Nigerian economy. In the 1980s, Nigeria was faced with huge capital inflows from the sales of crude oil that resulted in the appreciation of the Naira. However, in 1981, the world crude-oil market experience deterioration in crude oil price which led to serious economic crises in Nigeria. Hence as observed by Adubi and Okumadewa (1999), the oil boom in Nigeria ended in 1983, leaving behind a massive currency appreciation that hindered or slows down the economic performance of the country’s national economy especially in the agricultural sector. In the late 1970s and the 1980s, the Naira was said to be overvalued and such over-valuation was causing obvious adverse effects on the general economic performance, therefore an urgent need to restructure the exchange rate market in order to mitigate these effects.

Nigeria has a large market due to its population, which is over 160 million as at 2012. Aside its exports of crude oil, most of the goods and services that are commonly used in Nigeria are imported. The discovery of oil in Nigeria has led to a mono-economic system. Nigeria relies on importation for basic goods and services; the importation of goods is enabled by exchange rates. Due to high importation, it is obvious that demand for foreign currency as against the naira will be greater than supply. This will cause the naira to depreciate against other currencies; such depreciation affects the macro-economic equilibrium, which can results in the underperformance of other important economic variables. This study looks at the effects of foreign exchange rates volatility on the gross domestic product in Nigeria.

Foreign exchange rate is the price of a country’s currency in relative terms to that of another country and it thus plays a significant role in international trade relations and international finance. It is also a foundation, which encourages sustainable macroeconomic balances both internal and external over a period. Therefore, it is not an easy task to answer the question as to what determines the equilibrium exchange rate and its effects on other vital macroeconomic variables. As stated by Williamson (1994), the level of misalignment of the foreign exchange rate as well as the estimation of the equilibrium exchange rates continues to be of great challenge for sound and potent macroeconomic policies for an open economy.

The fundamental problem is that, the equilibrium exchange rate cannot be predicted and it is unobservable. While the foreign exchange rate disequilibrium is a condition where the exchange rate of a country moves from the equilibrium rate, an exchange rate is considered “overvalued” when it appreciates beyond the equilibrium and “undervalued where it depreciates beyond the equilibrium.

Obadan (1994) indicated that there is a general acceptance by scholars that protracted and significant exchange rate disequilibrium can lead to harsh macroeconomic problems for sound macroeconomic management policies with regards to a country’s external balance position. In the light of the above, the rectification of the external balance will entail both sound macroeconomic policies and hence, the devaluation of the exchange rate.

Policies on exchange rate in emerging nations are very sensitive and highly controversial, largely due to the type of structural change, which involves decreasing import or increasing export, this indirectly means a depreciation of the nominal exchange rate. The management of foreign exchange rate has in the last four decades experienced significant modifications in Nigeria. One of the remarkable events was the devaluation of the local currency with the implementation of the Structural Adjustment Programme in 1986.

The determination of a suitable and sustainable exchange rate policy has not been an easy task in Nigeria. Prior to the implementation of the Structural Adjustment Programme in 1986,  the National currency (naira) was said to be overvalued and that was the reason why it was opened to market forces to determine its realistic value that would diversify and improve the performance of the Nigerian economy. The central aim was to streamline the production base of the country to increase the agricultural sector for export. The reform of the foreign exchange, which aided the successive depreciation of the exchange rate, was projected to make the agricultural product cheaper in the international market, such that there will be an increased demand to boost domestic production. However, the consequences of the depreciation lead to changes in the volume and structure of Nigeria’s export. Various scholars have studied this empirically notably Oyejide, (1986) and Osuntogun et al. (1993). Such internal adjustment, owing to its short run effect on prices and demand, are believed to be highly detrimental to the structure of the economy. However, the huge distortions associated with overvalued exchange rate system are barely an issue of discussion in emerging countries, which relies highly on imports for both consumption and production.

1.2 The Patterns of Foreign Exchange Rates Policy in Nigeria

In the last four decades, the management of foreign exchange rate has experience significant modifications in Nigeria. One of the remarkable events was the devaluation of the currency in 1986 through the introduction of the Structural Adjustment Programme. The determination of suitable and sustainable exchange rate policy in Nigeria has not been an easy task. Prior to the introduction of the Structural Adjustment Programme, the national currency (naira) was said to be overvalued and that was the reason why it was opened to market forces to determine its realistic value that would improve the performance of the economy and diversify the Nigerian production base. The central aim was to streamline the production base with the focus of increasing the agricultural sector for export. Adubi and Okundawa (ibid), highlighted that the reform of the exchange rate that aided the successive devaluation of the Nigerian currency was targeted at decreasing the international prices of the output from agriculture for export thereby boosting the domestic production. However, Osuntogun et al. (ibid) pointed out that the devaluation changes the volume and structure of export in Nigeria, as has been empirically studied by many scholars.

The flexible exchange rates policy was introduced to allow the forces of demand and supply to determine the equilibrium price at any given time. However, the volatility that accompanied flexible exchange rate regime does not allow the full potential of domestic and international investors to be fully utilized.  Up to this time, after the devaluation of the currency, the Naira has not been able to find it appropriate value. So far in Nigeria the foreign exchange rate policies have not been effective in achieving the desired objectives. Nigeria continue to depend on oil as the source of its foreign currency earnings while output from agriculture that use to be the mainstay of the economy before the discovery of oil, has continued to dwindle. This has made it important to undergo a research on how exchange rate affects the GDP. The goal of the exchange rate reforms is to identify a suitable exchange rate policy and ensure the sustenance of such reform. Over the years, a lot of effort has been put in place to accomplish this goal through the application of different kind of foreign exchange rate policy in order to achieve efficiency. Exchange rate management in Nigeria was transformed from the fixed system that was in place in the 1960s to the “pegged” system in the 1970s as well as the mid 1980s and lastly, to the several variants of the flexible exchange rate system through the introduction of the Structural Adjustment Programme.

Nigeria implemented the International Monetary Fund and the World Bank imposed Structural Adjustment Programme in 1986. The approach of the Structural Adjustment Programme emphasizes a market driven system for the determination of foreign exchange rates. The position of the balance of payments and the poor level of the external reserves informed this choice.  Thus according to Obadan (1999), the nominal and the real exchange rates were depreciated in order to align them to their appropriate equilibrium rates. This lead to gains in the Nigerian economy such as enhanced agricultural production via increase in tariffs on agricultural imports and subsidy on some agricultural inputs like fertilizer, which resulted in the reversal of the former situation where there was a trade protection of all export of crops in the country (Hino, 2003).

In line with Nigeria’s Structural Adjustment Programme, a second-tier foreign exchange market was introduced in 1986. The main goal of the second-tier foreign exchange was to achieve an appropriate exchange rate through a sequence of the exchange rate depreciations. The dual exchange rate policy was implemented through the Second-tier Foreign Exchange Market (SFEM) and both rates were merged together in 1987 at 1 USD to 3.74 naira.

In 1987, the Dutch-Auction System was introduced to develop the bidding system. In that same year, Second-tier Foreign Exchange Market (SFEM) and the Dutch Auction System (DAS) were further replaced with the introduction of the Foreign Exchange Market (FEM). As stated by Odubogun (1995), the purpose was to reduce the multiplicity of foreign exchange rates and guarantee the depreciation of the naira. The Inter-bank Foreign Exchange Market (IFEM) and Bureau de change were both introduced in 1989 to take care of the needs of small end users. Thus, the Interbank Foreign Exchange Market was modified in 1990 to give room to the reintroduction of the Dutch Auction System.

Nigeria in 1999 deregulated the exchange rates market and it was further improved through the realignment of the parallel market and the official exchange rate. In 1994, the Inter-bank Foreign Exchange Market was replaced with the Autonomous Foreign Exchange Market. The aim of this replacement was to guarantee the sale of foreign exchange currencies at the market driven price through the authorized marketers. The domestic currency was further devalued such that in the autonomous market, 1 United States dollar was equivalent to 92 naira in 1999. This resulted in a wide gap between the official exchange rate and the parallel market. The subsequent depreciation of the currency in 1998 facilitated a market-driven arrangement that led to the reduction in the premiums that is observed in the parallel market, which narrowed the difference between the parallel market and the official exchange rates. In a bid to enhance the activities of the inter-bank foreign exchange market, the interbank Foreign Exchange Market was re-introduced in 1999.

As described in the CBN bulletin (2010), the Nigerian currency continues to depreciate and as at 2002, 1 United States dollar was equivalent to 120 naira. This period was also marked with high revenues from the sale of crude oil as well as improvement in the performance of the economy owing to the reforms in the banking sector.

Aliyu (2007) highlighted that in 2005 due to the monetary and fiscal policy, as well as the high inflows of revenue made the Naira to gain value considerably. To effectively manage the pressures on exchange rate, the Central Bank reintroduced the Dutch Auction System. The Nigerian currency however continued to gain value due to rising revenues from the sale of crude oil. One important factor that leads to the misalignment of the naira is that on one hand, the naira appreciates tremendously due to the high earnings from the sales of crude oil and on the other hand, it depreciates and fluctuates frequently due to the high importation of goods and services. However, this twofold of events does not appear to balance-up both in the short run and the long run. A policy to control and stem the effect of naira appreciation and depreciation must be implemented.

Mordi (2006), indicated that the circumstances that necessitated the re-introduction of the Dutch Auction System in 2002, was the stand of the external reserve, which was capable of ensuring sufficient funding of the foreign exchange market by the Central Bank to instrument it’s autonomy, bring down the inflationary pressures, as well as to allow the deployment of monetary management instruments that would sustain the Dutch Auction System. This was meant to ensure a constant and steady supply of foreign currency. The Dutch Auction System was to serve three main purposes i.e. reducing the premium of the parallel market, protect the decreasing the external reserves and achieve an appropriate exchange rate of the naira. The Dutch Auctions System has facilitated the stabilization of the fluctuations in the naira exchange rate, by reducing the rising premium, minimize the speculative tendencies of the authorized dealers and conserve the external reserves. This has in general led to the stability of the foreign exchange market since 2003.

The International Monetary Fund (IMF) research of 1984, argued that variability of the exchange rates stimulates undesirable macroeconomic problems such as inflation and balance of payment imbalances. For example, where exchange rate variability leads to high importation of goods and services, such policies that discourage import would be highly ineffective. There have been various policies by the Nigerian government on how best to effectively manage the foreign exchange market and many studies have been undertaken by scholars on foreign exchange volatility and its impacts on trade relations in Nigeria. Despite all the policies and studies, the issue of foreign exchange movements remains a big problem in Nigeria. Could this be a result of inappropriate policies or gaps in the studies so far conducted? It is against this backdrop that the research seeks to investigate further the effect of exchange rate movements on Gross Domestic Product (GDP).

1.3 Significance of the study

If the source of the volatility in foreign exchange rate can be identified and corrected, it will enhance trade relations, which can bring about economic growth and development in Nigeria. Foreign exchange rates is affected by  major macroeconomic variables such as real interest rate, inflation, imports and exports, BOP, gross domestic product etc., which are used to gauge the strength of an economy. The study is intended to identify how the fluctuations in the foreign exchange influence these macroeconomic variables and how they all affect GDP in both the short run and in the long run. This study will also serve as a tool and guide towards policy formation and implementation on foreign exchange rate in Nigeria.

1.4 Statement of the Problem

The revenue from agriculture accounted for over 75 percent of the gross domestic product in Nigeria from the 1960s and up to the early 1970s. However, because of the oil-boom in the 1970s the revenue from the agricultural sector declined significantly as crude oil became the mainstay of the Nigerian economy. In 1981, the world oil market experienced deterioration in the prices of crude-oil which led to serious economic crises in Nigeria. Nigeria has a large market due to its population, which is over 160 million as at 2012. Aside, its exports of crude oil, most of the primary goods and services that are commonly used in Nigeria are imported. The discovery of oil in Nigeria has lead to a mono-economic system. Nigeria relies on importation for basic goods and services; the importation of goods is enabled through exchange rates. Due to high importation, it is obvious that demand for foreign currency as against the naira will be greater than supply; this will cause the naira to depreciate against other currencies. This research would critically study the effects of foreign exchange rates on the growth of gross domestic product in Nigeria.

1.5 Research Hypothesis

The research question will include but not limited to:

  • What are the short and long-term impacts of exchange rate movements on GDP in the Nigerian economy?
  • Is there a significant relationship between the volatility of exchange rates and macroeconomic variables such as inflation, import, export and GDP? and
  • What is the causal relationship between macroeconomic variables and GDP?

The research questions will be considered through research objectives stated below.

1.6 Objectives of the Study

The central objective of the research is to analyze the impact of foreign exchange rate and some macroeconomic variables on the Nigerian economy, based on annual data from 1960 to 2012. The specific objectives will include but not limited to:

  • Examine the short and long-term impacts of exchange rate volatility on GDP in Nigeria;
  • Ascertain the relationship between macroeconomic variables such as the exchange rate, inflation, import, export, and GDP;
  • Determine the causal relationship between the macroeconomic variables and GDP. Base on results obtained from the analysis policy proposal will be suggested, for the optimal management and control of Nigeria’s exchange rate, inflation, export and import demand.
0/5 (0 Reviews)
0/5 (0 Reviews)
Be the first to review “IMPACT OF FOREIGN EXCHANGE MANAGEMENT ON ECONOMIC GROWTH FROM 1997-2017”

Your email address will not be published.

Reviews

There are no reviews yet.

Vendor Information

  • Store Name: Brilliantng
  • Vendor: Brilliantng
  • No ratings found yet!

Main Menu

impact-of-foreign-exchange-management-on-economic-growth-from-1997-2017

IMPACT OF FOREIGN EXCHANGE MANAGEMENT ON ECONOMIC GROWTH FROM 1997-2017

2,500.003,000.00 (-17%)

Add to Cart
%d bloggers like this: