CHAPTER ONE1.0 INTRODUCTION1.1 BACKGROUND OF THE STUDYthe exchange rate is perhaps one of the most widely discussed topicin Nigeria today. This is not surprising given it’s macro-economicimportance especially in a highly import dependent economy asNigeria (Olisadebe, 1995:20). Macroeconomic policy formulation is aprocess by which the agencies responsible for the conduct ofeconomic policies manipulate a set of instrumental variables in orderto achieve some desire objectives.In Nigeria these objectives include achievements of domestic pricestability, balance of payment equilibrium, efficiency, equitabledistribution of income and economic growth and development.Economic growth refers to the continuous increase in a country’snational income or the total volume of goods and services, a good2indicator of economic growth is the increase in Gross NationalProduct (GNP) over a long period of time. Economic development onthe overhead implies both structural and functional transformation ofall the economic indexes from a low to a high state (Siyan, 2000:150)one of the macro –economic variables of importance is the exchangerate policy country.Exchange rate policy involves choosing where foreign transaction willtake place (Obadan, 1996). Exchange rate policy is therefore acomponent of macroeconomic management policies the monetaryauthorities in any given economy uses to achieve internal balance inmedium run. Specifically internal balance mean the level of economicactivity that is consistent with the satisfactory control of inflation. Onthe contrary, external or sustainable current account deficit financedon lasting basis expected capital inflow.3It is important to know that economic objectives are usually the mainconsideration in determining the exchange control. For instance from1982 – 1983, the Nigerian currency was pegged to the British poundsterling on a 1.1 ration. Before then, the Nigerian naira has beendevalued by 10%. Apart from this policy measures discussed above,the Central Bank of Nigeria (CBN) applied the basket of currenciesapproach from 1979 as the guide in determining the exchange ratewas determined by the relative strength of the currencies of thecountry’s trading partner and the volume of trade with suchcountries. Specifically weights were attached to these countries withthe American dollars and British pound sterling on the exchange ratemechanism (CBN, 1994). One of the objectives of the various macro– economic policies adopted under the structural adjustmentprogramme (SPA) in July, 1986 was to establish a realistic andsustainable exchange rate for the naira, this policy was4recommended in 1986 by the International Monetary Fund (IMF). Onexchange mechanism and was adopted in 1986.The key element of structural adjustment programme (SAP) was thefree market determination of the naira exchange rate through anauction system.This was the beginning of the unstable exchange rate; thegovernment had to establish the foreign exchange market (FEM) tostabilize the exchange rate depending on the state of balance ofpayments, the rate of inflation, Domestic liquidity and employment.Between 1986 and 2003, the federal Government experimented withdifferent exchange rate policies without allowing any of them tomake a remarkable impact in the economy before it was changed.This inconsistency in policies and lack of continuity in exchange ratepolicies aggregated unstable nature of the naira rate. (Gbosi,1994:70).5
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