CHAPTER ONE INTRODUCTION 1.1 Background of the Study
Exchange rate is the rate price of one counting currency expressed in another country’s currency in other words the rate of which one currency for another, for example the higher the exchange rate for one euro in terms of one yen, the lower the relative value of the yen limits (2006). Exchange rates are the price at which one converted into another.
The exchange rate between the U.S. dollar and the British pound is different from rate between the dollar and the Euro, for example, a wide range of factors rates which generally change slightly each trading day.
Since the establishment of the CBN, Nigeria exchange rate policy has been aimed at preserving the external value of the domestic currency and maintaining a healthy balance for payment position, which indeed, is a major provision of the enabling law with the failure of the autonomous foreign exchange market in 1995, an inter -bank foreign exchange market was introduced on October 25, 1999. It would be recalled that the IFEM was designed as a two way quote system, and intended to diversify a supply of foreign exchange in of foreign in the economy by encouraging the funding of the inter-bank operations from privately earned foreign exchange rate.
The operation of the IFEM, however, experienced similar problem and setbacks as the autonomous foreign exchange market AFM, owing to supply side rigidities, the persistent expansionary fiscal operation of government and the peculiarity of the Nigeria foreign exchange earnings are more than 90 percent dependent on crude oil exports excepts the result is that the volatility of the world oil market price has a direct impact on the supply of foreign exchange.
Moreover, the oil sector contributes more than 80 percent of government revenue shared by the three tiers of government rise correspondingly and has been observed since early 1970’s elicited co-operation expenditure increases which has difficult to bring down when oil price collapse and revenue fall concomitantly.
Indeed, such unsustainable expenditure level has been at the root of high government difficult spending is therefore important than reserves to build up when the price is high to cushion the effect of revenues shortfall on government 6pending when oil price falls to the international oil markets Clark (1990). Specially, the sustained demand pressure and the consequent depreciation of the exchange rate under the IFEM were traced to the following caused
The excessive liquidity in the systems by the transfer of government account from the CBM to banks; and the huge extra-budgetary debt spending in 1999 on unproductive ventures.
The heavy debt service burden; and
Speculative demand, driven by uncertainties created by social and political unrest, expectations created by social and political unrest, expectation of future depreciation of the naira, as well as the deterioration of the external sector position.
It became a matter of serious concern that despite the huge amount of foreign exchange market, which the CBN supplied to the foreign market, the impact was not inflated in the performance of the real sector of the economy. Arising from Nigeria high import propensity of finished consumer goods, the foreign exchange earnings from oil continued to generate output on employment growth in other countries from which Nigeria imports originated. This development necessitated a change in policy on 2002, when the demand pressure in the foreign exchange market intensified and the depletion in external reserves level persisted (CBN), 2007 this led to the demand pressure said that the CBN thus, reintroduction of the Dutch Auction system (DAS) to replace the JFEM. DAS was designed to achieve a realistic exchange rate of the naira that will stem the excessive demand for foreign exchange conserve the dwindling external rate for the naira.
The DAS was conceived as a two —way auction system in which both the CBN and authorized dealers would participate in the foreign exchange market to buy and sell foreign exchange. The CBN is expected to sell a price buyers are willing to buy. The marginal rate, which by definition is the rate that clears the markets, represents the “ruling rate at the auctions.
According to CBN (2008), the since its introduction in July 2002, the DAS has been largely successfully in achieving the objectives of the monetary authority.
Generally, it has assisted in narrowing the arbitrage premium from double digit to a single, until the emergence of irrational market exuberance in the fourth quarter of 2003. Secondly, the DAS has enhanced the relative stability of the naira, vis-à-vis the US dollar the intervention currency. Specially, the naira has fluctuated within a single digit band, since the DAS was introduced in July 2002.
Thirdly it has also assisted in stemming the spate of capital flight and curbing rent-seeking amongst market operations. The evil effect of having an over-values exchange rate is legion. The most critical is the creation of a high prosperity to import because an over-valued currency makes imports cheaper and promotes balances of payments deficits. We experienced an unstable demand for foreign exchange control mechanism to support the over-valued naira. These debts, with the accrued interest and penalties constitute more than so percent of Nigeria total external debt. Indeed, most of these serves not incurred by the government but Nigeria private sectors, induced by the over-valued naira, we sometimes, remember the day the rate was. $1.8 to the Nigeria with nostablgia forgetting to recognize that it did incalculable damage to our economy. Worst of all it destroyed our agricultural base as food import was not spared. A new culture show and difficult to charge and at a painful cost that the current aggravation and discomfort in the land. Clark (1999).
A realistic exchange rate would also ensure that the naira is not over-valued in real terms, and that our external sector remains competitive. In our quest for a realistic naira exchange rate, the CBN employs the purchases power parity (PPP) model as guide to ganged movement in the nominal exchange rate and determine deviation from the equilibrium exchange rate Click (2002).
1.2 STATEMENT OF PROBLEM
In any country of the world, foreign exchange policy is an important policy instrument. Up to the time of SAP it appeared that Nigeria’s exchange rate policy tended to encourage over valuation of the discourage non-oil export and over dependence on imported inputs. The overriding exchange rate management was concerned apparently with medium and long-term balance of payment objectives. In other words exchange rate policy was not geared towards the attainment of long-run equilibrium rate that word equilibrates the balance of payment in the medium and structural adjustment objective e.g. export diversification.
Nigeria exchange rate has been more volatile in the post SAP period due to it excessive exposure to external shocks. The effect of the recent global economic meltdown on Nigeria exchange rate was phenomenon as the naira exchange rate vis–a-vis the dollar rose astronomically for about 120/s to more than 1 501s (about 50% increase) between 2008 and 2009. This is attributable to the share drop in foreign earnings of Nigeria as a result of the persistent fall of crude oil price, which plunged from an all time high of US $147 per barrel in July 2007 to low of US545 barrels in barrels in December 2008 (CBN 2008). Although various factors have been adduced to the poor economic performance of Nigeria, it is necessary to examine the growth process of Nigeria under the various exchange regimes that had been adopted in the country and that is the main course of this study.
1.3 PURPOSE OF THE STUDY
The main purpose of the study is to ascertain impact of exchange Rate Policy Management on the economic growth of Nigeria. The specific purposes of the study are:
To ascertain impact of exchange rate policy and management on the economic growth of Nigeria
To assess the regulatory factor facing exchange rate policy and management on the economic growth of Nigeria.
To analyzed the options for evolving a viable exchange
To identify the problems of exchange rate policy and management on the economic growth of Nigeria
To find solution to the problems of exchange rate policy in Nigeria.
To add to the literature on impact of exchange rate policy and management on the economic growth of Nigeria.
1.4 THE RESEARCH QUESTION
The following question shall be use in the course of this research study.
What is exchange rate policy and management?
Do you think that exchange rate policy and management have had any impact on the countries economic?
Is the Nigerian economy experiencing any impact from the exchange rate policy and management today?
What are the exchange rate policy and management?
1.5 RESEARCH HYPOTHESIS
The following are the research hypothesis:
Ho: There is a relationship between exchange rate policy and management have made no significant impact on economic growth of Nigeria.
Hi: There is a relationship between exchange rate policy and management have significant impact on economic growth of Nigeria
1.6 SIGNIFICANT OF THE STUDY
This research is on the impact of exchange rate policy and management on the economic growth of Nigeria. Therefore the study is focused towards gaining details insight on exchange rate policy and management in Nigeria. This research project will be beneficial to the government, people in the society who have the quest for more knowledge on the ascertain impact of exchange rate policy and management on the economic growth of Nigeria. The study is also intended to provide benchmark for central bank of Nigeria on the exchange rate guideline in Nigeria and to other banks based on their activities in foreign exchange transaction, especially for exchange rate management.
Finally, this study will be good help to the banking and finance student of the rivers state polytechnic and higher institutions of learning on the ascertain impact of exchange rate policy and management on the economic growth of Nigeria.
1.7 SCOPE OF THE STUDY
The scope will covers selected bank in Rivers State. The scope shall further cover the exchange rate policy and management in Nigeria.
1.8 LIMITATION OF THE STUDY
According to Baridam (1990:27) every research study has certain limitation which falls short of the ideas which the research has established or recognized. Given the critical and sensitive nature of the topic under this study, the researcher work. Paramount among these constraint is the time frame within the work was expected to be completed. The time period of completion for the work was too small considering the fact the topic covered the whole of the balancing sector.
Besides, the cost of embarking on this project work considering the volume of work involved also give its own constraint on the research work as the
researcher was not financially buoyant enough to carry out all the investigation deem it necessary to carried out.
Furthermore, the people interviewed also gives their own limitation as most information soughed for mainly from the selected banks in Rivers State. The research work gave him a tough time to do its worthy to mention that the mayor source of this work was on few Textbooks.
1.9 ORGANISATION OF THE STUDY
Chapter I of this study introduced the problem statement and described the specific problem addressed in the study as well as designed components.
Chapter 2: Presents a review of literature and relevant research associated with the problem addressed in this study.
Chapter 3: Presents the methodology and procedure used for date collection and analysis.
Chapter 4: Contains an analysis of the data and presentation of the results.
Chapter 5: Offers a summary and discussion of the researcher’s findings, implication for practice and recommendation for future research.
1.10 DEFINITION OF TERMS
Management: Management is the organizational process that includes strategic planning, setting objective, managing resources deploying the human and finance assets needed to achieve objectives and measuring results.
Impact: The impact is the striking of one body against another, collision see synonymous at collision.
Exchange Rate Policy: Exchange rate policy these is influenced the exchange rate by using its gold and foreign currency reserves held by its central bank to buy and sell it currency.
Growth: These refer to an increase in some quality over time. The quality can be physical (e.g growth in height, growth in amount of money) or abstract (e.g. system becoming more complex an organism becoming more nature).
Interest Rate: Is the rate at which interest is paid by a borrower for the use of money that they borrowed from a leader.