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THE EFFECT
OF EXCHANGE RATE FLUCTUATION ON THE NIGERIA ECONOMY (1980 – 2010)
ABSTRACT
This
research work is centred on the effect of exchange rate fluctuation on the
Nigeria’s economy with special emphasis
on purchasing power of the average Nigeria and the level of international trade
transaction. Without exchange rate the exchange of goods and services among trading
partners will be faced with a lot of problems, which may virtually narrow it
down to trade by barter. This exchange also is used to determine the level of
output of the country. Hence, the rate
at which exchange fluctuates calls for a lot of attention. However, with
already existing exchange rate policies, a constant exchange rate has not been
attained. The rate by which exchange rate fluctuates brings about uncertainty
in the trade transaction, and also the rate of naira has been unleashed and
continues to depreciate. This has resulted to declines in standard of living of
the population increase in costs of production (this is because most of the raw
materials needed by industries are usually imported), which resulted in
cost-push inflation. We made use of many tests, like the t-statistics table,
f-statistic table and the chi-square etc. When we found out real exchange rate
has a positive effect on the GDP.
CHAPTER ONE
The exchange
rate is perhaps one of the most widely discussed topic in Nigeria today. This
is not surprising given it’s macro-economy importance especially in a highly
import dependent economy as Nigeria (Olisadebe, 1995:20). Macroeconomy policy
formulation is a process by which the agencies responsible for the conduct of
economy policies manipulate a set of instrumental variables in order to achieve
some desire objectives.
In Nigeria
these objectives include achievements of domestic price stability, balance of
payment equilibrium, efficiency, equitable distribution of income and
economy and development.
Economy refers to the continuous increase in a
country’s national income or the total volume of goods and services, a good
indicator of economy is the increase in
Gross National Product (GNP) over a long period of time. Economy development on
the overhead implies both structural and functional transformation of all the
economy indexes from a low to a high state (Siyan, 2000:150) one of the macro
–economy variables of importance is the exchange rate policy country.
Exchange
rate policy involves choosing where foreign transaction will take place
(Obadan, 1996). Exchange rate policy is therefore a component of macroeconomy
management policies the monetary authorities in any given economy uses to
achieve internal balance in medium run. Specifically internal balance mean the
level of economy activity that is consistent with the satisfactory control of
inflation. On the contrary, external or sustainable current account deficit
financed on lasting basis expected capital inflow.
It is
important to know that economy objectives are usually the main consideration in
determining the exchange control. For instance from 1982 – 1983, the Nigerian
currency was pegged to the British pound sterling on a 1.1 ration. Before then,
the Nigerian naira has been devalued by 10%. Apart from this policy measures
discussed above, the Central Bank of Nigeria (CBN) applied the basket of
currencies approach from 1979 as the guide in determining the exchange rate was
determined by the relative strength of the currencies of the country’s trading
partner and the volume of trade with such countries. Specifically weights were
attached to these countries with the American dollars and British pound
sterling on the exchange rate mechanism (CBN, 1994). One of the objectives of
the various macro– economy policies adopted under the structural adjustment
programme (SPA) in July, 1986 was to establish a realistic and sustainable
exchange rate for the naira, this policy was recommended in 1986 by the
International Monetary Fund (IMF). On exchange mechanism and was adopted in
1986.
The key
element of structural adjustment programme (SAP) was the free market
determination of the naira exchange rate through an auction system.
This was the
beginning of the unstable exchange rate; the government had to establish the
foreign exchange market (FEM) to stabilize the exchange rate depending on the
state of balance of payments, the rate of inflation, Domestic liquidity and
employment. Between 1986 and 2003, the federal Government experimented with
different exchange rate policies without allowing any of them to make a
remarkable impact in the economy before it was changed. This inconsistency in
policies and lack of continuity in exchange rate policies aggregated unstable
nature of the naira rate. (Gbosi, 1994:70).
1.2
STATEMENT OF THE PROBLEM
The exchange
rate of the naira was relatively stable between 1973 and 1979 during the oil
boom er (regulatory require). This was also the situation prior to 1990 when
agricultural products accounted for more than 70% of the nation’s gross
domestic products (GDP) (Ewa,2011:78).
However, as
a result of the development in the petroleum oil sector, in 1970’s the share of
agriculture in total exports declined significantly while that of oil
increased. However, from 1981 the world oil market started to deteriorate and
with it’s economy crises emerged in Nigeria because of the country’s dependence
on oil sales for her export earnings. To underline the importance of oil export
to Nigerian economy, the gross national product (GNP) fell from $76 billion in
1980 to $40 billion in 1996, a number of economy became negative as result of
the adoption of structural adjustment programme (SAP).
This major
problem which this study is designed to solve is whether the exchange rate has
any bearing on Nigerians economy an d
development. While some Economist dispute the ability of change in the real
exchange rate to improve the trade balance of developing countries (Hinkle,
1999:21) because of elasticity of their low export, others believe that
structural policies could however change the long-term trends in the terms of
trade and the prospects for export led . Instabilities of the foreign exchange
rate is also a problem to the economy.
1.3 OBJECTIVE OF THE STUDY
the
objective of the study is to show the effect of exchange rate on gross domestic
product and hence how this effect the
and development of the Nigerian economy identifying the impacts of the
unstable exchange rate of the naira on these major macro-economy variables
would however, depend on the conditions prevailing in the economy at a given
time.
The main
objectives of exchange rate policy in Nigeria are:
To present the value of the domestic
currency.
To maintain favourable external reserve
position.
To ensure price stability and price
stability and price levels which are consistent with those of our trading
partners.
To have a realistic exchange rate which
will remove the existing distortions and distortions and disequilibrium in the
external sector of the economy.
To have a stable and realistic exchange
rate that is in consonance with other macro-economy fundamentals.
1.4
FORMULATION OF THE RESEARCH HYPOTHESIS
Based on the
objectives of the study, the following hypothesis were formulated.
Ho: Exchange
rate fluctuation has no significant impact on Nigeria economy and development.
Hi: Exchange
rate fluctuation has a significant impact on Nigerians economy and development.
1.5
SIGNIFICANCE OF THE STUDY.
The
significance of this research work lies in the fact that if the cause of the
unstable exchange rate of the naira is identified and corrected, the economy
will rapidly grow and develop into an advance one. This is so because if the
unstable exchange rate of naira is proved to be affecting the macro- economy
major variables badly, including Real exchange rate, Real interest rate,
inflation rate, gross domestic product and trade openess of the country,
attempts should be made to stabilize the exchange rate. This is because these
variables are gauge for the measurement of
and development of any economy. Importantly, this study would help the
government and the central bank of Nigeria (CBN) to identify the strength and
weakness of each foreign exchange system and hence adopt the policy that suits
the economy best. This will definitely enhance
and development of the economy, the study will also serve as a guide to
future researchers on this subject.
1.7 THE SCOPE OF THE STUDY
This
research work is designed to cover the period 1980-2009 a period of thirty
years. The scope consist of the regulatory and deregulatory exchange rate
period i.e. the fixed exchange rate and the floating exchange rate period. The
study is based on core macro-economy performance of Nigeria between 1980-2010
more so, it rests can core economy and
development in Nigeria for the period of thirty-one years.
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