AN ASSESSMENT OF EXCHANGE RATE POLICY MEASURES IN NIGERIA
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AN ASSESSMENT OF EXCHANGE RATE POLICY MEASURES IN NIGERIA
CHAPTER ONE
1.0 INTRODUCTION
The price of one country’s unit quoted in terms of another country’s currency, i.e. the mathematical or quantitative expression of one country’s currency in terms of another’s.
The exchange rate is a critical price mechanism that affects the movement of other prices in the domestic economy and attempts to balance the balance of payments.
It is also a variable that influences a country’s economic activities through the impact on investment, output, and inflation, among other things. This eventually leads to a country’s currency depreciating.
Insufficient foreign exchange earnings. A result of the dramatic drop in oil prices, inflation in 1984 reached about 40% as a result of a severe shortage of imported products and services.
SAP was used in July 1986 to, among other things, get the price correct by using foreign currency rate liberalisation as a century tool.
In pursuit of the second tier foreign exchange market was introduced in late September 1986, and since that time the naira has depreciated sharply against the US dollar and other major currencies. This development indicates that the naira’s depreciation has played a role in Nigeria’s recent inflation trend.
1.1 Background of the study
During the period of independent currency rate management policy, the naira was pegged to foreign currencies such as the US dollar or the British pound, and a policy of steady naira appreciation was adopted. The ongoing external surplus in the balance of payments, which aided the naira’s rise due to crude oil exports.
This reduces the cost of competing food items based on agriculture and industrial raw resources, to the detriment of local products of equivalent goods. When it became clear that aggregate imports had outstripped total foreign exchange, import trade restrictions were implemented.
There was a planned depreciation of the naira in 1976. Following the implementation of SAP, the fixed exchange rate had to be discovered in September 1986, and a flexible exchange rate was created. With the foreign exchange being subjected to market forces through an auction mechanism, the naira has become undervalued.
Exchange rate depreciation has since resulted in a domestic increase in the naira price of import and export to discourage importation, and the naira cost of imported items has also risen the dismal performance of the economy since the end of 1994 compelled the authorities to re-introduce the market-based approach under the autonomous foreign exchange market (AFEM) from January 1995 to October 1999.
The currency rate that fell from the fixed rate of N21.8881 to US$1.00. It depreciated further to N128.75 between 2002 and 205. However, relative stability was attained beginning in 2003, with the rate actually increasing between 2005 and 2008.
1.2 Statement of the Problem
For the period 1976-2004, evidence of exchange rate depreciation dominated the Nigerian exchange rate structure. The depreciation would generally be expected to have a favourable impact on Nigeria’s trade balance. However, the depreciation has reduced the value of the country’s exports, creating a deterioration in the trade deficit.
Since 1986, many types of market determined rates have been employed in an ongoing endeavour to set the exchange rate and secure a single exchange rate for the naira.
1. In 1986, the second tier foreign exchange market (SFEM) was established.
2. In 1987, the first and second tier markets were amalgamated to form the larger foreign exchange market (FEM).
3. The January 1987 interbank foreign exchange market (IFEM).
Despite these efforts, the Naira’s exchange rate has remained volatile throughout the period of deregulation. The necessity to analyse the impact of this fluctuating exchange rate on the economy is critical.
For an import-dependent economy, the stability of its currency rate is critical for credit distribution (Adebiyi, 2006). As a result, it is critical to investigate how the level of exchange rate fluctuation affects industry performance.
1.3 Objective of The Study
The major goals of Nigerian currency rate policy are to sustain the domestic economy’s value, maintain the external resource position, and ensure external balance without jeopardising the requirement for internal balance and the overall goals of macroeconomic stability.
The fundamental goal of this research is to discover, among other things, the following:
1. Analyse and describe the federal government of Nigeria’s previous exchange rate policies and measures.
2. To examine the current state of affairs and the possible future course of action.
3. To investigate issues related to the CBN’s management of foreign exchange for the benefit of development.
4. To give exchange rate recommendations to the CBN, commercial banks, and other financial institutions.
1.4 Research Hypothesis
To test the validity of the data base on the statement of generic problems, the following hypothesis was developed.
The null hypothesis.
Ho: The CBN’s intervention in the Nigerian foreign exchange market has not stabilised the Naira’s exchange rate.
b. A different theory
H1: The CBN’s intervention in the Nigerian foreign exchange market kept the Naira’s exchange rate reasonably constant.
1.5 Importance of the Research
This research will aid the CBN and other financial institutions in assuring critical exchange rate policy actions in relation to the current economic situation.
The study will also be of tremendous use to producers and importers in strategic industries in terms of saving and effectively utilising foreign exchange at their disposal.
Finally, the study is the writer’s contribution to research by making resources available for any researcher within to conduct similar research.
Furthermore, the study will serve as a guide towards developing an effective exchange rate, which will boost the country’s foreign reserves and the naira’s economic stability.
1.6 Scope of the Research
The research focuses on the policy measure of the Nigerian exchange rate from 2009 to 2012. The research is being conducted on the Central Bank of Nigeria Kaduna branch, with the goal of determining the impact and applications of the exchange rate policy utilised over the years.
1.7 Historical Background of Case Study
The need for an apex bank to manage the monetary and financial policies of the Nigerian economy was unavoidable and permanent, but the economy, which was established in 1912, performed some of the functions of the CBN prior to its establishment. It was largely in charge of printing legal tender cash.
To support financial market expansion, the WACB was kept at a set parity with British monetary management. To address this, the CBN was established on March 17, 1959, with a starting capital of N million.
The CBN Act of 1959 has been amended several times, and the CBN’s current legal banking is the execution of its functions bounded by CBN decree No. 24 of June 1991 (which supersedes the CBN Act of 1959 and its various amendments) and the bank and other financial industries (BOI) decree No. 25 of June 30, 1991.
Section 4 (1) states the CBN’s main goal as follows:
1. To print legal currency in the country.
2. To keep external reserves in place.
3. To protect the country’s currency’s international value.
4. To promote monetary stability and competent financial management.
5. To serve as the federal government of Nigeria’s bankers and financial advisers.
6. Act as a banker for other banks in the country.
The CBN’s headquarters are in Abuja, the country’s capital. Throughout the country, it has four zonal offices, twenty-one branches, and six currency centres. The bank is governed by a board of directors.
The governor serves as chairman of the board, along with five deputy governors and four full-time executive directors, all of whom are appointed by the federal government for a five-year term (in the case of the governor, deputy governor, and four executive directors) and a three-year term for other directors.
As a result, the key goals of monetary policy in 2003/2006 are to maintain price and exchange rate stability. The policy should specifically aim to keep inflation in the single digits throughout the time by effectively controlling the increase of monetary aggregates.
Finally, further efforts will be made to address the continuing problem of excess liquidity in the banking sector, as well as its negative consequences on inflation and currency rates.
Furthermore, the Nigerian Central Bank would continue to ensure banking soundness and financial sector stability in order to improve payment system efficiency and the effective transmission of monetary policy to the real sector.
Furthermore, the CBN would strive to guarantee effective market rule enforcement in order to instill appropriate market expectations. The broad measures of money supply (m2) will continue to be the intermediate aim of monetary policy, as they have been in prior years.
Thus, an average growth rate of 16.25% in M2 is expected to be maintained over the two-year period, with a maximum increase of 16.0% in 2009 and 16.5% in 2010/2011.
1.8 Definition of Terms
1. Foreign exchange: The mechanism of exchanging one country’s currency for the currency of another country; the location where money is exchanged.
2. Exchange rate: The process of exchanging one country’s money for the same amount of money in another.
3. Inflation is defined as a continuous rise in the price of goods and services as a result of the enormous value of money in the calculation utilised in the exchange of the limited available goods and services.
4. Monetary policy: it was excessively causing high demand pressure in foreign exchange markets and a sustained depreciation of the market’s naira segments.
5. Autonomous foreign exchange market (AFEM): an AFEM is a land of market established for the purpose of foreign exchange but operated independently of government intervention.
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