EFFECT OF EXCHANGE RATE FLUCTUATION ON IMPORTED GOODS IN NIGERIA.
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EFFECT OF EXCHANGE RATE FLUCTUATION ON IMPORTED GOODS IN NIGERIA.
Chapter one
INTRODUCTION
1.1 Background of the Study
Since the end of the Civil War, Nigeria’s economy has seen significant turbulence. Following the exchange of the Nigerian Pound to Naira in 1973, fixed exchange rates were established for both the Pound sterling and the US Dollar at £0.5833 and US 1.5200, respectively, to N1.00.
This has caused havoc to the Nigerian economy in that the exchange rate of the Naira to both the Dollar and the Pound sterling has been observed, as well as the highest level of inflation.
As a result, Nigeria has lost its financial credibility in the outside world, while at home, the exchange rate is net in our favour, and the country has experienced the greatest degree of brain drain.
Exchange rate swings have affected most of our industries that import all or part of their raw materials, resulting in production below capacity utilisation and unemployment. Again, due to the exchange rate, most locally produced goods are pricey, pricing them out of the market.
The exchange rate between Naira and Dollar impacts the market price of items. As a result, exchange rate fluctuations affect import prices, either upwards or downwards, depending on the scenario.
At the same time, it impacts the price of locally manufactured items because the majority of raw materials and machines are imported, and the prices at which the currency of exchange is secured have an impact on the pricing, either positively or negatively.
Controlling exchange rate fluctuations in the money market has been a challenge for both the government and individuals, as well as corporations and individual enterprises.
This has led to the ongoing quest for a viable economic order for the country, which has resulted in the establishment of FEM.
a. Determine the Naira’s realistic exchange rate.
b. Using the topic mechanism to direct resources towards the most deserving sectors of the economy.
The currency rate has a beneficial influence on importing. When the exchange rate is high, imports of goods fall, with the exception of needs, which have a minor reaction to the currency rate.
The exchange rate has a direct and positive influence on the pricing of imported items. However, in fact, imports react faster to changes in domestic revenue than to changes in the real exchange rate.
Again, if prolonged, a change in the real exchange rate will eventually have a considerable impact on both import and export levels. In contrast, imports have been increasing since 1985.
When the Naira depreciates, the exchange rate moves downward, making imports highly expensive; conversely, when the Naira appreciates, imports become more affordable.
Adverse fluctuation rates result in losses or reduced profits due to increases in the costs of inputs used in the production process. Nigeria relies heavily on imported inputs and raw materials to keep its diverse manufacturing industries running.
As a result, with each Naira depreciation, the price of imported inputs soars in terms of Naira, and this is transmitted to the whole economy in the form of higher prices of goods and services and intolerable inflation, because a fall in the international value of Naira makes Nigeria goods cheaper in foreign currencies and foreign goods more expensive in Naira.
This change in the Naira exchange rate tends to increase the quality of goods Nigeria exports and reduce the From 2000 to 2012, Nigeria has the highest inflation rate among its trading partners.
Whether Nigerian commodities become more or less competitive in the global market is determined by whether the gain in Nigerian competitiveness was justified by real-world economic events such as technological improvement, changes in external terms, taxation changes, and so on.
Adverse movements in exchange rates provide producers with a particular edge in cost competitiveness. The primary negative effect of the Naira exchange rate drop is that it makes planning extremely difficult.
Nearly correct plans cannot be made since the exchange rate continues to fall, rendering company estimates wrong. Marketing specialists and managers are thus faced with the challenge of developing accurate strategies for marketing plans and operations.
1.2 Statement of the Problem
Exchange rate fluctuations and their influence on the prices of imported commodities in Nigeria have provided a significant problem to financial institutions, the importance of various items, and the Nigerian public in general.
Based on this, the researcher was compelled to do more research to determine the impact of exchange rate fluctuations on imported commodities in Nigeria. As a result, the scope of this study is limited to imported items in Nigeria.
1.3 PURPOSE OF STUDY
The purpose of this study is to determine the impact of exchange rate fluctuations on imported commodities in Nigeria.
The objective can be split down into the following:
i. Determine the cause of the upward rise in the pricing of commodities in Nigeria.
ii. Determine why Nigeria relies entirely on imported industrial inputs for its industrial needs.
iii. To explain why the Naira’s exchange rate has been steadily rising against other currencies.
1.4 Significance of the Study
The study’s conclusions will serve as a benchmark for marketing specialists and monetary authorities to evaluate and, if necessary, adjust current regulations.
This study will provide a clear perception by highlighting the strengths and weaknesses of foreign exchange management. A large majority of the Nigerian population has yet to accept the reality that foreign exchange markets are part of the economic recovery strategy.
1.5 RESEARCH QUESTIONS.
The study will be guided by the following questions:
1. Is there an increased trend in the price of items in Nigeria due to currency rate fluctuations?
2. Is Nigeria’s overdependence on imported industrial equipment related to a lack of economies of scale?
3. Do the cost of Nigerian-made goods fluctuate with those of imported goods?
4. Is the continual rise in the price of imported items in Nigeria due to the Naira-to-dollar exchange rate?
1.6 Scope of the Study
The study examines the influence of exchange rate fluctuations on import prices in Nigeria.
The study covers the period 2000-2012 and is limited to some financial establishments and importers in the Lagos metropolis because the researchers believe that the general position in Nigeria will be the same as the result of the Lagos metropolis because exchange rate fluctuations occur throughout the country.
The study also looked at the annual average exchange rates of the Naira, retail prices of some locally manufactured/packaged goods, pre and post SAP retail price indices of some select goods imports, and the Naira’s annual rate.
1.7 Definition of Terms
The exchange rate is the price of one currency in relation to another. A more accurate definition of an exchange rate is the number of units of a foreign currency and vice versa.
Nominal Exchange Rate
The nominal exchange rate is expressed as units of domestic currency per unit of foreign exchange.
Trade Tables
These are goods that can be exchanged on the worldwide market.
Non-Trade Table
These are an economy’s outputs that can be consumed domestically and consequently exported, such as electricity.
Misalignment
This is the difference between the current real exchange rate and its equilibrium value.
Purchase Power Party (PPP)
The purchasing power parity rate is the nominal exchange rate route that maintains the exchange rate constant during a certain time period. The Purchasing Power Parity between two countries is defined as either the ratio of the currencies’ price levels (absolute PPP) or the product of the exchange rate in a base period and the reciprocal of the absolute PPP (relative PPP).
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