EFFECT OF EXCHANGE RATE ON BALANCE OF PAYMENT IN NIGERIA.
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EFFECT OF EXCHANGE RATE ON BALANCE OF PAYMENT IN NIGERIA.
Chapter one
INTRODUCTION
1.1 Background for the Study
Since time immemorial, a country’s exchange rate and balance of payments have been viewed as a collection of metrics that can be used to assess a nation’s strength, particularly its economic strength. The balance of payments is an accounting record of all monetary transactions between a country and the rest of the globe.
Devaluation occurs when a fixed exchange rate diminishes the value of a currency in terms of other currencies. So, the goal of this study is to assess how a currency’s loss in value relative to another country’s currency affects the record of all monetary transactions between countries, whether visible or invisible throughout time.
This is critical because no nation, no matter how autonomous or self-sufficient, can live on its own; instead, it must have a relationship with other nations, which can be defined as goods and services moving one way and foreign exchange going the other.
When entering the country, a record of gains and losses may have been kept. As a result, a country’s foreign exchange and balance of payments can help stall, accelerate, or decelerate its overall growth and development. This will also have an impact on citizens, both positively and negatively, because it primarily concerns economic interactions.
Nigeria is currently experiencing major challenges with its foreign exchange rating (which is quite poor in contrast to other countries) and its balance of payments, which is plainly in disequilibrium and deficit. As a result, the government is regressing while the population visibly suffer.
This study is important in order to figure out why this is the case and how to address it.
1.2 Statement of Problem
Prior to the implementation of the structural adjustment plan (SAP) in 1986, Nigeria lacked well defined trade policies. The practice was the formulation of trade policies, meant to protect the local industries, thus the policies consist of qualitative import control administered through the import licencing system relatively high tariffs and the imposition of quantity restrictions on imports by way of quotas and the outright ban on certain goods and services and thus the exchange of currencies between Nigeria and other countries as a result, the exchange rate of the naira has been greatly affected.
Typical of these economic limitations was the exchange control system, which was largely based on the Exchange Control Act of 1962 and was strictly enforced during the civil war and until 1971, when the Nigerian currency became increasingly unconvertible.
However, the issue of foreign exchange inadequacy, reliance on the oil sector for exchange earnings, continuous depreciation of the naira exchange rate, and the inability to precisely determine the naira exchange rate that would ensure both internal and external balance.
The existence of a black market where the naira is illegally exchanged with other currencies has also affected the exchanged rate in the sense that the black market violates all policies and regulatory measures used by the government to control the exchange rate of the naira, and as such
the existence of these black markets has to a large extent distorted the effective measure of exchange of Nigerian currency (naira) with those of other currencies, and as the records (data)
1.3 Research Questions.
Readers will find this research study relevant because it addresses or answers the following questions:
i. To what extent does the exchange rate affect the balance of payment?
ii. What is the link between national income and balance of payments?
iii. How does the relative pricing of agricultural products affect the balance of payments?
1.4 Objectives of the Study
The study’s aims are listed as follows:
i. Determine the extent to which the exchange rate influences the balance of payment.
ii. Determine the link between national income and the balance of payments.
iii. Determine how the relative pricing of agricultural products affect the balance of payments.
1.5 Statement of Hypothesis
Hypothesis One.
The exchange rate has no substantial effect on the balance of payments.
Hypothesis Two
The national income is negatively correlated with the balance of payments.
Hypothesis Three
The relative pricing of agricultural products are negatively correlated with the balance of payment.
1.6 Significance of the Study
Stakeholders: Stakeholders will typically gain from this study since it will make known the relationship between exchange rate and balance of payment policy implications and recommendations, which will be of enormous help to policy makers and balance of payment.
Government: This study will also aid the government, particularly in terms of exchange transactions and balance of payments in Nigeria.
Researchers: It is also important for researchers, whether students or lecturers, as well as the general public, who are interested in the subject matter and how it might be used.
1.7 Scope of Study
Balance of payment deficits and unstable currency rates are worldwide trends that have not moved smoothly in Nigeria. This study investigates the relationship between balance of payments and exchange rate using 2010–2015 as a reference period.
1.8 Limitations of the Study
The study is faced with some constraints, which may possibly affect the generalisation of findings. The constraints include the following:
· Geographical Coverage: Investigating all accounting companies around the country may impact the work. Due to the dispersion of accounting companies throughout the country’s major cities, the researcher was unable to cover all areas.
· Material sourcing challenge: Obtaining current resources, textbooks, journals, and seminar papers related to the research topic proved challenging. In the end, most of those interviewed and probed were unable to provide critical information that may have served as ingredients in the work.
· The study used only a few firms as case studies, therefore the results may not be representative of other firms due to contextual differences.
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