EFFECT OF EXCHANGE RATE POLICIES ON THE NIGERIAN MANUFACTURING SECTOR
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EFFECT OF EXCHANGE RATE POLICIES ON THE NIGERIAN MANUFACTURING SECTOR
Chapter one
1.0 Introduction
1.1 Background of the Study
The composition of a country’s manufacturing sector is critical to its economic existence. This is, however, influenced by a variety of macroeconomic variables, including the induced investment multiplier, stock exchange performance indexes, interest levied on loanable money, exchange rates, and exchange rate rules.
Foreign exchange profits from international trade transactions and external aid are critical to the economic development of Less Developed Countries (LDCs). All other things being equal, earned foreign exchange resources can increase factor supplies and promote the development of the manufacturing sector, technical skills, and knowledge, all of which should improve domestic capital formation.
Exchange has traditionally been a critical component in the development planning process of Less Developed Countries (LDCs). Regardless of a Less Developed Country’s (LDC) foreign exchange position, good resource management is critical for the efficient and effective operation of the manufacturing sector.
Nigeria went experienced a variety of growth experiences that necessitated careful use of its foreign exchange resources following independence. Inadequate foreign money was a fundamental limitation in the implementation of the First National Development Plan, 1962-1968, a position exacerbated by the ongoing civil war, which concluded in January 1970.
Nigeria’s international position improved dramatically between 1970 and 1980 as crude oil prices rose significantly in 1973/74 and 1979. However, foreign exchange management appeared to be overly short-term in character, failing to take into account potential long-term developments in the global economy.
Following the fall of the global oil market in the early 1980s, Nigeria resumed a very strong foreign exchange position, particularly in light of past promises.
Resource management and exchange policy were initially implemented with a short-term strategy, but became more dynamic after 1986, when it became clear that the economy’s issues were more fundamental than previously thought.
Despite the fact that foreign exchange management has sufficiently met the needs of the economy since 1986, it has revealed numerous concerns that must be addressed when designing future national development strategies.
The purpose of this article, in the context of efforts to improve the efficiency of foreign exchange management in Nigeria, is to review and evaluate foreign exchange policies (management techniques) and their influence on the Nigerian manufacturing sector.
1.2 Statement of the Problem
The exchange rate influences several economic variables, including price stability, economic growth, employment, and the balance of payments. The Nigerian economy’s reliance on imports for raw materials, capital equipment, and technical expertise for the manufacturing sector means that any significant volatility in the Naira exchange rate will have an impact on economic growth.
A significant increase in raw material costs, which raises manufacturing costs and causes price instability in the local market, affecting economic growth and development.
Most measures implemented by the Nigerian government from time to time focus on the gap between official rates and parallel market rates (unofficial rates), but the question is whether these policies have successfully merged the two currency rates in the economy.
Given the importance of a non-inflationary exchange rate that can encourage non-oil exports and capital inflows while discouraging imports and capital outflows. Merger parsing should not be the desired outcome.
In the early stages of the structural adjustment process, the formerly separate first and second tier exchange rates were merged in July 1987. However, this did not fix any issues. Distortions quickly returned in the foreign exchange market, and the stated objectives of exchange rate policy were not met.
To strengthen Nigeria’s production sector, her government has implemented policies such as the Second Tier Foreign Exchange Market (SFEM), Autonomous Foreign Exchange Market (AFEM), Inter Bank Settlement (IBS), Wholesales Dutch Auction System (WDAS), and Retail Dutch Auction System (RDAS)
which were recently implemented in response to fluctuations in the Naira exchange rate caused by the global economic meltdown. However, the following questions remain unanswered:
i. To what extent have the Nigerian government’s exchange rate policies improved the performance of the manufacturing sector?
ii. What are the potential effects of interest rate policy on the Nigerian manufacturing sector?
iii. What happens to a firm’s earnings, turnover, and investment when the exchange rate fluctuates or is unfavourable?
This research will explore these concerns in order to estimate the influence of exchange rate policy on the Nigerian manufacturing sector.
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