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IMPACT OF FOREIGN EXCHANGE MANAGEMENT ON THE NIGERIAN ECONOMY.

IMPACT OF FOREIGN EXCHANGE MANAGEMENT ON THE NIGERIAN ECONOMY.

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IMPACT OF FOREIGN EXCHANGE MANAGEMENT ON THE NIGERIAN ECONOMY.

Chapter one

INTRODUCTION

1.0 Background of the Study

This study will look at how Nigeria’s foreign exchange rate policy and management affects its economic growth. Attention is concentrated in this direction because Nigeria, as a growing country, must prioritise economic growth and development.

A developing economy will go a long way towards creating job opportunities for the rising population and raising the overall level of living. The foreign exchange position has deteriorated as a result of the continued decline in the price of crude petroleum, Nigeria’s previous significant foreign exchange source in the global market.

In light of this, Nigeria, which is endowed with abundant natural and human resources, must seek to utilise all of them for economic development.

The administration of foreign exchange presents a significant challenge to monetary authorities, as evidenced by the fact that foreign exchange plays an important role in a country’s economy.

As a result, regular assessments of the influence of foreign exchange on the economy are required to ensure that the development process continues.

Foreign exchange management in a deregulated economy could be a system of exchanging one country’s currency for another in a free trade economy. The interconnectedness of countries in terms of trade has developed to the point where no country can claim perfect self-sufficiency in its resource requirements.

However, a country’s level of exposure to international trade dictates its participation in Foreign Exchange Management. For example, a country with an adequate supply of foreign money would import basic raw materials required for the economic development process; conversely, an insufficient supply of foreign exchange puts pressure on external reserves and severely limits the country’s development plans.

The Naira currency rate has been one of the most contentious issues for Nigerian monetary authorities since the second-tier Foreign currency Market (SFEM) was established in 1986.

As all licenced banks became authorised foreign exchange traders, the number of market participants increased dramatically. It has also posed significant regulatory and supervisory issues for the Central Bank of Nigeria (CBN).

1.1 Statement of the Problem

The issue of insufficient foreign exchange availability remains a key concern, as the Central Bank of Nigeria is the market’s primary fund supplier.

The Apex Bank’s efforts continue to be hampered by expansionary fiscal operations driven by individual demand. Capital flight persists as many remain concerned about the anticipated depreciation, despite the fact that achieving FX on a one-to-one basis remains difficult.

Despite the significant penalty, the issue of numerous bids has persisted. Monitoring has been challenging due to the prevalence of incomplete data.

1.2 Significance of the Study

Foreign exchange management is only required in countries that engage in international trade as opposed to a closed economy. This necessity is emphasised by the economic theories of comparative advantage, comparative cost, and international resource endowment differentials.

This study is expected to demonstrate that a realistic exchange rate policy should minimise excessive demand for foreign exchange, particularly for the importation of finished goods and services

as well as eliminate the current economic distortions and encourage non-oil exports. It is also believed that a realistic exchange rate will increase the rate of economic growth by attracting more foreign capital and investment at a cheap basis.

1.3 Objectives of the Study

The purpose of this study is to examine the Nigerian Monetary Authority’s (Central Bank of Nigeria) previous experiences with foreign exchange management and to determine whether or not exchange rates are properly controlled by assessing their influence on the Nigerian economy.

1.4 Research Methodology

Collection of Data

The data for this analysis were acquired from a variety of secondary sources and documentary publications, including the Central Bank of Nigeria, the National Bureau of Statistics (NBS), and the Nigerian Institute for Social and Economic Research (NISER), among others.

Secondary time series data that reflect the relationship between exchange rate policies and export performance are significant to the study. These data include factors such as the real exchange rate, export value, interest rates, GDP, and domestic price levels.

These macroeconomic variables have a direct and indirect impact on the velocity and direction of trade between one country and the rest of the world. The aforementioned characteristics influence the propensity and capacity to export.

Method of Analysis

OLS regression techniques will be used to estimate the influence of exchange rate policies on Nigerian exports between 1981 and 2007.

Ordinary least squares regression is a simple estimate technique that has desirable optimum features such as linearity and unbias.

The OLS regression is based on the model shown below.

GDP equals Bo + B1 Export + B2 EXCR + B3 Import + µ

Where:

EXPORT = Total exports (oil and non-oil).

EXCR = Exchange Rate.

GDP represents Gross Domestic Product at Market Prices.

IMPORT denotes total imports (oil and non-oil).

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