THE IMPACT OF EXCHANGE RATE FLUCTUATION ON THE NIGERIA ECONOMIC GROWTH (1980-2010)

THE IMPACT OF EXCHANGE RATE FLUCTUATION ON THE NIGERIA ECONOMIC GROWTH (1980-2010)

CHAPTER ONE

INTRODUCTION

1.1      Background of the Study

Exchange rate is the price of one country’s currency expressed in terms of some other currency. It determines the relative prices of domestic and foreign goods, as well as the strength of external sector participation in the international trade. Exchange rate regime and interest rate remain important issues of discourse in the International finance as well as in developing nations, with more economies embracing trade liberalization as a requisite for economic growth (Obansa, Okoroafor, Aluko and Millicent, 2013). In Nigeria, exchange rate has changed within the time frame from regulated to deregulated regimes.

Ewa, (2011) agreed that the exchange rate of the naira was relatively stable between 1973 and 1979 during the oil boom era and when agricultural products accounted for more than 70% of the nation’s gross domestic products (GDP). In 1986 when Federal government adopted Structural Adjustment Policy (SAP) the country moved from a peg regime to a flexible exchange rate regime where exchange rate is left completely to be determined by market forces but rather the prevailing system is the managed float whereby monetary authorities intervene periodically in the foreign exchange market in order to attain some strategic objectives (Mordi, 2006). This inconsistency in policies and lack of continuity in exchange rate policies aggregated unstable nature of the naira rate (Gbosi, 2005). Benson and Victor, (2012) and Aliyu, (2011) noted that despite various efforts by the government to maintain a stable exchange rate, the naira has depreciated throughout the 80’s to date.Exchange rate, is the rate at which a currency purchases another (Jhingan, 2003), it is a reflection of the strength of a currency when measured against another country’s currency. According to Oloyede (2002), it is the price of one currency in terms of another, which is an important decision making variable in every nation, thus making it a crucial issue for any country desirous of economic growth as pointed out by Ahmed and Zarma (1997). Foreign exchange management is described as a technique that involves the generation and disbursement of foreign exchange resources so as to reduce destabilizing short-term capital flows. Consequently, in order to ensure that foreign change allocation and utilization are