THE IMPACT OF EXCHANGE RATE POLICY ON THE ECONOMIC GROWTH OF NIGERIA (A STUDY OF CENTRAL BANK OF NIGERIA)
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Exchange rate is an important economic metric as it reflects underlying strength and competitiveness with World economics whether fixed or floating, exchange rate affects macro-economic variables, such as import, export, output, interest rate, inflation rate etc.
Chong and Tan (2008) empirical analysis revealed that the exchange rate is responsible for changes in macro economics fundamentals for developing economics. Exchange rate fluctuations influence domestic’s price through their effect on aggregate supply and demand. In general, when a currency depreciates it result in higher import prices of the country. The potentially higher cost of imported inputs associated with an exchange rate depreciation increases marginal cost and leads to higher price of domestically produced goods (Kandil, 2004). Also, import competing firms might increase to improve profit margins. However, the extent of such price adjustment depends on a variety of factors as such market structure, the relative number of domestic and foreign firms in the nature of government exchange rate policy and product substitutability (Fouguin rate 2001). In the bid to achieve macroeconomic stability, Nigeria’s monetary authorities have adopted various exchange rate arrangements over the years. It shifted from a fixed regime in the 1960s to a pegged arrangement between the 1970 and the mid 1980s and finally, to be various types if the floating regime since 1986 (Dada and Oyerauti, 2001), following the adoption of the Structural Adjustment Programme (SAP). The fixed exchange rate regime included an over valuation of the Naira and was supported by exchange control regulation that engendered significant distortions in the economy. That gave vent to massive importation of finished goods with the adverse consequences for domestic product, balance of payments positions and the nation’s external reserves level. Moreover, the period was bedeviled by sharp practices perpetrated by dealers and end-users of foreign exchange (Adlowoccan, 2012).
These and many other problems informed the adoption of a more flexible exchange rate regime the content of the Structural Adjustment Programme (SAP), adopted in 1986. A regime of managed float has been the predominant characteristic of the floating regime in Nigeria 1986. Although the naira exchange rate has witnessed some period of relative stability since the implementation of the Structural Adjustment Programmes (SAP) in 1986. It continues depreciation, however, mars the economics performance of the country. The challenge of the combined effect of lives in oil price and exchange rate instabilities and economic growth for oil producing nations like Nigeria is really enormous.
Usman (2009) states that huge in flow of oil revenue are usually accompanied by budget deficits. There is no gain saying that Nigeria relies so much on revenue from oil exports, but it equally massively imports refined petroleum and other related products.
1.2 STATEMENT OF THE PROBLEM
In any country in the world, foreign exchange rate policy is an important policy instrument up to the time of Structural Adjustment Programme (SAP), it appeared that Nigerian’s exchange rate policy tended to encourage over valuation of the naira. Thus, in turn, encouraged import discourages non-oil export and over dependence on imported inputs. The overriding exchange rate management was made concerned apparently with medium and long term balance of payment objectives. In order words, exchange rate policy was not geared to words the attainment of long run equilibrium rate that would equilibrate the balance of payment in the medium and long term and facilitate the achievements of certain structural adjustments objective of export diversification.
Nigeria’s exchange rate been more volatile in the post Adjustment Programme period due to its excessive exposure to external shocks. The effect of the recent global economic meltdown on Nigeria exchange rate vis-à-vis the dollar rose astronomically from about N/120/$ to more than N180/$ (about 50% increase) between 2008 and 2009. This is attributable to the sharp drop in foreign earrings of Nigeria as a result of the persistent fall of crude oil price which plunged from an all time high of use 147 per barrel in December 2008 (CBN 2008). Although various factors have been adduced to the poor economic performance of Nigeria, it is necessary to examine the growth process of Nigeria under the various exchange rate regimes that had been adopted in the country, and that is the main thrust of this study.
1.3 OBJECTIVES OF THE STUDY
The broad objectives of the study include the following:
- To examine the effect of major exchange rate policies on economic performance in Nigeria.
- To examine exchange rate volatility of economic growth in Nigeria.
- To investigate the effects of foreign exchange rate and policies on the economic growth in Nigeria.
- To recommend ways on exchange rate policy of management on economic growth.
1.4 SCOPE OF THE STUDY
The scope of this work is resisted to the impact of exchange rate policy on economic growth of Nigeria, a case study of Central Bank of Nigeria. Obliviously, this researcher analysis both the positive and the negative economy conditions cost by exchange rate in the Nigeria economic. Since the Nigeria economic is the focal point of the researcher will not study the exchange rate policy in other country rather the exchange rate of naira to other currency will be study.
1.5 SIGNIFICANCE OF THE STUDY
The effect of the recent global economic crisis on Nigeria’s exchange rate has reaffirmed the urgent need for protection of the economy from exchange rate risk. Although, no country is immune to such global crises, the over-reliance on oil export revenue by Nigeria exposes her exchange rate and economy excessively to external shocks. Therefore, there is the need to conduct of research. This nature to examine the effect of exchange rate variability under different exchange rate regime on Nigeria economic growth.
1.6 RESEARCH QUESTION
According to the objectives of the study stated above the following are research questions that would be examined in the course of the study.
- Does CBN of Nigeria play any role in exchange rate policy on economic growth in Nigeria?
- Does the foreign exchange rate and policies affect the economic growth in Nigeria?
- Does exchange rate policy have any effect in the performance of Nigeria economy?
- Does exchange rate of Nigeria been volatile over the years?
1.7 STATEMENT OF HYPOTHESIS
HYPOTHESIS ONE
Ho: There is no significant relationship between foreign exchange rate policy and effects in the performance of Nigeria economy.
Hi: There is a significant relationship exchange rate policy and effect in the performance of Nigeria economy.
HYPOTHESIS TWO
Ho: CBN play no role in exchange rate policy on economic growth in Nigeria
H2: CBN plays a significant role in exchange rate policy on economic growth in Nigeria.
1.8 LIMITATION OF THE STUDY
The limitation of the study was difficult for a researcher by transportation problem and road congestion. Some of the staff shy away from answering the questions for fear of publication which they considered to be detrimental to their operation. They delayed to return the questionnaire, but that notwithstanding but the research work was conducted successfully.
1.9 DEFINITION OF TERMS
Growth: This is the process of increase in size economics activity etc. of an organization (Imala, 2005).
Capital Stock: Ownership shares of a corporation authorized by it articles of incorporation. The money value assigned to a corporation’s issued share (Akpabio, 2008).
