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Role Of Foreign Exchange Market In Achieving A Realistic Exchange Rate For Naira


THE ROLE OF FOREIGN EXCHANGE MARKET IN ACHIEVING A REALISTIC EXCHANGE RATE FOR NAIRA

 

Role Of Foreign Exchange Market In Achieving A Realistic Exchange Rate For Naira

CHAPTER ONE

 

INTRODUCTION

 

1.1 BACKGROUND OF STUDY

Foreign exchange is an important economic variable as its appreciate or depreciation the performance of other macroeconomic variables in any economy.  Also, its real value can be used to assess the strength and the overall performance of any economy for these the viability of a nation’s economy is measured by its ability to achieve certain macro-economy objectives.  These include:

(a) High level of employment

(b) Stability in the exchange rate

(c) Satisfactory balances of payment situation and maintenance of the external value of the domestic currency.

(d) A reasonable level of economic growth and rising living standards.

(e) Avoidance of inflation.

(f) Distribution of income

 

Soon after the attainment of independence, Nigeria like most sovereign nations directed its economy exchange earnings could not remedy the situation.  At this period when agriculture was regulated to the background , Nigeria depended on oil, nevertheless, oil boom did not survive for long addition, stringent measure in foreign exchange to banks on global sect oral and monthly basis, import-licensing matching with the foreign exchange budget for import to enhance budget discipline alighted and blue print to economic buoyancy, made the structural adjustment programme (SAP) inevitable.  As designed by the federal government, SAP focuses in four areas; they are:

1. Finding the true value of naira through the setting up of viable second-tier foreign exchange market, now foreign exchange market.

2. Overcoming the observed public sector inefficiency through improved public expenditure programmed and the speedy rationalization of peristyle relieving the debt burden through a comprehensive researching of country\s medium and long term debt and encouraging a net inflow of foreign capital.  With the approval of the international monetary authorities.  Nigeria parted with the fixed exchange a rate system and adopted the floating exchange rate system in September 1986 as part of structural adjustment programme.  With this end the establishment market government hoped to achieve the following objective.

Carrying out through examination of the foreign exchange management policies used in Nigeria.
More efficient resources allocation.  Through substantial reduction, if not elimination of fraudulent and wasteful foreign exchange transition.
Determining the cause of foreign exchange instability.
A realistic exchange rate for the naira through the interplay of market forces.
1.2 STATEMENT OF THE PROBLEM

Why is a foreign exchange market being look upon as the instrument of achieving a realistic exchange rate for the naira?

Why has it just downed on them, our monetary authorities that realistic exchange rate adjustment other such bright prospects for the reaping and restricting of our battered economy?

Before dealing with these key issues, it is pertinent to take a cursory look at the main thrust of Nigeria’s macro-economic management.  Since 1982, there has been an intensification of these controls and the economy had been as it were under depression.  An over valued currency was very much in evidence.

 

1.3 PURPOSE OF STUDY

To what extent has the foreign exchange market achieved a realistic exchange rate for the naira?  This is the question, which this research study seeks to investigate.

To identify the role of force market achieving a realistic exchange rate.
To determine whether or not the high exchange rate of naira to dollar and other foreign currencies as a result if imperfections in the Nigeria foreign market.
To determine whether or not equilibrium of the force of demand and supply will lead to a realistic exchange rate.  Micheal P. Todare expressed that “Choice payment deficits resulting primarily from current account transaction has been controlled by exchange rate market.
1.4 SIGNIFICANCE OF STUDY

  Prudential Regulation And Central Banking Policy

It is common knowledge that the most serious problem facing the Nigerian financial authorities in recent times has been the effective management of the foreign exchange market in the determination of a realistic rate of the naira. The demand for foreign exchange resource has continued to exceed supply of foreign exchange because virtually every unit 09f a higher total liquidity of the system is a potential buyer pf the grossly diminished foreign exchange earnings.

Consequently, this topic: the role of foreign exchange market in achieving a realistic exchange rate for naira has of great importance to our country and also foreign exchange through the achievement of a realistic exchange rate which alliterate the rate of economic growth.

 

1.5 LIMITATION OF THE STUDY

This study is limited to a particular foreign exchange market in achieving a realistic exchange rate for the naira.

 
REFERENCE

 

Atoloy E.A.S. “The foreign exchange market; its genesis operation and prospects (an unpublished document 8th February 1998), page 3.

 

Meri Geaald M. “Leading issues in economic development (New York, Oxford University press, 1976 3rd Edition), page 2316.

 

Todaro Michael: Economics for a developing world (Longman, it publication 1877) page 330.

 
CHAPTER TWO

 

2.1 REVIEW OF RELATED LITERATURE

We have come across a good number of investigative studies on the subject matter.  But for clarity of purpose, we would review only few of the most empirical substantiated.

These include the work of Rey Echebiri, S. Olo Ayinde and Don Ike (1990).  Rey Achebiri’s write ups he narrated the history of exchange rate systems, the role of international monetary fund (IMF) in exchange rate determination in relation to Nigeria in September, 1986 of the floating exchange rate system as part of the Structural Adjustment Programme (SAP) of the true floating exchange rate system into SAP was at achieving among other objective a realistic exchange rate for the naira through the interplay of market forces from his finding.

These policy measure that operation of the market would be smooth and strictly determined by the international of the forces of demand and supply.  Based on the above underlying assumption, the writer sets out a body legally related premises.

The first group of premises is that the foreign exchange market shortly after the inception, began to prove intractable resulting in various amendments to the operational procedures of the market and international by the Central Bank of Nigeria (CBN).

 

2.2 Accounting to exchange the amendment started from the very first month of operation.  In the third bidding session, the average bid replace with the marginal rate as the basis for debiting successful bids at the bidding session.  Further amendment to the rules of the market sum the charge in frequency of dealing from weekly to fourthly sessions and the introducing the Dutch Auction system with effect from 22nd April 1987, if these amendment has no serious supportive influence on the price mechanism.

Echebiri is of the view that glaring interventions by the Central Bank if Nigeria were witnessed in five different occasions between 1986 and 1987.

 
REFERENCE

 

Echebiri Ray (1987) :Harmonizing rate as a means of reducing paces of locally produced commodities paper presented at the 5th quarterly meeting of Anambra State branch.

 

Ayindo S.O. (1970) Nigeria business digest October page 16.

 

Ike Don N. (1985) an appraisal of the structural adjustment programme in Nigeria paper presented at the workshop on SAP.

 
CHAPTER THREE

 

3.1 RESEARCH DEGINED AND METHODOLOGY

  Business Social Responsibility And Ethics

Source of data for this research work great reliance was placed on secondary data, that is those data that well in existence before the need to conduct this research work conceived and which related to the research topic are make up of the secondary data.

Secondary data is of great importance to the researchers in that, it gives them the knowledge which they acquire reading and collecting material from work alone by others and also help them to generate primary data in their efforts all the data used were taken from several issue of central bank of Nigeria principle economic indication, annual of reports, economic financial review, periodicals newspapers both business times of various issues a legion of text books and other unpublished term papers.

 

3.2 LOCATION OF DATA

In carrying out this research extensive use of libraries was made in other to get valuable books, magazine, journals newspapers helped a lot in carrying this research work.  This information was located from institute of management and technology library, British council library, national library, ESUT library

3.3 METHOD OF DATA

The researchers, in their effort to carry out this study of work used inevitable secondary data.

No questionnaire was administered due to the fact that the level of which study was carried out close not require to questionnaire and avoided by the researchers, not withstanding only the interview held by the above mentioned has proved a productive result.

 
CHAPTER FOUR

 

4.1 FINDINGS

Under this situation the foreign exchange market was to be financed through:

(i) OFFICIAL SOURCE:  Earning from exports (mainly crude oil)

(ii) FOREIGN LOANS:  This will be in the form of outright new loan investment funds and loan scheduling.

(iii) Autonomous source and it is estimated to provide only 15% of the fem source of funds the other two sources providing for 85% of the fund.

 

4.2 CONTROL OF FOREIGN EXCHANGE OPERATION BY CBN

Intervention is the market by the CBN is aimed at keeping the naira exchange at a level consistent with the development in the economy.  Since the foreign exchange market is the cornerstone of SAP and SAP is the real assent of self-reliance rates should not be too low as to dampen altogether the prosperity to import or the other hand, exchange rate should not be too high because a very high exchange rate will cause on increase in the cost of production.

Commercial and Merchant bank and other authorized dealers are allowed to bid for foreign exchange in the bidding sessions subject to ceiling allocated to each of them by the CBN.

 
CHAPTER FIVE

 

RECOMMENDATIONS AND CONCLUSION

 

5.1 RECOMMENDATIONS

From the literature and from the analysis of the character of market, we could see that our exchange rate system is the managed flexible type of the wide-band variety.  It is therefore in the context of this types of recommendation would be made.

In the interacting, the dollar rate should be adjusted to fluting, within the narrow band of N8.15 and N8.53 until such market fries would signal the need for a review the CBN monetary authorities should timely intervened to confirm exchange rate flexibility to this internal.

Moreover, in so far as the foreign loan source of finding is not certain the daily supply of foreign exchange to the market should be pegged at about N3 million.  Aggregated demand restrictions must be pursued along these lines in order for there to be pursued along exchange market devices of speculations.

And it is for this reason that we share the view of the minister hat official intervention in the foreign exchange market development through finding as will as its order lines and reasonable rate stability.  It is not a retinal economic policy to continue to allow aggregate demands for foreign exchange to be far in excess of finding which is a reflection of the nation’s earning ability and not a contrived attempt to deprive any one of foreign exchange.  Already we know that demand is instable and must be controlled.

  Environment Factors Affecting The Organization - Internal And External Appraisal

 

5.2 CONCLUSION

In retrospect, the object of this study is to find out if the foreign exchange market has achieved a realistic rate for the naira and it is has somehow, to what extent?

There are three conditions, which spelt out of necessary and sufficient for the achievement of a realistic exchange rate.

Fulfillment of one or two of these conditions would be only but a partial achievement.

The first condition would be met if the prevailing official exchange rate equals the equilibrium rate from the test carried out, the inference drama and the discussion that followed the result, the prevailing official exchange rate fell short of equaling the equilibrium exchange rate even when an interval characteristic of an adjustable pay regime such as ours was in built, inference by the central the actual performance of the market to chiverge significantly from its expected performance.  Giver that the first condition was not met, what conclusion can now be drawn from the second?

Secondly condition for realistic exchange rate is the fall in exchange rate.  From our findings, inflation rate was found to be perfectly correlated with exchange rate meaning simply that inflation grew with exchange rate adjustment.  This implies that a condition two was also no met.

Two conditions have failed.  How about the third condition?  Based on the primary findings, obtained from the average official of elasticity test, one may be tempted to conclude the since the balance of trade positive improved it follows that the foreign exchange market has fulfilled this last condition.  Such a conclusion at best is a further closure of currency it close not make allowance for alternative interpretations for a comprehensive report of findings.  No doubt, the overall devaluation of the naira not only improved the relative balance of trade.  Position, it also contributes immensely to the proportion of non-oil exports mainly cotton, cocoa and rubber in overall exports.

 
BIBLIOGRAPHY

 

1. Business concord (1991) Lagos vol. 4 No. 465 January 27 business concord

“fluctuation in FEM exchange rate Ibid” Bureau De change.

2. Public Enlightenment (1991) Lagos vol 14 No. 10 53, January 6 Budget

Reaction.

3. Business Times (1990) Lagos vol 14 No. 24 June 12 Demand pressure

workers CBN by Assumpta Ekpa business times.

4. Periodical (1993) Committed on SFEM, CBN, Lagos “The second tier

foreign exchange for rational economic reform in Nigeria 26 August

 


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