Chapter one

1.0            Introduction

Exchange rate is the price of the unit of one country quotes in terms of another country’s currency i.e. it is the mathematical or quantitative expression of one country currency in terms of another’s.

Exchange rate is a very vital price mechanism that directs the movement of other prices in the domestic economy and tries to equilibrate the balance of payment. It is also the variable which affects the economics activities in a country through the impact on investment, output and inflation among others. This eventually leads to depreciation of a country’s currency.

The inadequate foreign exchange earnings. A derivation of the steep fall incurred oil prices exploring the inflation in 1984 which stood at almost 40% as a result of acute shortage of imported goods and services.

SAP was adopted in July 1986 to among other things get the price right using the foreign exchange rate reform as its century tool. In pursuit of the second tier foreign exchange market was introduced in late September 1986 and since that time the naira has depreciated sharply against the us dollar and other major currencies the development shows that a depreciation of the naira has a role to play in Nigeria’s recent inflation trend.  

1.1            Background of the Study

During the period of an independent exchange rate management policy the naira was pagged to other the us dollar or the British pounds, a policy of gradual appreciation of naira was pursued. The persistent external surplus in balance of payment which supported the appreciation of naira from crude oil export.

This cheapen import of competing food items agro based and industrial raw materials to the detriment of local products of similar goods. When it because obvious that aggregate import has outstripped total foreign exchange for import trade restriction was introduced. In 1976 there was deliberate measure to depreciate the naira. In September 1986 the fixed exchange rate had to be discovered and a flexible exchange rate was introduced following the adoption of SAP. With the foreign exchange were subjected to market forces under on auction system and now naira become under valued. Exchange rate depreciation has since resulted in domestic increase in the naira price of import and the is export to discourage importation and the naira cost of imported items have also risen the dismal performance of the economy as the end of 1994 compelled the authorities to re-introduce the market-based approach under the autonomous foreign exchange market (AFEM) from January 1995 until October 1999. The exchange rate which depreciated from the fixed rate of N21.8881: US$1.00  In 1995, it further depreciated to N128.75 between 2002 and 205. However, relative stability was achieved from 2003 with the rate actually appreciating between 2005 and 2008.

1.2     Statement of the Problem

Evidence OF exchange rate depreciation has dominated Nigeria exchange rate structure, for the period, 1976-2004. The depreciation would normally be expected to bring about a positive change in Nigeria’s balance of trade. But the depreciation has resulted in the reduction of the value of the country’s exports causing deterioration in balance of trade.

In a continue effort to established the exchange rate, as well as ensure a single exchange rate for the naira, numerous variations of market determined rates have been adopted since 1986.

1.     The second tier foreign exchange market (SFEM) was introduced in 1986.

2.     First and second tier markets were merged into enlarge foreign exchange market (FEM) in 1987.

3.     Inter-bank foreign exchange market (IFEM) in January 1987.

Despite these policies, the exchange rate of the Naira has remained unstable since the deregulation period. The need to investigate the impact of this fluctuation exchange rate is important for the economy. For a country that is import dependent, the stability of its exchange rate is important for credit allocation (Adebiyi, 2006). It is therefore important to examine how the level of volatility of exchange rate affects the performance of the industry.

1.3     Objective of the Study

The main objective of exchange rate policy in Nigeria are to presence the value of the domestic economy, maintain the external resource position and ensure external balance without compromising the need for internal balance and overall goals of macroeconomic stability.    

The primary objective of this research is to find amongst others the following:-

1.     To analysis describe the past policy and measures of exchange rate adopted by the federal government of Nigeria.

2.     To analyze the current dispensation and the possible direction that could be followed in future.

3.     To find out problems associated with managing foreign exchange by the CBN for the benefit  of development.

4.     To make recommendation to the CBN, commercial banks and other financial transactions of exchange rates.

1.4     Research Hypothesis

The following hypothesis has been made to test the validity of data base on the statement of the general problems.

a.     Null hypothesis.

Ho: The intervention of the CBN in the Nigeria foreign exchange market has not stabilized the exchange rate of the Naira.

b.     Alternative hypothesis

H1: The intervention of the CBN in the Nigeria foreign relatively made the exchange rate of the Naira stable.

1.5     Significance of the Study

This study will assist the CBN an other financial bodies in ensuring a vital policy measures of exchange rate vis-à-vis the prevailing economic condition.

The study will also be great help to manufacturers, importers in strategic industries conserving and making effective utilization of foreign exchange at their disposal.

Finally, the study is the writer’s contribution towards research by making available materials for any researcher within to undertake similar study.

Furthermore, the study will serve as a guide towards achieving effective exchange rate which will lead to an increase of the country’s foreign reserves and the stability of the naira in the economy. 

1.6     Scopes of the Study

The study is specially carried out on the policy measure of the exchange rate in Nigeria between 2009 to 2012. The research is carried out on the Central Bank of Nigeria Kaduna branch, at the conclusion of which we realized the impact and uses of the exchange rate policy used with the years.

1.7     Historical Background of the Case Study

The quest for an apex bank to regulate the monetary and financial policies of Nigeria economy was inevitable and permanent, however the economy which was set up in 1912, performed some of the functions of the CBN prior to the setting up of the CBN. It was primarily responsible for issuing legal tender currency. The WACB was kept at a fixed parity with the British monetary management to promote the growth of the financial market. To rectify this, the CBN was set up on the 17th of March 1959 with the initial capital of N million. The CBN Act of 1959 has undergone various amendments and currently legal banking of the CBN is the execution of its functions bounded by the CBN decree No. 24 of June 1991 (which supersedes that of CBN Act of 1959 and its various amendments) the bank and other financial industries (BOI) decree No. 25 of 30th June, 1991.

Section 4 (1) speit out the principal objective of the CBN as:  

1.     To Issue legal currency in the county.

2.     To maintain external reserves.

3.     To safeguard the international value of the country’s currency.

4.     To promote monetary stability and a sound financial.

5.     To act as the bankers and financial adviser to the federal government of Nigeria.

6.     To act as the banker to other banks in the country.

The head office of CBN is situated in Abuja, the country’s capital. It has four zonal offices, twenty one branches and six currency centers throughout the country. The bank is under the control of board of directors. The board comprises of the governor as the chairman of the board, five deputy governors, and four full time executive directors all of whom are appointed by the federal government for five years. (in the case of the governor, deputy governor and four executive directors) and then a term of three years for other directors.

Therefore, the primary objectives of monetary policy in 2003/2006 are the maintenance of price and exchange rate stability. Specially the policy shall seek to maintain a single digit in inflation rate during the period through  effective control of the growth of monetary aggregates. In conclusion sustained effort will be made to address the persistent problem of excess liquidity in the banking system and its adverse effects on inflation and exchange rate.

In addition, the central bank of Nigeria will continue to ensure banking soundness and financial sector stability in order to enhance the efficiency of the payments systems and effective transmission of monetary policy to the real sector.

Furthermore, the CBN shall seek to ensure effective enforcement of the market rules to engender the right market expectations. As in the previous years the broad measures of money supply (m2) shall continue to be the intermediate target of monetary policy. Thus, during the two-year period, an average growth in M2 off 16.25% shall be maintained which relates to a maximum increase of 16.0% in 2009 and 16.5% in 2010/2011.

1.8     Definition of terms

1.       Foreign exchange: The system of exchanging the money of one country for that of another country the place when money is exchanged.   

2.       Exchange rate: The process of changing an amount of one country for an equal value of another.

3.       Inflation: As a continues rise in the price of goods and services as a result of large value of money in calculation used in the exchange of the few available goods and services.

4.       Monetary policy: it was excessively giving rise to high demand pressure in foreign exchange markets and persistent depreciation of the naira segments of the market.

5.       Autonomous foreign exchange market: (AFEM): it is a land of market established for the purposes of foreign exchange but operated without government intervention.

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