AN ASSESSMENT OF
EXCHANGE RATE POLICY MEASURES IN NIGERIA
(A Case Study of central
bank of Nigeria Kaduna Branch)
TABLE CONTENT
Cover Page – – – – – – – – – i
Title page – – – – – – – – – – ii
Declaration – – – – – – – – – iii
Approval – – – – – – – – iv
Dedication – – – – – – – – – v
Acknowledgement – – – – – – – – vi
Abstract
– – – – – – – – – viii
Table of contents – – – – – – – – ix
Chapter one
1.0
Introduction – – – – – – – – 1
1.1
Background of the study – – – – – – 2
1.2
Statement of the
problem – – – – – – 3
1.3
Objectives of the study – – – – – – 4
1.4
Research
Hypothesis/questions – – – – – 5
1.5
Significance of the
study – – – – – – 5
1.6
Scope of the study – – – – – – – 6
1.7
Historical Background
of the case Study – – – 6
1.8
Definition of terms – – – – – – – 9
Chapter two
2.0
Literature Review – – – – – – – 10
2.1
Introduction – – – – – – 10
2.2
Conceptual framework – – – – – – 10
2.3
The foreign exchange
market – – – – – 12
2.4
The inter ban foreign
exchange – – – – 13
2.5
Theoretical framework – – – – – 15
2.6
Miscellaneous policy
measures – – – – – 17
2.7
Policy measure – – – – – – – 18
2.8
Speculations – – – – – – – – 20
2.9
The traditional flow
model – – – – – 21
2.10 Monetary
model – – – – – – – 23
2.11 Portfolio
balance model – – – – – – 24
2.12 The
Bureau De-change – – – – – – 25
2.13 Demand
and supply with price system – – – – 26
2.14 Exchange
rate variation and balance of trade – – – 27
Chapter three
3.0
Research Methodology – – – – – – – 29
3.1
Introduction – – – – – – – – 29
3.2
Research Design – – – – – – – – 29
3.3
Population and sample
Size – – – – – – 29
3.4
Sampling techniques – – – – – – – 30
3.5
Sources and method of
data collection – – – – – 30
3.6
Methods of data
Analysis – – – – – – – 31
3.7
Justification for the
choice. – – – – – – 32
Chapter four
4.0
Data presentation,
Analysis and Interpretation – – – 34
4.1
Introduction – – – – – – – – – 34
4.2
Data presentation and
Analysis – – – – – – 35
4.3
Testing of
Hypothesis/questions and Interpretation – – – 43
4.4
Summary of
Findings – – – – – – – – 47
Chapter five
5.0
Summary, conclusion and
recommendations – – – – 49
5.1
Summary – – – – – – – – – 49
5.2
Conclusion – – – – – – – – – 51
5.3
Limitations of the
study – – – – – – – 52
5.4
Recommendations – – – – – – – – 53
Bibliography – – – – – – – – 55
Appendix – – – – – – – – – 57
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.