CHAPTER ONE

INTRODUCTION
1.1 BACKGROUND OF THE STUDY

Following the fluctuation of the naira in 1986, a policy induced by the
structural adjustment programme (SAP), the subject of exchange rate
fluctuation has become a topical issue in Nigeria. This is because it is the
goal of every economy to have a stable rate of exchange with its trading
partners. In Nigeria, this goal was not reached in spite of the fact that
the country embarked on devaluation to promote export and stabilize
the rate of exchange. The failure to realize this goal subjected the
Nigerian manufacturing sector to the challenge of a constantly
fluctuating exchange rate. This was not necessitated by the devaluation
of the naira but the weak and narrow productive base of the sector and
the rising import bills also strengthening it. In order to stem this
development and ensure a stable exchange rate, the monetary authority
put in place a number of exchange rate policies.

However, very little achievement was made in stabilizing the rate of
exchange. As a consequence, the problems of exchange rate fluctuation
persisted in macro-economic management, exchange rate policy as an important tool derives from the fact that changes in the rate of
exchange have significant implications, for a country‟s balance of
payment position and even its income distribution and growth. It is not
surprising since its behaviour is said to determine the behaviour of
several other macro-economic variable (Oyejide, 1985). It is even more
so for Nigeria which had embarked on a course of rapid economic
growth with attendant high import dependency.

The manufacturing sector plays a catalytic role in a modern economic
and has many dynamic benefits that are crucial for economic
transformation. In an advanced country, the manufacturing sector is a
leading sector in many respects. It is a quest for increasing productivity
in relation to import substitution and export expansion, creating foreign
exchange earnings capacity, raising employment, promoting the growth
of investments of a faster rate than any other sector of the economy, as
well as wider and more efficient linkage among different sectors
(Fakiyesi, 2005). But the Nigerian economy is under-industrializes and
its capacity utilization is also low. This is in spite of the fact that
manufacturing is the fastest growing sector since 1973/74 (Obaden,
1994). The sector has become increasingly dependent on the external sector for import of non-labour input (Okigbo, 1973). In the ability to
import therefor; can impact negatively on manufacturing production
Oyejide (1985) posited that the breakdown of the Brelton woods system
induce variability in the rate of exchange worldwide; Nigeria inclusive.
Umubanwer (1995) has noted that three adverse consequence of this on
ability to import. Devaluation which further aggravates the situation has
not significantly affected economic performance in the positive direction
in Nigeria (Ojo, 1990). The impact of fluctuation in exchange rate on
manufacturing output had not receives adequate attention. This paper
attempts to give attention to the issue.

1.2 STATEMENT OF THE PROBLEM
This research work is meant to emphasize on the issue of fluctuating
exchange rate on the Nigeria manufacturing sector. Some of the
problems which cause the fluctuation of exchange rate on the Nigeria
manufacturing can be seen below.

The exchange rate of the naira was relatively stable between 1975 and
1979 during the oil boom or (regulatory require). This was also the
situation prior to 1990 when agricultural products accounted for more than 70% of the nation‟s gross domestic product (GDP) (Ewa, 2011:78),
however, as a result of the development in the petroleum oil sector in
1970, the share of agriculture in total export declined significantly while
that of oil increased.

Furthermore, more manufacturing companies are faced with the
problem, not recognising the fact that fluctuation in exchange rate
adversely affect output of the manufacturing sector, this because Nigeria
manufacturing sector is highly dependent on import of input and capital
goods, this is in spite of the fact that manufacturing sector is the fastest
growing sector since 1973 (Obadan, 1994), this sector has become
increasingly dependent on the external sector for import of non-labour
input. The impact of fluctuation in exchange rate on manufacturing
output has not received adequate attention.

Instabilities of foreign exchange rate is also a problem to manufacturing
sector; however, instability to import therefore can impact negatively on
manufacturing production; furthermore, Jhingen (1997), emphasized
that exchange rate fluctuation cause uncertainty and impede on
international trade.

Thus uncertainty in trade transaction post a lot of problems such as inflation, which determine the internet balance of a country, it has also tended to undermine the international competitiveness of non-oil export and make planning and projection difficult at both micro and macro levels of the economy, some small and medium scale enterprise have been strangled out as a result of low dollar naira exchange rate.

1.3 OBJECTIVES OF THE STUDY
In a highly import dependent economy like Nigeria, the naira exchange
rate has become one of the most widely discussed topic in the country
today. This is not surprising as this topic has had a lot of impact on the
Nigerian manufacturing sector. It is therefore, the objective of this study
to evaluate the effect of exchange rate fluctuation on the Nigerian
manufacturing sector.

To investigate empirically, the effect of exchange rate fluctuation on
Nigerian import or export and capital goods.
To determine if the continuous fluctuation of exchange rate of naira
have an impact on the quality and quantity of output of manufacturing
firms.

1.4 RESEARCH QUESTIONS
To what extent does exchange rate fluctuation affect the importation of
input and capital goods?

1.5 FORMULATION OF HYPOTHESES
The hypothesis of the study includes the null hypothesis denoted as „H0‟
and alternative hypothesis as „H‟.
H0: Exchange rate fluctuations have no effect on the importation of
input and capital goods.
H1: Exchange rate fluctuations have effect on the importation of input
and capital goods.
H0: Exchange rate fluctuation has no significant effect on the quality and
quantity of goods manufactured by Nigerian firms.
H1: Exchange rate fluctuation has a significant effect on the quality and
quantity of goods manufactured by Nigerian firms.
H0: Exchange rate fluctuations do not affect the exportation of made in
Nigeria goods.
H1: Exchange rate fluctuations affect the exportation of made in Nigeria
goods.

1.6 SIGNIFICANT OF THE STUDY
The study would identify the strengths and weakness of exchange rate
policy and management, identify those parts that are mostly affected by
instability in exchange rate provide the general public with adequate
information on the foreign exchange transaction and its impact on the
manufacturing sector. In general, the study benefits the following;

1. The government will benefit as it will enable them ascertain the
extent of the variation of exchange rate affect the quality of input
and capital goods imported into Nigeria by manufacturing firms, the
government can make policies that will help Nigerian manufacturers
prosper in the business.
2. The manufacturers will be much aware of the impact of the exchange
rate fluctuations on their firms.
3. To the students, it will be a work base for further research.
4. To the public it will be a thorough understanding of the exchange
rate fluctuation and having taken appropriate measure will lead to a
stable economy.

1.7 SCOPE AND LIMITATIONS OF THE STUDY
This research work is designed to cover a very long period that is (1986-
2010). The scope consists of the regulatory deregulatory exchange rate
period i.e. the fixed exchange rate and floating rate period. The study is
structured to evaluate Nigerian exchange rate as the pilot of economic
growth and development. Thus, this study is therefore limited to the
effect of exchange rate fluctuation in the Nigerian manufacturing sector.

1.8 DEFINITION OF TERMS
1. Exchange rate: This is the price of one country‟s currency in terms of
another
2. Foreign exchange: Foreign exchange is a means of payment for international transaction; it is made up of currencies of other countries that are freely acceptable in settling international transactions.
3. Dutch auction System (DAS): This is a method of exchange rate
determination through auctions where the bidders pay according to
their bid rates.
4. Exchange control: This is a foreign exchange arrangement in which
the government purchase all coming foreign exchange and is the only
source from which foreign exchange can be purchased legally.