CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The exchange rate is perhaps one of the most widely discussed topics in

Nigeria today. Macroeconomic policy formulation is a process by which the

agencies responsible for the conduct of economic policies manipulate a set of

instrumental variables in order to achieve some desired objectives. In Nigeria

these objectives include achievements of domestic price stabilit6y balance of

payment equilibrium efficiency equitable distribution of income and economic

growth and development. Economic growth refers to the continuous increase in a

country’s national income or the total volume of goods and services a good

indicator of economic growth is the increase in Gross National Product (GNP) over

a long period of time. Economic development on the other hand implies both

structural and functional transformation of all the economic indexes from a low to

a high state.

After several years of exchange rate floating among countries exchange rate

arrangement in Nigeria have undergone significant changes over the past four

decades. It shifted from a fixed regime in the 1960’s to a pegged arrangement

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between the 1970’s and the med 1980’s and finally to the various types of the

floating regime since 1936 following the adoption of the structural adjustment

programme (SAP). A regime of managed float without any strong commitment to

defending any particular patty has been the predominant characteristics of the

floating regime in Nigeria since 1986. The fixed exchange rate regime induced an

overvaluation of the naira and was supported by exchange control regulations that

engendered significant distortions in the economy. This gave rise to massive

importation of finished good with the adverse consequences for domestic

production balance of payments position and the nation’s external reserves level.

Moreover the period was bedeviled by sharp practices perpetrated by dealers and

end users of foreign exchange.

The floating exchange rate regime implies that the forces of demand and

supply will determine the exchange rate. This regime assumes the absence of any

visible hand in the foreign exchange market and that the exchange rate adjusts

automatically to clear any deflect or supply of market. Consequently changes in

the demand and supply of foreign exchange can outer exchange rates but not the

countries international reserves. In this arrangement the exchange rate serves as a

“buffer” for external shocks thus allowing the monetary authorit9ies full discretion

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in the conduct of monetary policy. The disadvantages of the freely floating regime

have been documented.

It is important to know that economic objectives are usually the main

consideration in determining the exchange control for instance from 1982-1983

the Nigeria currency was pegged to the British pound sterling on a 1.1 ratio. Before

then the Nigerian naira has been devalued by 10%. Apart from this policy

measures discussed above the central bank of Nigeria (CBN) applied the basket of

currencies approach from 1979 as the guide in determination of the exchange rate

which was determined by the relative strength of the currencies approach from

1979 as the guide in determination of the exchange rate which was determined by

the relative strength of the currencies of the country’s trading partner and the

volume of trade with such countries. Specifically weights were attached to these

with such countries with the American dollars and British pound sterling on the

exchange rate mechanism (CBN 1994). One of the objective of the various macro-

economic policies adopted under the structural adjustment programme (SAP) in

July 1986 was to establish a realistic and sustainable exchange rate for the naira

this policy was recommended in 1986 by the international monetary fund (IMF).

One exchange rate mechanism was adopted in 1986. the key element of structural

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adjustment programme (SAP) was the freely market determination of the naira

exchange rate through an auction system.

This was the beginning of the unstable exchange rate; the government had to

establish the foreign exchange market (FEM) to stabilize the exchange rate

depending on the state of balance of payments the rate of inflation domestic

liquidity and employment. Between 1986 and 2003 the federal government

experimented with different exchange rate policies without allowing any of them

make remarkable impact in the economy before it was changed. This consistency

in policies and lack of continuity in ex-change rate policies aggravated the

instability nature of the naira exchange rate (Gbosi 1994).

1.2 STATEMENT OF THE PROBLEM

The exchange rate of the naira was relatively stable between 1973 and 1979

during the oil boom era (regulating require). This was also the situation prior to

1990 when agricultural products accounted for more than 70% of the nations gross

domestic products (GDP) (Ewa 2011). However as a result of the development in

the petroleum oil sector in 1970’s the share of agriculture in total exports declined

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significantly while that of oil increased. However from 1981. the world oil market

started to deteriorate and with its economic crises emerged in Nigeria because of

the country’s dependence on oil sales for her export earnings. To underline the

importance of oil export to Nigerian economy the gross national product (GNP)

fell from $76 billion in 1930 to $40 billion in 1996 a number of policy measures to

revive and strengthen the economy. The real rate of economic growth became

negative as a result of the adoption of structural adjustment programme (SAP).

(Hinkle 1999) stated that “while some economist dispute the ability to change in

the real exchange rate to improve the trade balance of developing countries

because of elasticity of their low export others believe that structural policies

could however change the long –term trends in the trade and prospects for

exported growth. Instabilities of the foreign exchange rate is also a problem to the

economy.

1.3 OBJECTIVES OF THE STUDY

The objectives of the study is to show the impact of exchange rate on gross

domestic product and hence how this affect the growth of the country.

The sub-objectives are

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1. To determine the impact of exchange rate fluctuations on Nigeria’s growth

2. To ascertain the effect of exchange rate on Nigerian export.

1.4 RESEARCH QUESTIONS

1. To what extent does exchange rate fluctuation impacts on the volume of

Nigeria’s economic growth?

2. What is the effect of exchange rate on Nigeria’s export?

1.5 RESEARCH HYPOTHESIS

Base on the objectives of the study the following hypothesis were

formulated.

1. H

O

: exchange rate has no significant impact on Nigeria’s economic growth

2. H

O

: exchange rate has no significant impact on export in Nigeria.

1.6 SCOPE OF THE STUDY

This research work is designed to cover the period 1980-2010 a period of

thirty one years. The general overview of the profile of Nigerians exchange rate

over the years shall be discussed. The scope consist of the regulatory and

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deregulatory exchange rate period that is the fixed exchange rate and the floating

exchange rate period. The study is based on core macro-economic performance of

Nigeria between 1980-2010.

1.7 SIGNIFICANCE OF THE STUDY

The significance of this research work lies in the fact that if the causes of the

unstable exchange rate of the naira is identified and corrected the economy will

rapidly grow and develop into an advanced one. This is so because if the unstable

exchange rate of the naira is proved to be affecting badly the macro-economic

major variables including real exchange rate real interest rate inflation rate gross

domestic product and trade openness of the country attempts should be made to

stabilize the exchange rate. This is because these variables are gauge for the

importantly measurement of growth and development of any economy.

Importantly this study would help the government and the central bank of Nigeria

(CBN) to identify the strength and weakness of each foreign exchange system and

hence adopts the policy that suits the economy best this will definitely enhance

growth and development of the economy the study will also serve as a guide to

future researchers on this subject.

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1.8 LIMITATIONS OF THE STUDY

The study is structured to evaluate the Nigeria exchange rate as the pilot of

economic growth and development. The study is therefore limited to the core

economic growth in Nigeria and not the socio- political factors of the foreign

exchange rate.

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