THE EFFECT OF EXCHANGE RATE FLUCTUATION ON THE NIGERIA ECONOMY (1980 – 2010)

ABSTRACT

This research work is centred on the effect of exchange rate fluctuation on the Nigeria’s economy with special emphasis on purchasing power of the average Nigeria and the level of international trade transaction. Without exchange rate the exchange of goods and services among trading partners will be faced with a lot of problems, which may virtually narrow it down to trade by barter. This exchange also is used to determine the level of output of the country. Hence, the rate at which exchange fluctuates calls for a lot of attention. However, with already existing exchange rate policies, a constant exchange rate has not been attained. The rate by which exchange rate fluctuates brings about uncertainty in the trade transaction, and also the rate of naira has been unleashed and continues to depreciate. This has resulted to declines in standard of living of the population increase in costs of production (this is because most of the raw materials needed by industries are usually imported), which resulted in cost-push inflation. We made use of many tests, like the t-statistics table, f-statistic table and the chi-square etc. When we found out real exchange rate has a positive effect on the GDP.

CHAPTER ONE

The exchange rate is perhaps one of the most widely discussed topic in Nigeria today. This is not surprising given it’s macro-economy importance especially in a highly import dependent economy as Nigeria (Olisadebe, 1995:20). Macroeconomy policy formulation is a process by which the agencies responsible for the conduct of economy policies manipulate a set of instrumental variables in order to achieve some desire objectives.
In Nigeria these objectives include achievements of domestic price stability, balance of payment equilibrium, efficiency, equitable distribution of income and economy and development.

Economy refers to the continuous increase in a country’s national income or the total volume of goods and services, a good indicator of economy is the increase in Gross National Product (GNP) over a long period of time. Economy development on the overhead implies both structural and functional transformation of all the economy indexes from a low to a high state (Siyan, 2000:150) one of the macro –economy variables of importance is the exchange rate policy country.

Exchange rate policy involves choosing where foreign transaction will take place (Obadan, 1996). Exchange rate policy is therefore a component of macroeconomy management policies the monetary authorities in any given economy uses to achieve internal balance in medium run. Specifically internal balance mean the level of economy activity that is consistent with the satisfactory control of inflation. On the contrary, external or sustainable current account deficit financed on lasting basis expected capital inflow.

It is important to know that economy objectives are usually the main consideration in determining the exchange control. For instance from 1982 – 1983, the Nigerian currency was pegged to the British pound sterling on a 1.1 ration. 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 determining the exchange rate 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 countries with the American dollars and British pound sterling on the exchange rate mechanism (CBN, 1994). One of the objectives of the various macro– economy policies adopted under the structural adjustment programme (SPA) 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). On exchange mechanism and was adopted in 1986.
The key element of structural adjustment programme (SAP) was the free 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 to make a remarkable impact in the economy before it was changed. This inconsistency in policies and lack of continuity in exchange rate policies aggregated unstable nature of the naira rate. (Gbosi, 1994:70).

1.2 STATEMENT OF THE PROBLEM

The exchange rate of the naira was relatively stable between 1973 and 1979 during the oil boom er (regulatory require). This was also the situation prior to 1990 when agricultural products accounted for more than 70% of the nation’s gross domestic products (GDP) (Ewa,2011:78).

However, as a result of the development in the petroleum oil sector, in 1970’s the share of agriculture in total exports declined significantly while that of oil increased. However, from 1981 the world oil market started to deteriorate and with it’s economy 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 1980 to $40 billion in 1996, a number of economy became negative as result of the adoption of structural adjustment programme (SAP).

This major problem which this study is designed to solve is whether the exchange rate has any bearing on Nigerians economy an d development. While some Economist dispute the ability of change in the real exchange rate to improve the trade balance of developing countries (Hinkle, 1999:21) because of elasticity of their low export, others believe that structural policies could however change the long-term trends in the terms of trade and the prospects for export led . Instabilities of the foreign exchange rate is also a problem to the economy.

1.3 OBJECTIVE OF THE STUDY

the objective of the study is to show the effect of exchange rate on gross domestic product and hence how this effect the and development of the Nigerian economy identifying the impacts of the unstable exchange rate of the naira on these major macro-economy variables would however, depend on the conditions prevailing in the economy at a given time.

The main objectives of exchange rate policy in Nigeria are:

To present the value of the domestic currency.
To maintain favourable external reserve position.
To ensure price stability and price stability and price levels which are consistent with those of our trading partners.
To have a realistic exchange rate which will remove the existing distortions and distortions and disequilibrium in the external sector of the economy.
To have a stable and realistic exchange rate that is in consonance with other macro-economy fundamentals.
1.4 FORMULATION OF THE RESEARCH HYPOTHESIS

Based on the objectives of the study, the following hypothesis were formulated.

Ho: Exchange rate fluctuation has no significant impact on Nigeria economy and development.

Hi: Exchange rate fluctuation has a significant impact on Nigerians economy and development.

1.5 SIGNIFICANCE OF THE STUDY.

The significance of this research work lies in the fact that if the cause of the unstable exchange rate of the naira is identified and corrected, the economy will rapidly grow and develop into an advance one. This is so because if the unstable exchange rate of naira is proved to be affecting the macro- economy major variables badly, including Real exchange rate, Real interest rate, inflation rate, gross domestic product and trade openess of the country, attempts should be made to stabilize the exchange rate. This is because these variables are gauge for the measurement of 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 adopt the policy that suits the economy best. This will definitely enhance and development of the economy, the study will also serve as a guide to future researchers on this subject.

1.7 THE SCOPE OF THE STUDY

This research work is designed to cover the period 1980-2009 a period of thirty years. The scope consist of the regulatory and deregulatory exchange rate period i.e. the fixed exchange rate and the floating exchange rate period. The study is based on core macro-economy performance of Nigeria between 1980-2010 more so, it rests can core economy and development in Nigeria for the period of thirty-one years.