EFFECT OF EXCHANGE RATE MANAGEMENT POLICIES ON DEVELOPING ECONOMIES

ABSTRACT

The foreign exchange management policy of an economy serves as one of the major factor that contributes to the economic development of such nation. To the federal government, FOREX is a very crucial resource for conducting international transaction; therefore, the government felt once earned should be judiciously managed.

The extent of the effective management of exchange rate on import and export is what the project really examined. There came different era of, changes of foreign exchange management policies ranging from pre SAP period, SAP period and post SAP period with each having different effects on import and export trade. The project tends to answer how these different policies really affected the import and export trade of the Nigerian economy. The procedure for analyzing the collected data was transformed into a linear regression equation using the least square method and other hypothesis were carried out, in order to achieve the objective of the study.

Following the outcome of the analysis and hypothesis tested, it shows that there is a direct relationship between foreign exchange rate policies and net export; it also shows that import and export trade of a developing economy depended greatly on the foreign exchange management policies at any particular period of focus.

However, the conclusion reached was that, at any point, in time, increase in the export as a result of foreign exchange rate management policies has been able to promote economic growth and development, reduce inflation and also stabilize the exchange rate in the economy.

CHAPTER ONE

INTRODUCTION

1.1    BACKGROUND OF THE STUDY

Economies are confronted with one problem or the other, and governments are constantly locked in effort and actions to alleviate them from the economic point of view, there is the gap between the potential Gross Domestic Product (GDP) and the actual, which is referred to as the employment gap, or the GDP gap. This gap has to be reduced to the minimum. In order to achieve this, the government or its agencies take various actions, referred technically as policies.

The natures of economic problems differ from a recession/depression with high levels of unemployment or at the extreme rampaging inflation, currency, depreciation and balance of payments deficits. Since the 1970’s, it has been recognized that rather than the existence of a trade-off between inflation and unemployment, a country could be experiencing stagflation- a combination, of stagnating outputs as well as high levels of inflation at the same time (Samuelson and Nordhaus 1989: 204: 206). This situation calls for a combination of policies to address them.

Policies available to any government in managing its economy by tackling the problems identified above exist in. a menu; from monetary and exchange rate through fiscal, trade, commercial, Income among others. Consequently, the government often uses these in combination or singly, depending on the problem at hand and the philosophy of the regime in power. A rightist philosophy is inherently anti-policy activists and when necessary will prefer monetary to fiscal policies. However, he reality of economic malaise confronting an economy. These policies are used in packages.

1.2    DEFINITION OF FOREIGN EXCHANGE

Foreign exchange has been variously, defined by different works of study but all tending towards the same meaning. Foreign exchange is a means of effecting payments for international transactions. It can be acquired by a country through, the export-of goods and services, direct investment in-flow, draw down on external loans, aids and grants and it can be expended to settle international obligations.

Foreign exchange in Nigerian context is defined as any currency other than the Nigerian currency which as at anytime been legal tender in any territory outside Nigerian. Exchange rate policy is. intractably tied up with the management of a country’s foreign exchange; it refers to the manipulation of some crucial variables so as to ensure that the country’s exchange rate contributes to the attainment of external (or payment viability and general economic prosperity.

Foreign exchange transaction is carried out in the foreign exchange market, this market is a market for the sale or purchase of foreign provides a frame work and opportunity to trade in deal in, off load or produce foreign currencies for effecting or closing international transaction. In case where foreign expenditures is lower than foreign receipts, the surplus is added to reserves, these reserves which are also savings from foreign exchange transactions are held by the authorities to finance shortfalls in foreign exchange receipts and to safeguard the international valve of the domestic currency.

Foreign exchange earrings from international trade transactions and external aids are great important for economic development of less developed counties (LDCs). This is as a result of the fact that resource form the sources can induce increase in factors supplies and promote the development of technical skills and knowledge, all of which should enhance domestic capital formation and economic growth.

Nigeria like other developing nations had chosen to determine her exchange rate through basket of currencies; naira was pegged to the U.S dollar and to the pounds on a bid to ensure that he rate have some bearing with the factors of the balance of payment and domestic economy .

The Nigerian economic history reveals that, Nigerian initially operated affixed exchange rate regime from independence in 1960-1986 before switching to a flexible rate regime. These changes where anchored as a result of the types of disturbance to which economies are exposed the structural characteristics of the economy and the commonality of the risks to which they are subject and the objectives they pursue (Guitan 1994) Agbevlic eta., 1991, frankel 1992.

In this connection, the consideration are that where the problems are external shocks and domestic real stocks, such as imbalance in the goods market as the country experienced in the 1980’s then the best policy regimes becomes flexible rate because shocks to domestic demand will lead to change in the rate that will bring about off-setting movement in foreign demand so that domestic output is not severely affected” ceteris paribus (Guitan 4: 19).

For the purpose of analysis, the period under review will include:

–        Exchange rate management policy before SAP.

–        Exchange rate management policy under SAP.

–        Exchange rate management policy after SAP.

–        Review of monetary policy.

1.3    STATEMENT OF PROBLEMS

–        The rationale for various macro-economic policies adopted under the structural Adjustment Programme (SAP) have failed to impact on the Nigerian export and import and therefore affect our foreign reserves.

–        Why the various foreign exchange regimes (policies) have not been able to impact significantly on the macro economic variable as balance of payment, employment, inflation etc.

–        The extent on which the exchange rate can be managed through the effective management of the country export index and external reserves.

–        The extent to which other macro- economic indices depend on the exchange rates

1.4    OBJECTIVES OF THE STUDY

Although, the objectives of exchange rates management policies to achieve macro-economic goals. This study strives to ascertain;

–        To what extent are these objectives been achieved

–        To determine how such objectives as been achieved in the past, current dispensation on and the possible direction that could be followed in the future.

–        To investigate the possible problems and constraint and proffer suggestion to factors that militates against effective management of foreign exchange in Nigeria.

–        To review the monetary policies and various measures used in achieving its objectives.

1.5    RESEARCH QUESTION & HYPOTHESIS

This study is centered on findings out the effect of foreign exchange rate management policies on developing economy, taking Nigeria as a case study. The following question will be considered in order to achieve of the study.

–        Is there a link between exchange rate and monetary policy in Nigeria?

–        To what extent do the instruction of SAP and other economic reforms impact on the foreign exchange management in Nigeria? To review the monetary, policies and various measures used in achieving its objectives.

–        What is the relationship between demand and supply of foreign exchange to various users?

The hypothesis will be testes as follows;

Ho:    Foreign exchange rate do not contribute to Net Export

Hi:     Foreign exchange rate contributes to Net Export.

1.6    SCOPE AND LIMITATION OF THE STUDY

This study is confined on the effectiveness of foreign exchange management policies and conducts of monetary policies in a developing economy. This research work is also limited to Nigerian economy as a case study of a developing economy.

1.7    SIGNIFICANT OF STUDY

The result of this research work would be relevant to academicians, investors, financial institutions as well as the government who may wish to avail themselves of the data and information therein. It will particularly assist student of finance on their study of foreign exchange on economy and will also enlighten the public on how foreign exchange management policies affect their daily business and governance. It will also serve as a dimension for future research and recommend direction for necessary amendments.

1.8    DEFINITION OF UNFAMILIAR TERMS

1)      Direct Investment: This inv investment enterprises of a domestic firm in a foreign country as a subsidiary of the parent business enterprises.

2)      First-Tier Foreign Exchange Market: This is a market for government reservation in transaction, where valves of naira are pegged and remain relatively stronger.

3)      Fiscal policy:  It is use of measure such as taxation, government expenditures budgetary variables in order to achieve desired economic objectives.

4)      Fixed Rate Regime: This is a period where administrative fixing of the value of national currency are employed in relation to major currencies by the monetary authorities.

5)      Floating Rate Regime:  This is the period where national currency was allowed to fluctuate in response to the forces of demand and supply in the foreign exchange market.

6)      Inflation:  It is a persistent increase in price or a fall in the value of money.

7)      Legal Tender:  This is any commodity that is generally accepted as a means of exchange and setting debt.

8)      Over Value Exchange Rate:  This implies artificially high valued currency which makes imports cheaper relative to exports.

9)      Second-Tier Foreign Exchange Market:   This is a market where the determination or value of the naira exchange rate was made to reflect the market force of demand and supply.

10)    Under-valued Exchange Rate:  This implies artificially low valued currency which makes imports costly relative to export.

11)    Bureau de Change:   Is a non bank financial institution licensed by Central Bank of Nigeria to operate in FOREX market in order to improve access to FOREX especially, for small users. Over 240 bureau de change. has been licensed and supervised by Central Bank of Nigerian.

REFERNCES.

i.        The Nigerian Banker, July- September, 2003

ii.       Abgevli, B.B et al (1991) Exchange Rate Policy in Developing Countries.

Some Analytical Issues” Occasional Paper No.78 (Washington DC IMF)

iii.      Frankel, J.A (1992) “Monetary Regime Choices for a semi-open economy” Paper presented at a conference on monetary policy in Semi- open economies in Seoul Korea November.

iv.      Guitan M. (1994), ”The choice of an Exchange Rate Regime in Barth Rand Wong C. (eds) Approaches to Exchange Rate Policy, (Washington DC, IMF Institute).

v)      George Nwadibia (2001), ”Theory of Money and Banking”.