THE IMPACT OF EXCHANGE RATE FLUCTUATION ON INTERNATIONAL TRADE (EXPORT) IN NIGERIA

ABSTRACT

International trade and other economic activities between nationalities have greatly expanded in modern times. Movements of goods and services over great distances have made possible the consumption of such goods and services even in place or countries where they are not produced. The implication being and improve the standard of living for many. However, exporting countries and importing nations trace the enormous problems or exchange rates fluctuations. In this work an attempt have been made to examine the impact of exchange rates fluctuations and balance of payment (export position) in Nigeria. This is study was carried out through the use of a questionnaire, Oral, interviews and secondary data. It was found that there is a positive relationship between foreign exchange earnings and volume of imports in Nigeria that the importers do not think favourable of the structural adjustment programme and some Bank do not pay interest on the delayed export proceeds of FEM deposit account. Based on the findings we re commend that government should intervene to the foreign regulation of the sharp fluctuations in the foreign exchange market by improving the real productive sector of the economy. The apex bank should punish severely banks who do not repatriate export proceeds.

CHAPTER ONE

1.1 INTRODUCTION

The historical development of international trade can be dated as back the period of world war 1 (1914-1918).

Though world trade was heavy during world I, that world depression of the 1930’s greatly brought a decline in world trade.

The actions of several governments aggravated the from in the level of the world trade.

After world war ii era, the long run trend has been toward a relaxation of trade barriers (Solomon, 1976).

International trade sprang up in both century courtesy of mergers, acquisitions, consolidation and formulation of new companies and various types of securities issued by co-operations from survival of expansion following the development of financial management system, international trade was accelerated (Ndu, 1991).

International financial developments are having an increased effect on people because all parts of the world are now more closely linked together than ever before. Communications throughout the world take place within a matter of minutes or even seconds (Weston and Copeland, 1986).

Trade and other economic contracts between countries have expended greatly in modern time, the mass movement of commodities often over great distance has made available many articles, which could nor be enjoyed, hitherto and this has raised standard of living. As a result of international trade rule now have both a greater amount and a greater variety of goods to consume. The growth of international trade has gone hand in hand with technological improvements in productions and with development in transportation. These advances have made possible the large increase in the volume and variety of goods produced and traded factories turn out large quantities of commodities which are not only consumed locally, but are immediately distributed to different parts of the world improvement in transportation and the expansion of world markets have made possible this large and economic production.

Before the advents of oil exploration in 1958, Nigeria was an exporter of some agricultural product such as palm oil, cocoa, palm kennel, groundnut. Rubber etc the exchange earner for the country was also the greatest employer of labour.the importance of Agriculture can be best appreciated when it is realized that if accounted for greatest proportion of our Gross Domestic product (GDP). In the immediate post independence years, Nigeria had about 72 percent of its total working population engaged in Agricultural sector.

As a matter of tract, export declined from 75.3 percent in 1960 to 3.6 percent in 1983, while import was from n56.7 million in 1962 to n2.05 billion in 1980 (Nwachukwu 1989).

Export promotion, structural adjustment programme (SAP) as was witnessed under the infamous Babangida regime. The main aim was to revitalize the economic system and get rid of economic propriety for Nigeria in which export revenues will as much from many other sources as from oil whose fluctuations in the world market have come a nightmare for all those who plan the economy. The deviation of the Naira was most instrumental in making prices of export Hughes in terms of Naira because foreign currencies when converted fetched more naira. As a result farmers now earn more for their crops than before and this clearly has been an unprecedented inducement to farmers to produce more for export. For instance, cocoa accounted for about 50 percent of Nigeria’s non-oil export in 1989). Maintaining a realistic exchange rate for exporters regardless of trade and foreign exchange rate regime is the first requirement for export development and for sound investment planning and for attracting meaningful foreign investment into the country. With the introduction of sound tier foreign exchange market (SFEM) in 1986, which gave rise to FEM and inter bank foreign exchange market (IFEM). The idea of shopping imported.

Thus, foreign exchange transactions are payment mechanism operated by commercial and merchant banks to for the purposes of exchange domestic money for foreign currency or vice versa (Ebony, 1989).

A foreign exchange market has several functions if others as a mechanism for clearing payment related to international trade or investment on multinational basis provide credits in different currencies including facilities against lodging exchange and determines exchange rates between convertible currencies (Abodo, 1989). The foreign exchange rate as well as means by which both exporters and importers can be protected against unexpected fluctuation in exchange rates. This could be seen by the way new companies are seting up factories across the country. Businessmen particularly from the Far East are now coming into the country because the exchange rate has been so attractive to them (Ayobola, 1989).

Reports put together by Nigeria trading partners inclusive of members of the European Economics April 1989 shows that Nigeria wa the recipient of goods valued N36.496 which fell short of her export profile at N724.7m (FEM) (Nwosu, 1989). The official exchange rate which was N1.55$1 just before the inception of SFEM in 1989 was 4.25 to (1.00 in June, 1989 (Nwachukwu 1989) it went on further in 1990 and 1991, as at December 30, 1991 it was N9.86 to $1.00. this deteriorated at N112 to $ 1 as at June 22, 2001. the Federal government of Nigeria is convinced that the exchange rate of Naira will not fixed by executive fact but will continue to be determined by the forces of demand and supply. The demand for foreign exchange exceeds the supply in Nigeria.

Consequently, we pay high price to obtain foreign currencies. To improve the value of Naira on the external front, we either increase supply or reduce demand for foreign exchange. But most countries like Nigeria, the monetary authorities, intervene from time to time on the side of either demand and supply so as top limit the range within the rate has to clear the market. When such intervention occurs it implies that the exchange rate is not being allowed to move sufficiency to maintain a continuous balance between normal external payments and receipts (Ebony, 1987).

The thrusts of the exchange rate policy under the structural Adjustment programme are to discourage imports and promote agricultural production, encourage local sourcing of raw materials something they had considered impossible before the introduction of structural adjustment programme. One cannot tail to notice that importation has decreased, exports other than crude oil has increase over the months.

Problems crisis in this international transactions because of the inefficiency in our financial system, which introduce “lag” between the time the importer and the time of the fund are actually remitted to the exporter. The remittance lag as we call it, introduces exchange rates risk into the transaction. For example the rate prevailing at the time of payment by imports may differ from the rate of which the commercial banks will use in remitting the funds. These exchange rate differential results in either exchange rate loss or gain on the part of the importers.

1.2 STATEMENT OF THE PROBLEMS

The foreign suggestion that the exchange rate risk as it affects the importer as well as exporter is one that is enough to hinder development in the country, thereby detecting the laudable objective of the government.

The remittance lag problem has far reaching economic implications for the society at large especially because importers already has the business risk to worry about in international trade transaction. The question that this paper addresses is who bears the burden of delayed interest on transaction money caused by “remittance “lag” lasting for as long as four months?

1.3. OBJECTIVE OF THE STUDY

The objectives of this research work as follows:

i. To seek and determine as far as possible methods by which this risk associated with exchange fluctuations can be minimized.

ii. To determined who should equitably bear the burden of the delayed interest the commercial banks, the central bank or the importer.

iii. To discover whether government importers are given preferential treatment as regard the remittance of funds.

iv. To ascertain whether it’s widely believe that the FEM policy has not achieve a realistic exchange rate for the Naira.

v. To ascertain whether the introduction of structural adjustment programme by the government through foreign exchange market (FEM) is reducing the problems created by the dual nature of international trade and .

vi. Based on the findings to make appropriate recommendations.

1.4. STATEMENT OF HYPOTHESIS

This work will test the following hypothesis which shall form the core of this study.

1. Hi: There is a significant relationship between foreign earning and value of export in Nigeria.

Ho: There is a significant relationship between foreign earning and value of export in Nigeria.

2. Hi: Nigerian banks have been paying interest accruing on deposit exporters for letter s of credit.

1.5 SIGNIFICANCE OF STUDY

The significance of this study therefore, lies on the r recommendation made at the end of the study and their implementation. In general, the research is immense benefit to the following:

1. Importers and exporters who always trade and are in need of direct finance.

2. Policy makers of the central bank of Nigeria who issue guideline governing international trade practices.

3. Banks especially the commercial banks.

4. Students of finance and banking who might take a cue from the work done have to further re search into the field of exchange rate fluctuations and international trade.

5. The general public who have a right to contribute and informed to the activities of our banking institutions.

It is hoped that the, findings and recommendations of this study will be of great importance to the above mentioned group.

1.7 SCOPE OF THE STUDY

This research will be organized into five chapters. The first will be devoted to a clear introduction of the concept. The second centers on the literature review of related articles written on the topic. In the third chapter the writer will examine the methodology to be used in the research. Chapter four will be exclusively for data analysis and presentations. Finally, chapter five will be devoted to recommendation and conclusion of the research.

1.8 DEFINITION OF TERMS

Deposits: The are money kept in the bank by the customers for purchase of foreign exchange. Multilateral and Bilateral: A state of freedom of trade. In Multilateral it involves all countries of the world, while Bilateral, it involves only two countries letters of credit: A document authorizing a bank to pay the bearer a specified sum of money. It provides a useful means of settlement for a credit on favor of his creditors at a bank.

Depreciation of Naira: This is a situation where a given a mount of Naira buys less quantity of goods than it used to this is mainly brought about by higher demand than supply in the exchange market.

Foreign exchange: This is the same with international liquidity. An amount kept by a country in world or convertible currency example dollar, with which such a country meets its international payment obligations.

External debts: These are debt owned to external bodies or institutions by Nigeria.

Foreign exchange squeeze: This is a situation where Nigeria has no foreign currency, for example dollar Dr. pound sterling to buy from droning to the dividend from export.

SFEM- This is the market where buyers and sellers of foreign exchange meet to transact business. In Nigeria since the Naira cannot float effectively alongside with other currencies like U.S Dollars due to its non-convertibility and non- trading status, an alternative is create S (FEM) where the value of Naira can be determined by the forces of demand and supply. For example it N20 billion constitutes effective demand for Dollar and $ 10 billion currencies effective is supply would be N2$1. Most currencies now allow free movement of funds for ordinary trade and commerce, so called current account items since that is where such trade would appear in the country’s balance of payments statistics.

Deviation: A demand change in the official parity of an exchange rate (often loosely used as synonymy for depreciation).

A Naira devaluation of 5% in terms of sterling means that a Niaira will buy 5% less sterling foreign exchange.

Exchange Market: It is a situation where a given amount of Naira buys less quantity of goods. Than it used to but in this case it is mainly increased supply of Naira by printing more notes or borrowing from external bodies. Accrued interest in the FEM account of importers as a result of time lag between the time the importer makes deposit and time actual payment of good is made to the exporter Bureaux de change.

A systematic record of the economic transactions, during a given period between the residents of a country and the rest of the world it covers earning from flow of real resources change in country’s foreign assets and liabilities that arises from economic transactions. The balance of payments must always balance and it is therefore nonsense to speak of a balance of payment difficult.

Exchange control: The set of rules introduced by the government to prevent or just make more expensive, the ability of their residents to invest in their countries and occasionally to restrict the inward flow of investment.