THE ROLE OF FOREIGN EXCHANGE MARKET IN ACHIEVING A REALISTIC EXCHANGE RATE FOR NAIRA

ABSTRACT

The remote cause of the problem that necessitated this study in perhaps, the chronic balance of payment deficit which the country has been experiencing since independent. An attempt to solve the problem through the use of exchange control measure ha not been quite successful rather, it has succeeded in bringing about on over valued naira the foreign exchange market as an implementation strategy of the structural adjustment programme introduced bid, the study seeks to investigate the role which the foreign exchange market has played in achieving a realistic exchange rate for naira, quite elaborately, there optima supported by existing literature are if the officials to the equibrium rate, if exchange rate adjustment are not accomplished by proportionate improvement in balance of trade cum-payment.

Some statistical tests are employed in the study this is the market equilibrum model used to date the equilibrium exchange rate out to be.

At the end of study, it was found out that the foreign exchange market failed to fulfill any of the above condition meaning that so far. It has not achieved a realistic exchange rate for naira.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF STUDY

Foreign exchange is an important economic variable as its appreciate or depreciation the performance of other macroeconomic variables in any economy. Also, its real value can be used to assess the strength and the overall performance of any economy for these the viability of a nation’s economy is measured by its ability to achieve certain macro-economy objectives. These include:

(a) High level of employment

(b) Stability in the exchange rate

(c) Satisfactory balances of payment situation and maintenance of the external value of the domestic currency.

(d) A reasonable level of economic growth and rising living standards.

(e) Avoidance of inflation.

(f) Distribution of income

Soon after the attainment of independence, Nigeria like most sovereign nations directed its economy exchange earnings could not remedy the situation. At this period when agriculture was regulated to the background , Nigeria depended on oil, nevertheless, oil boom did not survive for long addition, stringent measure in foreign exchange to banks on global sect oral and monthly basis, import-licensing matching with the foreign exchange budget for import to enhance budget discipline alighted and blue print to economic buoyancy, made the structural adjustment programme (SAP) inevitable. As designed by the federal government, SAP focuses in four areas; they are:

1. Finding the true value of naira through the setting up of viable second-tier foreign exchange market, now foreign exchange market.

2. Overcoming the observed public sector inefficiency through improved public expenditure programmed and the speedy rationalization of peristyle relieving the debt burden through a comprehensive researching of countrys medium and long term debt and encouraging a net inflow of foreign capital. With the approval of the international monetary authorities. Nigeria parted with the fixed exchange a rate system and adopted the floating exchange rate system in September 1986 as part of structural adjustment programme. With this end the establishment market government hoped to achieve the following objective.

(i) Carrying out through examination of the foreign exchange management policies used in Nigeria.

(ii) More efficient resources allocation. Through substantial reduction, if not elimination of fraudulent and wasteful foreign exchange transition.

(iii) Determining the cause of foreign exchange instability.

(iv) A realistic exchange rate for the naira through the interplay of market forces.

1.2 STATEMENT OF THE PROBLEM

Why is a foreign exchange market being look upon as the instrument of achieving a realistic exchange rate for the naira?

Why has it just downed on them, our monetary authorities that realistic exchange rate adjustment other such bright prospects for the reaping and restricting of our battered economy?

Before dealing with these key issues, it is pertinent to take a cursory look at the main thrust of Nigeria’s macro-economic management. Since 1982, there has been an intensification of these controls and the economy had been as it were under depression. An over valued currency was very much in evidence.

1.3 PURPOSE OF STUDY

To what extent has the foreign exchange market achieved a realistic exchange rate for the naira? This is the question, which this research study seeks to investigate.

1. To identify the role of force market achieving a realistic exchange rate.

2. To determine whether or not the high exchange rate of naira to dollar and other foreign currencies as a result if imperfections in the Nigeria foreign market.

3. To determine whether or not equilibrium of the force of demand and supply will lead to a realistic exchange rate. Micheal P. Todare expressed that “Choice payment deficits resulting primarily from current account transaction has been controlled by exchange rate market.

1.4 SIGNIFICANCE OF STUDY

It is common knowledge that the most serious problem facing the Nigerian financial authorities in recent times has been the effective management of the foreign exchange market in the determination of a realistic rate of the naira. The demand for foreign exchange resource has continued to exceed supply of foreign exchange because virtually every unit 09f a higher total liquidity of the system is a potential buyer pf the grossly diminished foreign exchange earnings.

Consequently, this topic: the role of foreign exchange market in achieving a realistic exchange rate for naira has of great importance to our country and also foreign exchange through the achievement of a realistic exchange rate which alliterate the rate of economic growth.