The impact of exchange rate fluctuation on the nigeria economic growth (1980 – 2010)

Thesis Overview

<p> </p><p>1.0 INTRODUCTION<br>1.1 BACKGROUND OF THE STUDY<br>the exchange rate is perhaps one of the most widely discussed topic<br>in Nigeria today. This is not surprising given it’s macro-economic<br>importance especially in a highly import dependent economy as<br>Nigeria (Olisadebe, 1995:20). Macroeconomic policy formulation is a<br>process by which the agencies responsible for the conduct of<br>economic policies manipulate a set of instrumental variables in order<br>to achieve some desire objectives.<br>In Nigeria these objectives include achievements of domestic price<br>stability, balance of payment equilibrium, efficiency, equitable<br>distribution of income and economic growth and development.<br>Economic growth refers to the continuous increase in a country’s<br>national income or the total volume of goods and services, a good<br>2<br>indicator of economic growth is the increase in Gross National<br>Product (GNP) over a long period of time. Economic development on<br>the overhead implies both structural and functional transformation of<br>all the economic indexes from a low to a high state (Siyan, 2000:150)<br>one of the macro –economic variables of importance is the exchange<br>rate policy country.<br>Exchange rate policy involves choosing where foreign transaction will<br>take place (Obadan, 1996). Exchange rate policy is therefore a<br>component of macroeconomic management policies the monetary<br>authorities in any given economy uses to achieve internal balance in<br>medium run. Specifically internal balance mean the level of economic<br>activity that is consistent with the satisfactory control of inflation. On<br>the contrary, external or sustainable current account deficit financed<br>on lasting basis expected capital inflow.<br>3<br>It is important to know that economic objectives are usually the main<br>consideration in determining the exchange control. For instance from<br>1982 – 1983, the Nigerian currency was pegged to the British pound<br>sterling on a 1.1 ration. Before then, the Nigerian naira has been<br>devalued by 10%. Apart from this policy measures discussed above,<br>the Central Bank of Nigeria (CBN) applied the basket of currencies<br>approach from 1979 as the guide in determining the exchange rate<br>was determined by the relative strength of the currencies of the<br>country’s trading partner and the volume of trade with such<br>countries. Specifically weights were attached to these countries with<br>the American dollars and British pound sterling on the exchange rate<br>mechanism (CBN, 1994). One of the objectives of the various macro<br>– economic policies adopted under the structural adjustment<br>programme (SPA) in July, 1986 was to establish a realistic and<br>sustainable exchange rate for the naira, this policy was<br>4<br>recommended in 1986 by the International Monetary Fund (IMF). On<br>exchange mechanism and was adopted in 1986.<br>The key element of structural adjustment programme (SAP) was the<br>free market determination of the naira exchange rate through an<br>auction system.<br>This was the beginning of the unstable exchange rate; the<br>government had to establish the foreign exchange market (FEM) to<br>stabilize the exchange rate depending on the state of balance of<br>payments, the rate of inflation, Domestic liquidity and employment.<br>Between 1986 and 2003, the federal Government experimented with<br>different exchange rate policies without allowing any of them to<br>make a remarkable impact in the economy before it was changed.<br>This inconsistency in policies and lack of continuity in exchange rate<br>policies aggregated unstable nature of the naira rate. (Gbosi,<br>1994:70).<br>5<br>1.2 STATEMENT OF THE PROBLEM<br>The exchange rate of the naira was relatively stable between 1973<br>and 1979 during the oil boom er (regulatory require). This was also<br>the situation prior to 1990 when agricultural products accounted for<br>more than 70% of the nation’s gross domestic products (GDP) (Ewa,<br>2011:78).<br>However, as a result of the development in the petroleum oil sector,<br>in 1970’s the share of agriculture in total exports declined<br>significantly while that of oil increased. However, from 1981 the<br>world oil market started to deteriorate and with it’s economic crises<br>emerged in Nigeria because of the country’s dependence on oil sales<br>for her export earnings. To underline the importance of oil export to<br>Nigerian economy, the gross national product (GNP) fell from $76<br>billion in 1980 to $40 billion in 1996, a number of economic growth<br>6<br>became negative as result of the adoption of structural adjustment<br>programme (SAP).<br>This major problem which this study is designed to solve is whether<br>the exchange rate has any bearing on Nigerians economic growth an<br>d development. While some Economist dispute the ability of change<br>in the real exchange rate to improve the trade balance of developing<br>countries (Hinkle, 1999:21) because of elasticity of their low export,<br>others believe that structural policies could however change the longterm<br>trends in the terms of trade and the prospects for export led<br>growth. Instabilities of the foreign exchange rate is also a problem to<br>the economy.</p><div><div></div></div><br> <br><p></p>