Wednesday, October 30, 2019

AN EFFECT IN EXCHANGE RATE ON BALANCE OF PAYMENT IN NIGERIA


CERTIFICATION
          We the undersigned certify that this research work, whose title is “An effect in exchange rate on balance of payment in Nigeria.


















CHAPTER ONE

INTRODUCTION

1.1           OVERVIEW OF THE STUDY
Since 1982, Nigeria has been experiencing a propound and sustained economic crisis unparallel in her contemporary economic history, indeed from the economic squall of 1978, Nigeria has been unsteadily and dangerously towards the devastating economic hurricane of the 1980’s. It can be said that the deepening current Nigeria economic crisis has in long term perspective spanned about two decades since 1978. the crisis has in general been manifested in acute problem of fiscal in balances and accommodating monetary policy or expansionary fiscal and monetary policies, fragile export base and weak non-oil export earning, import dependent production structure, and weak production base and undiversified nature of the economy. Other problems include unprecedently increasing level of unemployment of the energetic imaginative, innovative and highly educated and skilled section of the capacity utilization in the manufacturing industries. All these and many others resulted into serious foreign exchange problem, because exchange controls were not applied consistently and the administered exchange rate mechanism adopted let to the over valuation of the naira exchange rate. Nigeria has been endangered by high rate of foreign exchange inflation and balance of payment disequilibrium which led to series of political unrest and social disorder such as the 29-9% average annual growth rate in 1980-1984 as recorded by the total domestics credits to the economy and most of the increase was attributable to net claims by government. Simultaneously two-digit inflation at a mean yearly rate of 20.2% was registered, clear evidence perhaps in support of the monetarist’s proposition. But the inflation in 1984, which stood at almost 40%, is often explained in terms of acute storages of imported goods and services imposed by inade4quate foreign exchange earnings.
Before the introduction of structural adjustment programme (SAP) in 1986, the Nigeria economy was obviously distress the demand for external reserve was high while the balance of payment areas pushed the country to an economically disadvantage position. Real output declined and hence import which in turn resulted to the decline in foreign exchange earnings and as such ASP which is structural adjustment programmed was introduced in 1986 to eliminate these observed distortion in the economy. Also due to the deepening internal and external disequilibrium, it then became imperative to adopt the structural adjustment programme (SAP). The SAP is predicated mainly on the principle of “getting price right and has foreign exchange rate reform as it central focus. In pursuit of this, the second tier foreign market (SFEM) was brought in existence in late September 1986. the SFEM later metamorphosis 1.9 something change completely into the foreign exchange market (FEM) inter-bank foreign and exchange market (IFEM) then Autonomous foreign exchange market (AFEM), but now, it’s back to IFEM, all reflecting a high degree of deregulation. The SFEM 1.9. The second tier foreign market was predicated on the attainment of a realistic exchange rate of the naira, through depreciation by the market forces of supply and demand for foreign exchange. It was expected that a realistic exchange rate should reduce excessive demand for foreign  exchange, especially for the importation of finished exchange as well as eliminating the prevailing distortions in the economy and stimulate non-oil exports. In addition, the new foreign exchange management system was to be relied upon to eliminated illegal currency trafficking, smuggling activities and foreign exchange malpractices if the objective of eliminating bureaucratic and rigid exchange control could be attained (OJO, 1990).
So far, most of the desired exchange rate objective have not been achieved because that prevailing exchange rate now cannot be described as a realistic exchange rate. In essence, it hence reduced excessive demand for foreign exchange neither has it stimulated none of exports; foreign exchange capital inflow has been below expectations while capital flight has heightened. Yet the unstable exchange rate and the balance of payment deficit position would be better appreciated of its nature dimension and causes are closely understood.
1.2           STATEMENT OF THE PROBLEMS
Prior to the adoption of structural adjustment program (SAP) in 1986, Nigeria had no well spelt out trade policies. The practice was the formulation of trade policies, meant to protect the local industries, thus the policies consist of qualitative import controls administered through import licensing system relatively high tariffs and imposition of quantity restrictions on imports by way of quotas and the outright ban on certain items. All these measures limits the free movement of goods and services and hence exchange of currencies between Nigeria and other countries as a result, the exchange rate of the naira has been greatly affected by this economic controls. Typical of this economic control was the exchange control system based largely on the exchange control act of 1962, which was applied vigorously during the civil war and up to 1971, during which the Nigeria currency became increasingly, unconvertible.
However, the problem of foreign exchange inadequacy, dependence on the oil sector for exchange earning, continuous depreciation of the naira exchange rate coupled with the inability to determine precisely the level of exchange rate of the naira that would ensure the internal and external balance simultaneously. The existence of black market where the naira is exchange with other currencies illegally has also affected the exchange rate in the sense that the black market violates all policies and regulatory measures used by the government to control the exchange rate of the naira and as such the existence of these black market has to a large extent distorted the effective measure of exchange of Nigeria currency (Naira) with those of other currencies and as the records (data) of exchange does not reflect the actual exchange due to the existence of the black market.

1.5           SCOPE OF THE STUDY
Balance of payment deficit and unstable exchange rate is a global phenomenon and has not been smooth in it’s movement in Nigeria. This study examines the relationship between balance of payment and exchange rate using 1980-2004 as a reference period.
This period is chosen because 1980-1985 is the pre-SAP period while 1986-1988 is the SAP period and 1984-2004 is the post-SAP period.

CHAPTER TWO
LITERATURE REVIEW
                                          CONCEPT OF FOREIGN EXCHANGE RATE
The main objective of exchange rate policy during the early years of 1980’s was to check inflationary pressures. This was achieved by maintaining an overvalued exchange rate so as to encourage importation. Consequently the exchange rate was maintained well below the equilibrium level. The official average rate was ($100=N0.8924) between 1980-1985 compared with purchasing power parity (PPP) rate of ($1.00= N3.4716).
In 1986, a market driven exchange rate policy was therefore put in place to adjust the exchange rate to it’s equilibrium and reflect from export and payment for import over a specified period of time usually a year.
     III.      MONETARY POLICY: this has to do with the regulation of money supply by the monetary authorities of a country to affect the real sector of the economy.
        III      MONETARY POLICY: This has to do with the regulation of money supply by the monetary authorities of a country to affect the real sector of the economy.
   IV  FISCAL POLICY: This policy involves the control of taxes and government expenditure. It is often called “power of the purse” entrustment.
    V  INFLATION: This is the persistent and appreciable increase in general price level of an economy.
   VI  UNEMPLOYMENT: Is a situation which arises when able-bodies member of the labour force who are qualified and willing to work at the prevailing wage rate in an economy present themselves for payment but cannot get jobs.
NATIONAL INCOME: As a money or market value of the final goods and services currently produced in an economy by its citizens during a particular period of time usually one year.
DEFICIT: is a situation whereby the government expenditure exceeds it revenue target there by creating government dis-savings that could result in public borrowing of financing programme R L E.
FOREIGN EXCHANGE MARKET: Foreign exchange market deals with the sales and purchases of foreign currencies where importers buy foreign currencies to pay for import.
DEPRECIATION: is an allowance made in estimates, valuation on balance sheet, normally for wear and tear of assets.
REGRESSION: This is the study of relationship among variables.














CHAPTER TWO
LITERATURE REVIEW

2.1 CONCEPT OF BALANCE OF PAYMENT
          The balance of payment is a statistical statement summarizing for a specific time frame, economic transaction between residents of an economy and the rest of the world. Specifically, the balance of payment record the import and exports of goods, services and income and transfer as well as changes in a country’s liabilities to and claim (assets) on the rest of the world or non residents. Thus the balance of payment is a flow and not a stock concept and it involves more than payments. In other words, certain transaction which may not have been paid for in cash and kind are also recorded gifts in cash and kind, deferment of debt service payment due, as well as unmerited profit among others.
          The balance of payment is broadly structured into the current and capital accounts. The current account records transactions in goods, service and income as well as unrequited transfer which the capital account (excluding reserve movement) refers to changes in financial assets and liabilities specifically, the capital account records transactions in direct and portfolio investment, external loan drawing and amortization changes in shirt term capital including the net change in commercial and merchant banks assets and liabilities as well as errors and omissions. It also records reserve movement, which refers to transaction relating to central bank holding of gold, special drawing right (SDR) foreign exchange and use of fund credit.
      
CHAPTER FIVE
SUMMARY CONCLUSION AND RECOMMENDATIONS
SUMMARY

          The data analysis in chapter four is in line with appropriate expectation and also in consensus with the reviewed literature, it show that there is a relationship between exchange rate and Nigeria’s balance of payments and that is an issue independence. It should be mentioned that a lot of the seed of payment problem and that of exchange rate were some by colonial masters which came with the objective or exploiting the country and the over and under earnings and the values of imports.
          For this reason therefore, it is clear that factors which have contributed to the weakness of balance of payments includes, the poor performance of non-oil exports fluctuation in crude oil prices, lack of meaningful participation by Nigeria’s in the provision of international service related to shipping, insurance and tourism as well as the low level of income from direct investment aboard by Nigerians. Others include low level of loan disbursement leading to net transfer of resource aboard and the high debt service payments. However, these factors include lack of adequate strategy for managing crude oil shock, hostile international economic environment, lack of progress in restructuring Nigeria a long term basis, slippages in monetary and fiscal policy implementation, high and volume of imports due to the high demand for foreign goods. All these have effect on the balance of payment position.
 CONCLUSION
Since 1982, when the second oil shock and shock ans debit burden became seriously pronounced the Nigeria’s balance of payment have been under persistent pressure, attempt towards managing balance of payment involving restrictive exchange rate practice failed to achieve the objective of policy. The liberalization of exchange controls and the instruction of a market bases exchange mechanism with the commencement of the structural adjustment programmed [SAP] temporarily stabilized international payment. However, slippages in policy, in particular the pressure on the external sector. Non-oil export that initially rose at the incitation of [SAP] declined after some time and remained low and this has affected the balance of payment position.
          This disparity in the size of oil export and non export in terms of relative comparism, the unfavorable domestic and international economic environment have constrained the achievement of balance and sustained economic growth that could foster balance of payment viability.
          However, if the foreign exchange rate policies are seriously implemented as well as the recommendation started earlier, then the Nigeria’s balance of payment will improve to sustain and revamp the economy from it’s present predicament.
RECOMMENDATION
The following recommendations are suggested to correct the worrisome mistake of the past and create positive and dynamically viable level of balance of payment a stable exchange rate.
1.         the unification of the official and autonomous exchange rate will reduce the distortion effect of such divergence and encourage non-oil export.
2. resolution of the external debt problem by way of restructuring the external debt so as to reduce the debt service payments to a level that will release resources for domestic use in the productive sectors of the economy. To achieve this objective, the need to conclude a medium term economic restructuring programmed with the international monetary fund [IMF] becomes very compelling.
3.                increase the non-oil export commodities.
4.                harmonization of monetary non-oil export and fiscal policies.
5.                protection of small scale industries
6.           encouraging the agricultural sector so as to increase agricultural export.

Reference
IGANIGA B.O (2000) The Structure Of The Nigeria Financial System First Edition Amfitop Ekpoma Books






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