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THE EFFECT OF EXCHANGE RATE POLICIES ON THE NIGERIAN
MANUFACTURING SECTOR AN EMPIRICAL ANALYSIS
ABSTRACT
The main objective of this study is to examine empirically
the effect of exchange rate policies on Nigerian Manufacturing Sector, because
most policies put in place by Nigerian Government from time to time focus on
the margin between official rates and parallel market rate (Unofficial rates).
In July 1987, a merger of the erstwhile first and second-tier
exchange rates in the early phases of the structural adjustment programme took
place but this did not solve any problem.
The constructed model was estimated using the simple regression
analysis to test the relationship between the variable considered to the
dynamic behaviour and interaction of all other variables.
The result findings implied that a unit change in exchange
rate will lead to 42 percent decrease in average capacity utilization of the
Nigerian Manufacturing Sector while all other estimated variable co-efficient
included in the model gave the expected negative signs.
Finally, it was recommended that the internal strength of the
economy should be built up through agricultural and industrial transformation
which with the big potential of the Nigerian Economy should result in its less
dependence on external trade and short run crisis management of limited foreign
exchange resources.
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF
THE STUDY
The survival of any economy depends on the composition of the
manufacturing sector that operates in the country. This is however affected by
different macro-economic variables ranging from induced investment multiplier,
stock exchange performance indices, interest charged on loanable funds,
exchange rate and exchange rate policies.
Foreign exchange earnings from international trade
transactions and external aid are vital for the economic transformation of Less
Developed Countries (LDCs). All other things being equal, foreign exchange
resources so earned can induce increased factor supplies and promote the
development of manufacturing sector, technical skills and knowledge all of
which should enhance domestic capital formation and exchange has traditionally
been a critical element in the development planning process of Less Developed
Countries (LDCs). Whatever maybe the foreign exchange position of a Less
Developed Countries (LDCs) , effective management of available resource is
crucial for efficient and effective performance of manufacturing sector.
Nigeria went through varying development experiences which
required prudent management of available foreign exchange resources after
independent. Inadequate foreign exchange was a major constraint in the
execution of the First National Development Plan, 1962-1968, a situation that
was accentuated by the prosecution of the civil war which ended in January
1970. The period 1970-1980 witnessed a dramatic improvement in Nigeria's foreign
position following the substantial increase in crude oil prices in 1973/74 and
1979. however, foreign exchange management appeared too short term in nature
with the result that it did not consider possible long-term developments in the
world economy. Following the collapse of the world oil market in the early
1980's, Nigeria once more entered a very high foreign exchange position
especially in the context of previous commitments. Resource management and
exchange policy in place, initially continued with the short term approach, but
became more dynamic since 1986 when it was evident that the problems of the
economy were more fundamental than was previously conceived. Despite the fact
that foreign exchange management, since 1986, has responded adequately to the
needs of the economy it has revealed several issues which the design future
national development strategies must take into account.
In the context of the efforts to improve the efficiency of
foreign exchange management in Nigeria, the aim of this paper is to review and
assess the foreign exchange policies (management strategies) and its impact on
the Nigerian Manufacturing Sector.
1.2 STATEMENT OF THE
PROBLEM
The exchange rate has a direct bearing on many economic
variables, it effects; the stability of price, economic growth, employment and
balance of payment. The dependence of the Nigerian economy on imports for raw
materials capital equipment as well as technical expertise for the
manufacturing sector is such that any drastic fluctuation in the Naira exchange
rate is going to affect economic growth. A drastic change in cost of raw
materials thereby increasing cost of production thus resulting in price
instability in the local market and affect economic growth and development.
Most policies put in place by Nigeria government from time to
time, focuses in the margin between official rates and parallel market rate
(unofficial rates), but the question is, has these policies been able to merge
the two exchange rates in the economy. In view of the significant role of
exchange rate that is non-inflationary and capable of promoting non oil exports
and capital inflows and discouraging imports and capital overflows. Merger
parse should not be the desired goal. In July 1987, a merger of the erstwhile
first and second - tier exchange rates in the early phases of the structural
adjustment programme took place. But this did not solve any problem.
Distortions soon resurfaced in the foreign exchange market and the desired
objectives of exchange rate policy were not accomplished.
In order to strengthen the production sector in Nigeria, her
government has adopted policies like Second Tier Foreign Exchange Market
(SFEM), Autonomous Foreign Exchange Market (AFEM), Inter Bank Settlement (IBS),
Wholesales Dutch Auction System (WDAS) and Retail Dutch Auction System (RDAS),
which was adopted recently because of the Fluctuation in exchange rate of Naira
due to the economic meltdown in the world. But the questions still linger in
the mind, that:
i. To what
extent has the exchange rate policies adopted by Nigerian government improve
the performance of manufacturing sector?
ii. What are the
possible implications of interest rate policies on Nigerian Manufacturing
Sector?
iii. What happen
to firm's profit, turn over and investment in the face of fluctuation or
unfavourable exchange rate?
These issues are to be addressed in this research as a way of
assessing the impact of exchange rate policies on manufacturing sector in
Nigeria economy.
1.3 SIGNIFICANCE OF
THE STUDY
Nigeria economy is impact oriented and monoculture in nature,
almost 85% of her revenue are generated from proceed of oil, the epileptic
nature of other sector aids importation of finished and unfinished goods into
the country. The case is so worst to the extent that drinkable water and
toothpick are imported into the country. In view of this quick attention must
be given towards the fluctuating nature of Naira and the review of the
existence exchange rate policies must be of paramount issue, if the economy
will move forward mostly in the face of world economy recession.
Many studies have been carried out on the effect of exchange
rate policies on manufacturing sector mostly in growth and development, but
much effort must be laid in the manufacturing sector of sector of any economy
because of the vital roles in plays in the quest for growth and development
which will be the central theme of this research work.
Also, this research will be of great significant because of
its recency, for it will take into consideration the performance of the
manufacturing sector and try to ascertain the impact of the recent fluctuation
in Naira and the introduction of Retail Dutch Auction System (RDAS) by Central
Bank of Nigeria (CBN) level of production and capital investment in Nigeria.
Relevant research in this topic stopped at 2005 and the most
recent stopped at 2006 because of unavailable data, this research work will
take the pain and update the trend to 2008.
1.4 OBJECTIVE OF
THE STUDY
The main objective of the study is to examine empirically the
effect of exchange rate policies in Nigeria manufacturing sector. The specific
objectives of this study are:
i. To trace the
relationship between exchange rate fluctuation and performance of manufacturing
sector in Nigeria.
ii. To examine
the direct effect of exchange rate policies on Nigerian Manufacturing Sector.
iii. To draw
policy conclusion at enhancing and synchronizing the probable benefits of
exchange rate policies while limiting its side effects.
1.5 RESEARCH
HYPOTHESIS
The objectives earlier states are the basis of the evolved
research hypothesis and they seek to answer questions in:
· How Nigerian
manufacturing sector respond to any change in exchange rate of Naira.
· Investigate
and establish an empirical link between exchange rate and the performance of
manufacturing sector in Nigeria.
The Hypothesis is as follows:
Ho: Exchange rates
of Naira to Dollar do not have significant impact on manufacturing sector.
Hi: Exchange rates
of Naira to Dollar have significant impact on manufacturing sector.
1.6 SCOPE AND PLAN
OF THE STUDY
The scope of this research work covers the period of
1970-2007 in the area of data analysis but extends its framework to the first
quarter of 2009 in discussion and empirical analysis. The exchange rate of
Naira will be limited to Dollar for easy analysis and much effort will be in
local productivity firms rather than inflow of goods into the country.
This study is divided into five chapters with chapter one
containing the background, aims, objective, scope and justification of the
study. Chapter two focuses on what scholars had written on the topic and the
empirical framework of the research methodology. The fourth chapter contains
data presentation, model specification, statistical and mathematical analysis
of data and interpretation of data to see if the exchange rate policies have
effect in the performance of the manufacturing sector.
Chapter five which is the last chapter proffers suggestion
and recommendations based in observation. It also includes summary and
conclusion.
1.7 SOURCES OF DATA
AND METHODOLOGY
For this research work secondary data are employed which are
source from CBN, FOS bullions, CBN bulletins, CBN annual report and statements
of reports etc.
Regression analysis was used to analyze the collected data,
structured towards determination of significant relationship between the
fluctuations in exchange rate policies and the performance of the Nigerian
Manufacturing Sector. Required model were built to give a quantitative and
behavioural relationship that exist between the variable under study. At the
process of the model estimation, E-views facilitate the estimation process.
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