THE EFFECT OF EXCHANGE RATE ON BALANCE OF PAYMENT OF NIGERIA ECONOMY

CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND OF THE STUDY

In any nation, there are basically four objectives or goal of micro- economics policies (Ogunjimi, 2020).

i.     High level of employment

ii.     A reasonable stable price

iii.    Rapid economic growth and maintenance of equilibrium in the international balance of payment.

The last objective (balance of payments stability is very crucial since then basic condition of the world community is one of the mutual independence. Again, there is not a country in the world that does not rely to some degree for it’s national well being on international trade and payment (Ikechi & Nwadiubu, 2020).

The truth carried particular force for must developing countries whose trade and payment magnitudes are particularly large in relation to domestic economics activity (Musa, 2021).

According to Mesagan, Alimi & Vo, (2022), Since 1982, Nigeria has been experiencing a profound and sustained economic crisis used in her contemporary economic history indeed from the sailed on unsteadily and dangerously towards the devastating economic hurricane of the 1980’s . It can be said that the deeping current Nigerian economic crisis has in long term perspective spanned about two decades, since 1978 (Asaleye, Maimako, Inegbedion, Lawal & Ogundipe, 2021). The crisis has in general been manifested in an acute problem of federal imbalance and accommodating monetary policy or expansion fiscal and monetary policy, fragile export base and weak non-oil export earning import depended production base and undiversified nature of the economy (Fofanah, 2020). Other problem include unprecedented increasing level of unemployment of the most energetic Imaginative, Innovative and highly educated and skilled section of the labour force. Low and decreasing level of capacity utilization in many others resulted into manufacturing Industries. All these and many others resulted into serious foreign exchange problem because exchange control were not applied consistently and the administered exchange late mechanism adopted led to the over evaluation of the naira exchange rate (Keho, 2021).

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 29.9% average annual growth rate in 1980-1984 as recorded by the total domestic credit to the economy (Aderemi, Fagbola, Sokunbi & Ebere, 2020). And most of the increase was attributed to net claims by government simultaneously, two debit Inflation at a mean yearly rate of 20.2% was registered, clear evidence perhaps, in support of the monetarists proposition. But the Inflation in 1984, which stood at almost 40% is Imported goods and services imposed by Inadequate foreign exchange earning.

A derivation of the steep fall in crude oil price before the Introduction of SAP in 1986, the Nigerian economy was obviously distress for external reserve was high while the balance of payment area pushed the country to an economically disadvantaged position. Real out put declined and hence Import which in turn resulted to the decline in foreign exchange earning as such SAP was introduce in 1986 to eliminate there observed distortion in the economy (Moyo & Tursoy, 2020). That’s why structural adjustment programme (SAP) getting price has foreign exchange rate reform as it’s central focus (FRM) in pursuit of this, the second tier foreign exchange market, (FEM) Inter-bank foreign exchange market (IFEM) was established. The autonomous foreign exchange market (AFEM) especially for the Important of Important of finished goods and services as well as eliminating the stimulate non-oil exports, in addition to the new foreign exchange management system was to be relied upon to eliminate illegal currency trafficking, smuggling activities and foreign exchange malpractices. If the objectives of eliminating bureaucratic and rapid exchange control could be attained (Mlambo, 2020). So far most of the designed exchange rate objectives has not been achieved because the prevailing exchange rate now cannot be described as a realistic exchange neither has it stimulate non oil exports.

Foreign capital inflow has been below expectation which capital flight has heightened yet the parallel foreign exchange market has not been eliminated. The unstable exchange rate and the balance of payment deficit position would be better appreciate if the nature dimension and cause closely understood.

1.2  STATEMENT OF RESEARCH                    

The following problem has necessitated this;

A)   Prior to the adoption of SAP in 1986, Nigeria has no well spelt out trade policies. The aim was the formulation of trade policies meant to protect the local Industries thus the policies consists of quantitative Import control administered through Import licensing system relatively high tariff and imposition of quantity restrictions on imports by way of quota as and the out right barn on certain  items. All their measures limits the free movement of goods and services and hence exchange of currencies both between Nigeria and other countries as a result, the exchange rate of Naira has been greatly affected by those economic controls.

B)   Dependence on the oil sector for exchange earning  

C)  There exist the problem of foreign exchange inadequacy

D)  Continuous depreciation of the naira exchange rate coupled with inability to determine precisely the level of exchange rate of the naira that would ensure the internal and external balance simultaneously.

(E) The existence of black market where the naira in exchange rate in the sense that the black market violates all policies and regulatory measures used by government to control the exchange rate of the naira and as such records the actual exchange due to the existence of the black market.

1.3  OBJECTIVES OF THE STUDY

The objectives of this study includes;

(a)   To examine the relationship between exchange rate and the Nigeria balance of payment position

(b)   To examine the relationship exports, imports and Nigerians balance or payment using economic analysis

(c)   To examine the relationship between national income and Nigeria balance of payment using economic analysis

(d)   To evaluate the level of impact of import on some economic variables (GDP) Gross domestic product, if-relative price index of average world price of Nigeria’s major agricultural commodities.

(e)   Based on the finding, make policy recommendation that will be useful in fore-exchange management.

1.4  SIGNIFICANCE OF THE STUDY

The general relevance of this study lies in it’s attempt towards the understanding of the relationship between exchange rate and balance of payment in the Nigeria economy. In particular by using Nigeria as an empirical evidence, the research will provide quantitative information which will enable us know and when to use exchange rate management policy to current balance of payment problem.

A further significance of this study is that it will serve as one of the studies or research work aimed at verification or refutation of balance of payment theories since any theories, regardless of its elegance in exposition or its sound logical consistency, cannot be established and generally accepted without some empirical testing.

1.5  SCOPE OF THE STUDY

Balance of payment deficit and unstable exchange rate is a global phenomenon and ha not been smooth in its movement in Nigeria. The study examines the relationship between balance of payment and exchange rate and the period covered by the research is twenty-five years period 1980-2004. This period is chosen because 1980-1986 is the pre-SAP period.

While 1986-1988 is the SAP period and 1989-2004 is the post SAP period.

1.6  HYPOTHESIS

The following hypothesis will be tested in this research work.

Hypothesis 1

H_o:   That exchange rate is not the main determinate     of balance of payment and does not have inverse relationship with balance of payment.

H_i:   That exchange rate is the main determinate of balance of payment and have no increase relationship with balance of payment.

Hypothesis 2

H_o:   That the national income (GDP) and relative price of agricultural products are likely going to have position correction with balance of payments.

H_i:   That the national income (GDP) and relative prices of agricultural products are not likely to position correlation with the balance of payments.

1.7  LIMITATION OF THE STUDY

The researcher while carrying out this project work encountered the following limitation. First the accuracy and reliability of the research finding gathered through personals. Interview are limited by the extent of the reliability of the information.

Also a time constraint is a major factor. The information used are not all products of primary research but are largely published information obtained from books and statistics from government department and agencies.

1.8  DEFINITION OF TERMS

The definition of basic concepts for the research work.

Balance of payment: According to Oxford dictionary of economics by John Black, balance of payment is an overall statement of a country’s economic transactions with the rest of the world over some period, often a year. It can also be seen as  the difference between futal receipt and expenditure in any category of payment account as a summary of the money value of all international transaction of an economy, in some form of aggregation, pertaining to a given period of time usually a year.

Exchange rate: Keho, (2021) definied foreign exchange rate of a country as the rate at which a country’s currency exchanges for other country currencies the oxford dictionary of economics defined exchange rate as the price of one currency in terms of another.

An Economy: An economy can be seen as any specified collection of interrelated set of market and non-marketed productive activities.

Nigeria Economy: The Nigeria economy refers to all such economy activities taking place in the geographical diemain of Nigeria (the domestic economy) or such economic activities of Nigeria residents wherever in the world they happen to perform that activity.

1.9  ORGANIZATION OF WORK

For a systematic  approach, this research paper is divided into five chapter which are further subdivided in sections.

The Introductory sections present the general introduction, the statement of problem, objective of study significance of study scope, stated hypothesis, limitation of work are shown in chapter one in chapter two, in relevant literature is reviewed. The methodology of the research is presented in chapter three chapter four concentrated on presentation and analysis of reggression result the policy implications of such analysis or result are also identified chapter five concludes the research.