THE EFFECT OF THE CURRENT EXCHANGE RATE POLICY ON THE MANUFACTURING

CHAPTER ONE

INTRODUCTION

GENERAL BACKGROUND TO THE SUBJECT MATTER:

            Exchange rate is the price of domestic currency in terms of foreign currency. There exist various forms of exchange rate; i.e those determined by the market forces of demand and supply.

            No matter the type of exchange rate adopted by a country, it has an effect on the manufacturing sector of that particular country and in this research an attempt is made to examine the current exchange rate policies adopted by the Nigeria  government and its effect on the manufacturing sector, this effects may be positive or Negative.

            Since independence, the Nigerian government has been engaged in activities to boast the performance of its manufacturing sector because the manufacturing sector it inherited from the colonialist government of great Britain was virtually non existent. This was because the colonialist encouraged product of primary products such as cocoa, rubber, groundnut, palm kernel and other cash crops for export to their mother country and for use as imports in their industries instead of using them in  Nigeria’s industries and the finished products are exported back to Nigeria for sale to thee citizens.

            Foreign exchange is an important aspect of the development of the manufacturing sector.  This is because foreign exchange is needed to source for import from abroad, such import take the source for import from abroad, such imports take the from of capital goods (like heavy machinery and equipment) and raw materials that are needed in order for production of manufactured goods to commence with this in mind the government introduced sectorial location whereby foreign exchange would be accessible to different sectors of the economy especially the manufacturing at rate at which the cost of production would not be too high as to push prices of finished goods above the reach of average citizens. The manufacturers were encouraged to produce goods above the reach of average citizens. The manufactures were encouraged to produce goods especially those that could be exported in order for them to source their own foreign exchange.

            The government adopted foreign exchange policies, this project looks into them and see how they have affected the manufacturing sector taking particular reference to Anammco manufacturing company. By the 1970’s Nigeria became an oil rich country with etro-dollar flowing into the coffers of the nation, this led to a neglect of the agricultural sector and manufacturing sector and Nigeria a former net exporter of food became a net exporter of food and essential commodities. This led to an over dependent oil export for our foreign exchange earning and therefore subsequent fluctuations in the price of oil in the early 1980’s and then a fall in oil price from N40 per barrel to about N22 led to a fall in our earning of foreign exchanged and this affected our economy. In the face of a dividing in the foreign exchange reserve of our country, the nation was faced with a balance of payment deficit as we were importing more goods than exporting the government had to  change its exchange rate policy as well as source for foreign exchange from exchange from other sectors like the manufacturing sector and agricultural sector, therefore this sector were encouraged and given incentives. The economic stabilization measure of stringent foreign exchange control was therefore introduced in April 1982 with various modifications.  In 1984 when this measure failed to revamp the economy, the structural adjustment programme was introduced in September 1986 and its philosophy was the introduction of a floated exchange rate that would determined by the market forces of demand and supply.

            During this period of scarcity of foreign exchange the manufactures could not import the raw materials needed, most of their industrial machines were in need of spare parts and those that a number of industries folding up and declaring bankrupt but Anammco manufacturing company was able to source it foreign exchange, it led to prices of their finished products being too expensive.

            As a result of the situation in which Nigeria found herself, Nigerians were forced to look inward and this increased the actuality of the manufacturing sector and led it to be a high priority sector in terms of credit allocation under SAP and also the manufacturers were encouraged to source their raw material locally.  Also the government advocated for import substitutes to the imported ones.

            In 1995, a dual exchange rate policy was introduced and which was also retained in 1996 and 1997, in  this policy the autonomous foreign exchange market (AFEM) was established. In this year’s budget, the government promised that they would maintain he current dual exchange rate policy with the ultimate aim of a subsequent major.

 PROBLEMS ASSOCIATED WITH THE SUBJECT MATTER:

The first division of problems is in relation to the current exchange rate policy, these include the volatility of exchange rate, inadequate foreign exchange supply, high demand for foreign exchange, operations of the parallel market as an unsanctioned barometer of market forces, government intervention in the foreign exchange market through the country’s monetary authority and there solution of banks to be successful at every bidding session.  A fact that the more volatile an exchange rate is the higher the cost of risk and speculations which will in a way affect production.

The Nigerians has been subjected to two major exchange rate policies (ie. The fixed and floated exchange rates) by the government and this study will examine the effect of the current exchange rate policy (ie. The dual exchange rate) on the manufacturing sector either positive effect or negative effect, whether an increase in production or a decrease in production has been tremendous.

The current exchange rate policy has affected Anammco manufacturing company in the following ways:

1.            The cost of production through the influence of the price of C.K.D completely knocked down parts).

2.            The capacity utilization of the company since production is limited to available raw materials.

3.            The unit price (marginal cost) of the products due to the constant fluctuation in value of foreign currency Vis-à-vis the naira, (exchange-rate).

4.            The efficiency of production since there is no assurance that production can always take place.

In this regard this study seeks to examined the current exchange rates been used in Nigeria and to find out which exchange rate will be best suited for the country’s economy so as to enhance an increase in production of the manufacturing section.

1.3         PROBLEMS THAT THE STUDY WILL BE CONCERNED WITH:

In view of the problems stated above the major objective of this study is to examine the performance of the manufacturing sector under to current exchange rate policy with special emphasis on Anammco manufacturing company.

 THE OBJECTIVE OF THIS STUDY INCLUDES:

i.              Look into how these exchange rate policies have influenced the sourcing of imports ie. Either reduction or increase in level of raw material acquisition.

ii.            Look into these exchange rate policy have influenced the manufacturing sector either positively or negatively. This is in terms of investment, profit etc.

iii.           To examine how the current exchange rate have affected sectorial allocation of foreign exchange to the manufacturing sector.

iv.           To review the performance of the manufacturing sector under the current exchange rate policy with regard to G.DP.

THE IMPORTANCE OF STUDYING THE AREA:

This research is carried out with aim of knowing the effect of the current exchange rate with the aim of knowing the effect of the current exchange rate policy on the manufacturing sector, this project will also look into the motive of their establishments, their conduct, structure, problems, performance and prospects of the sector.                     

            The significance of this research is that it helps to know whether exchange rate and the level of population in any way affects the production and sales level of the sector. It will further expose us to the roots of their ineffectiveness and also prove the causes.

 DEFINITION OF IMPORTANT TERMS:

This research work is basically on the effect exchange rate policy on the manufacturing sector. The study is primarily concerned with the effect of the current exchange rate policy on ANAMCO MANUFACTURING COMPANY Enugu.

The underlisted terms are used to expanciate the company.

EFFET -  The change, or cause; result or the outcome of current exchange rate policy on the manufacturing sector.

CURRENT EXCHANGE: The present relation in value between the money in different countries.

POLICY- A plan of action proposed or adopted by a government concerning exchange rate which affect the manufacturing sector.

RAW MATERIAL ACQUISITION – Acquiring of raw material 9input) is affected by current exchange rate policy.

INEFFECTIVENESS – This is used to qualify the company that is not producing the required result.

VOLATILITY – The exchange rate situation is likely to change suddenly which means that it is not stable.