EFFECT OF EXCHANGE RATE FLUCTUATION ON IMPORTED GOODS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND OF THE STUDY

        The Nigeria economy has witnessed a great degree of instability ever since the end of Civil War. From 2.48824 to 1.24414 grains of fine gold following the exchange of the Nigerian Pound to Naira in 1973, fixed exchange rates were establish for both Pound sterling and the US Dollar at £0.5833 and US 1.5200 respectively to N1.00 this has caused havoc to the Nigerian economy in that exchange rate the Naira to both Dollar and Pound sterling has been observed that the economy has it also been witnessed the highest degree of inflation. The result is that Nigeria as a country has last it’s financial credibility in the outside world at the home front because the exchange rate is net to our favour the country has witnessed the greatest degree of brain drain.

        The exchange rate fluctuations has effected most our industries that import whole or part of their raw materials and the result is that production is below capacity utilization, resulting in unemployment. Again, because of the exchange rate, most local home made goods are expensive thereby pricing themselves out of the market.

        The rate at which Naira exchange for Dollar determines the rate at which goods are sold in the market. Therefore, the exchange rate fluctuation effects the prices of imported goods upwards or downwards as the case may be.

        At the same time, it affects the price of locally produced goods that most of the raw materials and machines are imported and prices at which the currency of exchange are secured effect the price positively or negatively.

        The control of exchange rate fluctuation in the money market has posed problems to both the government and individuals corporate and individual firms.

        This has lead to the continued search for a viable economic order for the country which has to the introduction of FEM were:

a. Determination of realistic exchange rate of the Naira.

b. Using the topic mechanism to channel resources to the most deserving sector of the economy. 

        The exchange rate influence importation positively. When exchange rate is high, importation of goods will decrease except for necessities, which have a negligible reaction to exchange rate.

        Exchange rate has a direct influence on price of imported goods positively. However, in practice, imports respond more quickly to change in domestic income than to change in the real exchange rate. Again, if sustained, a change in the real exchange rate will eventually have significant effect on the level of imports as well as export in contrast, imports have been on the increase since 1985. When there is depreciation of the Naira, the exchange rate fluctuates downwards and this makes import very costly, conversely, when the Naira appreciates, it favour imports.

        Adverse fluctuation rate make for losses or lower profit due to increases in the prices of input used in production process  Nigeria is highly dependent on imported input and raw materials to keep the numerous manufacturing industries going. Consequently, with every depreciation of the Naira, the price of imported inputs soar in terms of Naira and this is transmitted to the whole economy in the form of higher price of goods and services and intolerable inflation since a fall in the international value of Naira makes Nigeria goods cheaper in foreign currencies and foreign goods more expensive in Naira this change in the Naira exchange rate tends to increase the quality of goods Nigeria export and reduce the quality of goods imported to Nigeria. During the period under review, 2000 – 2012 Nigeria had the highest inflation rate than most of its trading partners. Whether Nigeria goods became more or less competitive in the world market depends on whether the increase in Nigeria competitiveness as justified by real events in the economy such as technological progress, changes in external terms, change in taxation etc.

        Adverse changes in exchange rate gives producer distinct advantage in cost competitiveness. The major negative effect of the fall in exchange rate of Naira is that, it make planning very difficult.

        Near accurate plans cannot be made because exchange rate continues tumbling thereby making business projections inaccurate marketing experts and mangers are therefore faced with the problem of setting accurate strategies marketing plans and operations. 

1.2      STATEMENT OF THE PROBLEM

        The fluctuation of exchange rate and its attendant effects on price of imported goods in Nigeria has posed a big challenge to financial institution importance of various goods and Nigeria institutions, importance of various goods and Nigerian populace in general.

        It is on this backed up that the researcher was prompted to engage in further exploration with a view to ascertain, the effect which exchange rate fluctuation have on imported goods in Nigeria. Hence this study focuses on the imported goods in Nigeria.

1.3      PURPOSE OF THE STUDY

        The objective of this study is to ascertain the effect of exchange rate fluctuation on the imported goods in Nigeria.

The objective can be broken down as follows:

i.              To know the reason of this upward movement of the pricing of goods in Nigeria. 

ii.            To discover why Nigeria depends solely on imported industrial inputs for its industrial use.

iii.            To x – ray why the steady rise in exchange of the Naira over other currencies.  

1.4      SIGINIFICANCE OF THE STUDY

        The findings of the study will form a benchmark on which the marketing experts and monetary authorities will appraise and if necessary modify the existing policies.

        This study will give a clear perception through the highlight of the strengths and weakness of foreign exchange management a great percentage of the Nigerian populace have not yet come to terms with the fact that the foreign exchange markets is part of the economic recovery programme.

1.5      RESEARCH QUESTIONS

   The following questions will guide the study:

1.     Is upward movement of the pricing of goods in Nigeria due to exchange rate of fluctuation?  

2.     Is over dependence on importation of industrial equipment in Nigeria due to lack of economics of scale?

3.     Does the price of made in Nigeria goods fluctuate with the prices of imported goods?

4.     Does the steady rise in prices of imported goods in Nigeria due to the exchange rate of Naira to Dollar?

1.6   SCOPE OF THE STUDY

        The study sets out of X – ray the effect of the exchange rate fluctuation on the prices of imported goods in Nigeria.

        The period covered by the study is 2000 – 2012 and limited to some financial establishments and importers within Lagos metropolis because the researchers believes that the general position in Nigeria would be the same from result of the Lagos metropolis since the exchange rate fluctuation prevails throughout the country. The other areas the study peered into through availability of some secondary data, including x – raying the annual average exchange rates of the Naira, retail prices of some locally manufactured/packaged goods, pre SAP and Post SAP retail prices indices of some select goods imports and annual rate of the Naira.

1.7   DEFINITION OF TERMS

        Exchange rate is the price of one currency in terms of another. More accurately an exchange rate is the number of units of foreign currency and vice versa.

Nominal Exchange Rate

        The nominal exchange rate is defined as units of domestic currency per unit of foreign exchange.

Trade Tables

These are goods what could be exchange for in the international market.

Non Trade Table

        These are the outputs of an economy that can be consumed domestically and therefore for exportation e.g. electricity.

Misalignment

        This is the deviation of the actual real exchange rate from its equilibrium value.

Purchasing Power Party (PPP)

        The purchasing Power Parity rate is path of the nominal exchange rate that would keep exchange rate constant over a given period. The Purchasing Power Parity between two countries is defined as either the ration currencies price level (absolute PPP) or the product of the exchange rate

in a base period and the reciprocal of the absolute PPP (relative PPP).