THE EFFECT OF EXCHANGE RATE POLICIES ON THE NIGERIAN MANUFACTURING SECTOR AN EMPIRICAL ANALYSIS

 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.