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EXCHANGE RATE DETERMINATION IN NIGERIA; 1971-1990
EXCHANGE RATE DETERMINATION IN NIGERIA; 1971-1990
Abstract:
The exchange rate policy introduced in Nigeria in September, 1986, aims at establishing the naira exchange rate based on the market conditions of demand for and supply of foreign exchange. The objectives of the policy are to diversify the revenue and foreign exchange sources to the government, reduce the over-valuation of the naira and improve the trade balance of the country. The controversies about the appropriateness of this policy of allowing market forces to determine the exchange value of the currency provide the inspiration of this study to enquire into whether Nigeria should continue, modify or abandon the policy of depending on market forces in determining the naira exchange rate. This study looks at the Nigeria’s exchange rate time path and evaluates the fluctuations in exchange rate which the foreign exchange market has produced since 1986. we 2 have also used the X tests to evaluate the responses of exports, imports and rate of inflation to the market exchange rate over the period. The results of the dissertation show that the depreciation of the naira as a result of determining the exchange value of the naira through the foreign exchange market has failed to significantly reduce imports and boost the exports denominated in foreign.currency. The increase in exports is only in nominal (naira) terms. The policy has also led to under-valuation of the naira as a result of which the rate of inflation has risen sharply and real income reduced. It has also led to currency speculations and these cause constant depreciation of the naira because of the limited supply of foreign currencies. From 1986 to 1990, when the exchange rate is determined through the foreign exchange market, there has been fluctuations of exchange rate and these are likely to distort long—term development plans and discourage both domestic and foreign investments. As an alternative to the market-determined exchange rate, we suggest a weighted average of market-determined rate which is to be determined through the foreign exchange market and the purchasing power parity rate to be computed periodically by the central Bank of Nigeria. This will help to achieve the objectives of boosting the non-oil exports and reduce imports with minimum rate of inflation. There should also be more control and supervision of the authorised dealers in their sale of foreign exchange to customers to ensure strict compliance with central Bank’s directives on allocation of foreign exchange according to sectoral priority.
EXCHANGE RATE DETERMINATION IN NIGERIA; 1971-1990