THE EFFECT OF EXCHANGE RATE FLUCTUATION ON THE NIGERIA MAUFACTURING SECTOR

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Following the fluctuation of the naira in 1986, a policy induced by the structural adjustment programme (SAP), the subject of exchange rate fluctuation has become a topical issue in Nigeria. This is because it is the goal of every economy to have a stable rate of exchange with its trading partners. In Nigeria, this goal was not reached in spite of the fact that the country embarked on devaluation to promote export and stabilize the rate of exchange. The failure to realize this goal subjected the Nigerian manufacturing sector to the challenge of a constantly fluctuating exchange rate. This was not necessitated by the devaluation of the naira but the weak and narrow productive base of the sector and the rising import bills also strengthening it. In order to stem this development and ensure a stable exchange rate, the monetary authority put in place a number of exchange rate policies.

However, very little achievement was made in stabilizing the rate of exchange. As a consequence, the problems of exchange rate fluctuation persisted in macro-economic management, exchange rate policy as an important tool derives from the fact that changes in the rate of exchange have significant implications, for a country‟s balance of payment position and even its income distribution and growth. It is not surprising since its behaviour is said to determine the behaviour of several other macro-economic variable (Oyejide, 1985). It is even more so for Nigeria which had embarked on a course of rapid economic growth with attendant high import dependency.

The manufacturing sector plays a catalytic role in a modern economic and has many dynamic benefits that are crucial for economic transformation. In an advanced country, the manufacturing sector is a leading sector in many respects. It is a quest for increasing productivity in relation to import substitution and export expansion, creating foreign exchange earnings capacity, raising employment, promoting the growth of investments of a faster rate than any other sector of the economy, as well as wider and more efficient linkage among different sectors (Fakiyesi, 2005). But the Nigerian economy is under-industrializes and its capacity utilization is also low. This is in spite of the fact that manufacturing is the fastest growing sector since 1973/74 (Obaden, 1994). The sector has become increasingly dependent on the external sector for import of non-labour input (Okigbo, 1973). In the ability to import therefor; can impact negatively on manufacturing production

Oyejide (1985) posited that the breakdown of the Brelton woods system induce variability in the rate of exchange worldwide; Nigeria inclusive. Umubanwer (1995) has noted that three adverse consequence of this on ability to import. Devaluation which further aggravates the situation has not significantly affected economic performance in the positive direction in Nigeria (Ojo, 1990). The impact of fluctuation in exchange rate on manufacturing output had not receives adequate attention. This paper attempts to give attention to the issue.

1.2 STATEMENT OF THE PROBLEM

This research work is meant to emphasize on the issue of fluctuating exchange rate on the Nigeria manufacturing sector. Some of the problems which cause the fluctuation of exchange rate on the Nigeria manufacturing can be seen below.

The exchange rate of the naira was relatively stable between 1975 and 1979 during the oil boom or (regulatory require). This was also the situation prior to 1990 when agricultural products accounted for more than 70% of the nation‟s gross domestic product (GDP) (Ewa, 2011:78), however, as a result of the development in the petroleum oil sector in 1970, the share of agriculture in total export declined significantly while that of oil increased.

Furthermore, more manufacturing companies are faced with the problem, not recognising the fact that fluctuation in exchange rate adversely affect output of the manufacturing sector, this because Nigeria manufacturing sector is highly dependent on import of input and capital goods, this is in spite of the fact that manufacturing sector is the fastest growing sector since 1973 (Obadan, 1994), this sector has become increasingly dependent on the external sector for import of non-labour input. The impact of fluctuation in exchange rate on manufacturing output has not received adequate attention.

Instabilities of foreign exchange rate is also a problem to manufacturing sector; however, instability to import therefore can impact negatively on manufacturing production; furthermore, Jhingen (1997), emphasized that exchange rate fluctuation cause uncertainty and impede on international trade.

Thus uncertainty in trade transaction post a lot of problems such as inflation, which determine the internet balance of a country, it has also tended to undermine the international competitiveness of non-oil export and make planning and projection difficult at both micro and macro levels of the economy, some small and medium scale enterprise have been strangled out as a result of low dollar naira exchange rate.

1.3 OBJECTIVES OF THE STUDY

In a highly import dependent economy like Nigeria, the naira exchange rate has become one of the most widely discussed topic in the country today. This is not surprising as this topic has had a lot of impact on the Nigerian manufacturing sector. It is therefore, the objective of this study to evaluate the effect of exchange rate fluctuation on the Nigerian manufacturing sector.

To investigate empirically, the effect of exchange rate fluctuation on Nigerian import or export and capital goods.

To determine if the continuous fluctuation of exchange rate of naira have an impact on the quality and quantity of output of manufacturing firms.

1.4 RESEARCH QUESTIONS

To what extent does exchange rate fluctuation affect the importation of input and capital goods?

Does exchange rate fluctuation have effect on the quality and quantity at goods manufactured by Nigeria firms?

To what extent does exchange rate fluctuation affect the exportation of made in Nigeria goods?

1.5 FORMULATION OF HYPOTHESES

The hypothesis of the study includes the null hypothesis denoted as „H0‟ and alternative hypothesis as „H‟.

H0: Exchange rate fluctuations have no effect on the importation of input and capital goods.

H1: Exchange rate fluctuations have effect on the importation of input and capital goods.

H0: Exchange rate fluctuation has no significant effect on the quality and quantity of goods manufactured by Nigerian firms.

H1: Exchange rate fluctuation has a significant effect on the quality and quantity of goods manufactured by Nigerian firms.

H0: Exchange rate fluctuations do not affect the exportation of made in Nigeria goods.

H1: Exchange rate fluctuations affect the exportation of made in Nigeria goods.

1.6 SIGNIFICANT OF THE STUDY

The study would identify the strengths and weakness of exchange rate policy and management, identify those parts that are mostly affected by instability in exchange rate provide the general public with adequate information on the foreign exchange transaction and its impact on the manufacturing sector. In general, the study benefits the following;

  1. The government will benefit as it will enable them ascertain the extent of the variation of exchange rate affect the quality of input and capital goods imported into Nigeria by manufacturing firms, the government can make policies that will help Nigerian manufacturers prosper in the business.
  1. The manufacturers will be much aware of the impact of the exchange rate fluctuations on their firms.
  1. To the students, it will be a work base for further research.
  1. To the public it will be a thorough understanding of the exchange rate fluctuation and having taken appropriate measure will lead to a stable economy.

1.7 SCOPE AND LIMITATIONS OF THE STUDY

This research work is designed to cover a very long period that is (1986-2010). The scope consists of the regulatory deregulatory exchange rate period i.e. the fixed exchange rate and floating rate period. The study is structured to evaluate Nigerian exchange rate as the pilot of economic growth and development. Thus, this study is therefore limited to the effect of exchange rate fluctuation in the Nigerian manufacturing sector.

1.8 DEFINITION OF TERMS

  1. Exchange rate: This is the price of one country‟s currency in terms of another
  1. Foreign exchange: Foreign exchange is a means of payment for international transaction; it is made up of currencies of other countries that are freely acceptable in settling international transactions.
  1. Dutch auction System (DAS): This is a method of exchange rate determination through auctions where the bidders pay according to their bid rates.
  1. Exchange control: This is a foreign exchange arrangement in which the government purchase all coming foreign exchange and is the only source from which foreign exchange can be purchased legally.

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