THE FOREIGN EXCHANGE MARKET AND THE DEVELOPMENT OF THE MANUFACTURING INDUSTRY IN NIGERIA.
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THE FOREIGN EXCHANGE MARKET AND THE DEVELOPMENT OF THE MANUFACTURING INDUSTRY IN NIGERIA.
The study examined foreign market and the manufacturing sector in Nigeria from 1980-2009. The broad objective of the study is to examine the impact of foreign exchange market on the manufacturing output in Nigeria. Using the ordinary least square regression analysis to find the relationship between the dependent variable (manufacturing output) and the independent variables (market capitalization and market turnover). From the regression analysis it is observed that both market capitalization and market turnover are statistically significant and positively related to the output of the manufacturing sector in Nigeria during the period of study. Based on this researcher made some recommendations, such as improvement in infrastructure facilities and development of stock market for the purpose of enhancing efficiency and productive capacity of the manufacturing sector and the Nigeria economy.
TABLE OF CONTENTS
Title Page i
Table of Contents vi
CHAPTER ONE: INTRODUCTION
1.1 Background of the study 1
1.2 Statement of the problem 4
1.3 Objectives of the study 6
1.4 Hypothesis of the study 6
1.5 Significance of the study 6
1.6 Scope and limitation of the study 7
1.7 Organization of study 8
CHAPTER TWO; LITERATURE REVIEW
2.1 The foreign exchange management in Nigeria 10
2.2 The foreign exchange market in Nigeria 12
2.3 Structure of Nigeria FEM 15
2.4 Exchange rate regimes in emerging markets 16
2.5 Forms of exchange rate in Nigeria 21
2.6 The manufacturing sector 22
2.7 Capital market sector 39
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction 41
3.2 Research design 41
3.3 Data required 41
3.4 Data collection method and sources 42
3.5 Data analysis techniques 43
3.6 Model specification 44
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Introduction 46
4.2 Data presentation 46
4.3 Analysis of regression results 47
4.4 Interpretation of results 47
4.5 Discussion of findings 49
4.6 Test of hypothesis 50
CHAPTER FIVE: SUMMARY, RECOMMENDATION AND CONCLUSION
5.1 Summary 52
5.2 Recommendations 54
5.3 Conclusions 55
1.1 BACKGROUND OF THE STUDY
Globally, operations in the foreign exchange market started in a major way after the breakdown of the Bretton Woods system in 1971. This also marked the beginning of floating exchange rate regimes in several countries. Over the years, the foreign exchange market has emerged as the largest market in the world.
The evolution of the foreign exchange market in Nigeria up to its present state was influenced by a number of factors such as the changing pattern of international trade, institutional changes in the economy and structural shifts in production (Ekep, 2006).
Before the establishment of the central bank of Nigeria (CBN) in 1958 and the enactment of the exchange control Act of 1962, foreign exchange was earned by the private sector and held in balances abroad by commercial banks which acted as agents for local exporters. During this period, agricultural exports contributed the bulk of foreign exchange receipts. However, with the establishment of the CBN and the subsequent centralization of foreign exchange authority in the bank, the need to develop a local foreign exchange market became paramount.
The increased export of crude oil in the early 1970s, following the sharp rise in its prices, enhanced official foreign exchange receipts. The foreign exchange market experienced a boom during this period and the management of foreign resources became necessary to ensure that shortages did not arise.
The second tier foreign exchange market (SPEM) was introduced in September, 1986. Under SFEM, the determination of the naira exchange rate and allocation of foreign exchange were based on market forces. To enlarge the scope of the foreign exchange market Bureau de change were introduced in 1989 for dealing in privately sourced foreign exchange (see CBN, statistical bulletin, 2008).
The foreign exchange market was liberalized in 1995 with the introduction of an autonomous foreign exchange market (AFEM) for the sale of foreign exchange to end users by the CBN through selected authorized dealers at market determined exchange rate. In addition, bureau de change was once more accorded the status of authorized buyers and sellers of foreign exchange. The foreign exchange market was further liberalized in October, 1999 with the introduction of an inter-bank foreign exchange market (IFEM) (Gbosi, 1997).
The dismal performance of the Nigeria manufacturing sector is not far from the other African countries Soderbam and Teal (2002) aptly notes that in most African countries, performance in this area has been poor over the last decades. For instance, Nigeria has only some 5 percent of tis GNP coming from the manufacturing, which is low among the countries of Africa, compares to 20 percent levels for south Africa and Mauritius.
Before independence in Nigeria, the manufacturing sector did not make any primary reason for the low degree of industrialization were not lack of market, raw materials or labour, but due to institutional obstacles inherent in the colonial economic structures which were largely determined by grading companies (Ajakaiye, 2002).
Against the above background, this chapter attempts to analyze the role of foreign exchange market in the development of the manufacturing industry in Nigeria.
1.2 STATEMENT OF THE PROBLEM
One of the major problem facing investors is the fluctuation in exchange rate. Exchange rate generally is regarded as the rate at which one dollar is exchange to one naira.
The instability in the exchange rate in the foreign exchange market in most cases discourages investors. On the other hand, rising level of exchange rate discourage savings. Several policy measures had exchange rate in the foreign exchange market.
The use of exchange rate policy to correct internal imbalance in the economy came to limelight following the devaluation of pound starling by Britain in 1967 and US dollar in 1973. Since then, various governments had on one time and the other, adopted different policies on exchange rate on the economic situation of the country at that time.
In a bid to achieve a realistic exchange rate for the naira and diversify the productive base of Nigerian economy, the structural adjustment programme (SAP) was adopted in July 1986, in order to eliminate the overvaluation of the naira and reduce the drain on foreign exchange reserves (Gbanador, 2005).
The developments in the foreign exchange market show that the naira exchange rate had depreciated persistently and had remained unstable (Gbosi, 1997).
In lieu of the above state of affairs, economics and other commentators argued that variations in exchange rate in Nigeria is responsible for decline in manufacturing output and hence the economic conditions in general.
Moreover, the manufacturing sector has not reached the desirable states of industrialization and economic growth in Nigeria. It is recognized that austerity without comprehensive structural adjustment will not provide enough responses to the fundamental economic problem of the nation hence creating the need to establish broad base reform programme designed to stimulate and encourage the production and export on non-oil products that are export oriented.
This decline in the productive activities of the small scale industries like in the production of synthetic fabric, cotton, textiles, soap and detergents, footwear, and so on, the poor performance of the Nigeria economy attributed to the low productivity in the manufacturing sector. This is due to the utilization rate, low investment, high cost of production and high interest rate.
In summary, is our desire in this study to answer the question, “Does foreign exchange market impact on the manufacturing sector in Nigeria?”
1.3 OBJECTIVE OF STUDY
The general objective of the study is to examine the role of foreign exchange market in the development of the manufacturing industry in Nigeria.
Specifically the study seeks to;
i. Analysis the relationship between foreign exchange market and output of the manufacturing industry in Nigeria.
ii. Assess the problems of the manufacturing industry in Nigeria.
iii. Determine the performance of the manufacturing industry in Nigeria.
1.4 HYPOTHESIS OF THE STUDY
The hypothesis of the study is stated in a null form. Thus;
H01: There is no significant relationship between the roles of foreign exchange market in the development of the manufacturing industry in Nigeria.
H02: There is no significant relationship between the foreign exchange market and output of the manufacturing industry in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY
The finding of this study will enlighten the public, private and public sectors as well as the economy in general on the roles of foreign exchange market in the development of the manufacturing industry in Nigeria.
Beside the importance of the research work, it will serve as a reference material for further research work on foreign exchange market and as well add to the existing stock of knowledge on activities of foreign exchange market in Nigeria.
1.6 SCOPE AND LIMITATION OF STUDY
The study will cover a period of 30 years that is between 1980 and 2009. The role of foreign exchange market in the development of the manufacturing industry in Nigeria needs such long time period of study in order to dig deep into it actual impacts on the economy.
The limitations encountered in the course of this study include;
1. Time Constraints: The time available to the researcher to extensively conduct this study was not enough as the researcher hand other academic activities to attend to at school, which now had to be combined with the research work.
2. Availability of Data: Most of the information used in this work is obtained basically from central bank of Nigeria (CBN) and most times it is difficult to get adequate information from the bank except one has one connection or the other with the bank.
In spite of the above mentioned constraints, there is hope that the result will be relevant and also serve the intended purpose
1.7 ORGANIZATION OF STUDY
The study is structured in five chapters. Chapter one deals with the introduction, which comprises of the background to the study, statement of problem, significance of the study, scope and limitations of the study, and organization of the study. Chapter two deals with the literature review and theoretical framework.
Chapter three deals with the method of study such as, the data collection method and model specification. Chapter four deals with the data presentation and analysis of empirical result.
Finally, chapter five contains the general summary of the work, summary of major findings, recommendations and conclusion.