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THE FOREIGN EXCHANGE MARKET AND THE DEVELOPMENT OF
THE MANUFACTURING INDUSTRY IN NIGERIA.
ABSTRACT
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
Certification ii
Dedication iii
Acknowledgement iv
Abstract v
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
References 56
CHAPTER ONE
INTRODUCTION
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.
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