IMPACT OF EXCHANGE RATE FLUCTUATION ON INTERNATIONAL TRADE IN NIGERIA
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IMPACT OF EXCHANGE RATE FLUCTUATION ON INTERNATIONAL TRADE IN NIGERIA
ABSTRACT
International trade and other economic activity between nationalities have grown dramatically in recent years. The movement of commodities and services over long distances has enabled their consumption even in places or nations where they are not produced. The inference is that many people’s standard of living will improve.
However, exporting and importing countries trace the significant challenges or changes in Exchange rates. The purpose of this paper is to investigate the influence of exchange rate variations on Nigeria’s balance of payment (export position).
This study was conducted using a questionnaire, oral interviews, and secondary data. It was discovered that there is a positive association between Foreign Exchange earnings and the volume of imports in Nigeria,
indicating that importers are not supportive of the structural adjustment programme, and that certain banks do not pay interest on the delayed export revenues of FEM deposit accounts.
Based on the findings, we recommend that the government interfere in the foreign regulation of the sharp fluctuations in the foreign exchange market by enhancing the economy’s real productive sector. The central bank should severely penalise banks that do not return export revenues.
THE IMPACT OF EXCHANGE RATE FLUCTUATION ON INTERNATIONAL TRADE (EXPORT) IN NIGERIA, CHAPTER ONE
1.1 FORMAL INTRODUCTION
International trade has a long history that may be traced back to World War I (1914-1918).
Though world trade was robust throughout World War I, the 1930s global depression significantly reduced global trade.
Several governments’ actions exacerbated the gap in global trade levels.
After World War II, the long-term trend has been towards trade barrier easing (Solomon, 1976).
International trade sprang up in both centuries as a result of mergers, acquisitions, consolidation, and the formation of new companies, as well as various types of securities issued by cooperatives from survival of expansion following the development of financial management systems (Ndu, 1991).
Because the world is today more intimately linked than ever before, international financial developments have a greater impact on people. Worldwide communications occur in a matter of minutes or even seconds (Weston and Copeland, 1986).
Trade and other commercial arrangements between countries have expanded enormously in modern times, and the widespread movement of commodities, frequently over great distances, has made numerous articles available that could not be enjoyed previously, raising the level of living.
As a result of international trade rules, we now have a bigger quantity and variety of commodities to consume. The expansion of international trade has coincided with technological advancements in manufacturing and transportation.
These advancements have enabled a significant increase in the volume and variety of goods produced and traded. Factories produce large quantities of commodities that are not only consumed locally,
but are immediately distributed to various parts of the world. Improvements in transportation and the expansion of global markets have enabled this large and economical production.
Prior to the discovery of oil in 1958, Nigeria was an exporter of agricultural products such as palm oil, cocoa, palm fibre, and groundnut. Rubber, for example, was the country’s largest employer of labour.
The importance of agriculture is best understood when it is realised that it accounts for the greatest part of our Gross Domestic Product (GDP). In the initial post-independence years, agriculture employed approximately 72 percent of Nigeria’s total working population.
Export fell from 75.3 percent in 1960 to 3.6 percent in 1983, while imports increased from n56.7 million in 1962 to n2.05 billion in 1980 (Nwachukwu 1989).
Export promotion and structural adjustment programmes (SAP) were implemented during the terrible Babangida era. The major goal was to revitalise the economic system and rid Nigeria of economic propriety, in which export income will come from many other sources as well as oil, whose swings in the global market have been a nightmare for all those in charge of the economy.
The Naira’s divergence was most helpful in determining export Hughes prices in terms of Naira because foreign currencies fetched greater naira when converted. Farmers now earn more money for their products than they did previously, and this is certainly an extraordinary incentive for farmers to produce more for export.
In 1989, cocoa accounted for over half of Nigeria’s non-oil exports. The primary prerequisite for export development, effective investment planning, and drawing meaningful foreign investment into the country is to maintain a realistic exchange rate for exporters regardless of trade and foreign exchange rate regime.
With the advent of the sound tier foreign exchange market (SFEM) in 1986, the FEM and interbank foreign exchange market (IFEM) were born. The concept of shopping was imported.
Foreign exchange transactions are hence payment mechanisms used by commercial and merchant banks to swap domestic money for foreign currency or vice versa (Ebony, 1989).
A foreign exchange market serves several purposes, including serving as a clearing mechanism for payments related to international trade or investment on a multinational scale, providing credits in various currencies, including facilities against lodging exchange, and determining exchange rates between convertible currencies (Abodo, 1989).
The foreign exchange rate, as well as the mechanisms by which both exporters and importers can be protected from unanticipated exchange rate fluctuations.
This can be observed in the manner that new enterprises are establishing factories across the country. Businessmen, notably from the Far East, are increasingly flocking to the country because the exchange rate is so appealing (Ayobola, 1989).
According to reports compiled by Nigeria trading partners, including members of the European Economics in April 1989, Nigeria was the recipient of commodities valued at N36.496 million, falling short of her export profile of N724.7 million (FEM) (Nwosu, 1989).
The official currency rate, which was N1.55 to $1 immediately before the establishment of SFEM in 1989, was 4.25 to 1.00 in June 1989 (Nwachukwu 1989), and it increased further in 1990 and 1991, reaching N9.86 to $1.00 on December 30, 1991. As of June 22, 2001, this had fallen to N112 to $1.
The Federal Government of Nigeria is persuaded that the Naira exchange rate would continue to be controlled by market forces rather than executive decree. In Nigeria, the demand for foreign exchange outweighs the supply.
As a result, we pay a premium price to obtain foreign currency. To boost the external value of the Naira, we can increase supply or decrease demand for foreign exchange. However, in most countries, such as Nigeria,
the monetary authorities intervene on the side of either demand or supply to limit the range within which the rate has to clear the market. When such intervention takes place,
it indicates that the currency rate is not being permitted to fluctuate sufficiently to ensure a continual balance between normal external payments and receipts (Ebony, 1987).
The thrusts of the currency rate policy under the structural adjustment programme are to discourage imports and stimulate agricultural output, as well as to encourage local sourcing of raw resources,
which they previously thought unattainable. One cannot fail to note that, while imports have declined, exports other than crude oil have increased in recent months.
Because of inefficiencies in our financial system, which impose a “lag” between the time the importer and the time the funds are actually sent to the exporter, there is a problem in international transactions. The so-called remittance lag puts currency rate risk into the transaction.
For example, the rate applicable at the time of import payment may differ from the rate applied by commercial banks when remitting payments. These exchange rate differentials result in either an exchange rate loss or gain for importers.
1.2 STATEMENT OF THE PROBLEMS
The foreign proposal that the exchange rate risk as it affects both importers and exporters is enough to stymie development in the country, thereby undermining the government’s commendable goal.
The remittance lag problem has far-reaching economic ramifications for society as a whole, particularly when importers already face commercial risks in international commerce transactions.
The subject addressed in this paper is who bears the burden of delayed interest on transaction money induced by “remittance “lag” lasting up to four months.
1.3. PURPOSE OF THE STUDY
The following are the goals of this research project:
i. To investigate and determine, as much as practicable, ways for reducing the risk associated with exchange fluctuations.
ii. To establish who should pay the burden of the delayed interest equitably: commercial banks, central banks, or importers.
iii. To determine whether government importers receive favourable treatment in terms of remittance of payments.
iv. To determine whether the FEM policy has failed to achieve a reasonable exchange rate for the Naira.
v. Determine whether the government’s implementation of a structural adjustment programme through the foreign exchange market (FEM) is alleviating the problems caused by the dual nature of international commerce and.
vi. To offer suitable recommendations based on the findings.
1.4. HYPOTHETIC STATEMENT
The following hypothesis, which will constitute the basis of this study, will be tested in this work.
1. Hello, in Nigeria, there is a considerable association between foreign earnings and export value.
Ho: In Nigeria, there is a considerable relationship between foreign earnings and export value.
2. Hello, Nigerian banks have started providing interest on deposit exporters in exchange for letters of credit.
1.5 THE IMPORTANCE OF THE STUDY
The importance of this study thus rests on the recommendations given at the conclusion of the investigation and their implementation. In general, the research will be extremely beneficial to the following:
1. Importers and exporters who constantly trade and want direct financing.
2. Policymakers at Nigeria’s central bank who set guidelines regarding international trade practises.
3. Banks, particularly commercial banks.
4. Students of finance and banking who may be inspired by the work must conduct more research on exchange rate variations and international trade.
5. The general public has the right to contribute to and be informed about the actions of our financial institutions.
It is envisaged that the study’s findings and recommendations will be extremely useful to the aforementioned group.
1.7 SCOPE OF THE STUDY
This study will be divided into five chapters. The first will be devoted to a thorough explanation of the subject. The second section focuses on a review of similar publications produced on the subject.
The methods to be employed in the research will be examined in the third chapter. The fourth chapter will be devoted entirely to data analysis and presentation. Finally, chapter five will be devoted to research recommendations and conclusions.
1.8 DEFINITIONS OF TERMS
Deposits are funds held in a bank by customers for the purchase of foreign currency. A state of trade freedom, both multilateral and bilateral. Letters of credit: A document authorising a bank to pay the bearer a defined sum of money in Multilateral.
Letters of credit: A document authorising a bank to pay the bearer a specific sum of money in Bilateral. It is a good method of settling a credit in favour of his creditors at a bank.
Naira depreciation. This is a condition in which a given amount of Naira buys fewer products than it used to. This is mostly due to stronger demand than supply in the exchange market.
Foreign exchange and foreign liquidity are the same thing. Amount held by a country in world or convertible currency, such as the US dollar, with which it meets its international payment obligations.
External debts are obligations owed by Nigeria to external bodies or organisations.
Foreign exchange squeeze: This is a circumstance in which Nigeria lacks foreign currency, such as dollars or pounds sterling, to purchase from droning dividends.
SFEM- This is the market where buyers and sellers of foreign currency meet to do business. Because the Naira cannot float successfully alongside other currencies such as US dollars due to its non-convertibility and non-trading status in Nigeria,
an alternative is to construct S (FEM) in which the value of the Naira is determined by the forces of demand and supply. For example, if N20 billion constitutes effective demand for US dollars and US dollars constitute effective supply,
the effective supply would be N2$1. Most currencies today permit the free movement of funds for routine trade and commerce, also known as current account items since such trade appears in the country’s balance of payments data.
Deviation: A change in demand in the official parity of an exchange rate (sometimes used interchangeably with depreciation).
A 5% depreciation of the Naira in terms of sterling means that a Niaira will purchase 5% less sterling foreign exchange.
The exchange market is a condition in which a certain amount of Naira buys fewer products. than it used to, although in this situation, the additional supply of Naira is primarily due to the printing of more notes or borrowing from foreign agencies.
Accumulated interest in importers’ FEM accounts as a result of the time lag between the importer’s deposit and the actual payment of goods to the exporter’s Bureaux de change.
A systematic record of economic transactions between citizens of a country and the rest of the world over a certain period. It includes earnings from the flow of actual resources as well as changes in the country’s external assets and liabilities as a result of economic transactions. The balance of payments must always balance, hence talking about a tough balance of payments is absurd.
Exchange control: A system of restrictions implemented by the government to prevent or simply increase the cost of their people’ capacity to invest in their country, as well as to periodically restrict the inbound flow of investment.
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