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Chapter one


1.1 Background of the Study

Economies are confronted with one or more problems, and governments are constantly engaged in efforts and actions to alleviate them. From an economic standpoint, there is a gap between the potential and actual Gross Domestic Product (GDP), known as the employment gap or the GDP gap. This gap must be reduced to a minimum. To do this, the government or its agencies implement a variety of acts known as policies.

Economic challenges differ from a recession/depression with substantial unemployment or, at its extreme, rampant inflation, currency devaluation, and balance of payments imbalances.

Since the 1970s, it has been recognised that, rather than a trade-off between inflation and unemployment, a country may be experiencing stagflation, which is characterised by stagnant outputs and high levels of inflation. To deal with this scenario, a combination of policies is required.

Policies available to any government in managing its economy by addressing the challenges outlined above exist in a menu ranging from monetary and exchange rate to fiscal, trade, commercial, and income, among others.

As a result, the government frequently employs these in combination or alone, depending on the crisis at hand and the regime’s mindset. A rightist philosophy is fundamentally anti-policy advocates and

where required, prefers monetary over fiscal policies. However, the reality of economic doldrums confronts the economy. These policies are implemented in packages.

1.2 Definition of Foreign Exchange.

Foreign trade has been characterised in a variety of ways, although they all seem to mean the same thing. Foreign exchange is a method of facilitating payments for overseas commerce.

It can be obtained by a country through the export of products and services, direct investment inflows, borrowing from external loans, assists, and grants, and expenditure to satisfy international debts.

Foreign exchange in the Nigerian context is defined as any currency other than the Nigerian currency that has ever been legal tender in any region outside of Nigeria.

Exchange rate policy is inextricably linked to the administration of a country’s foreign exchange; it refers to the manipulation of several critical variables in order to ensure that the country’s exchange rate contributes to external (or payment) viability and overall economic prosperity.

Foreign exchange transactions take place in the foreign exchange market, which is a market for the selling or purchase of foreign currencies. It provides a framework and opportunity to trade, deal in, offload, or create foreign currency for the purpose of accomplishing or concluding international transactions.

When foreign expenditures are less than foreign receipts, the surplus is added to reserves. These reserves, which are also savings from foreign exchange transactions, are held by the authorities to cover shortfalls in foreign exchange receipts and to protect the domestic currency’s international liquidity.

Foreign exchange earnings from international commercial transactions and external aid are critical for the economic development of less developed countries (LDCs).

This is due to the fact that resource extraction can increase factor supplies while also encouraging the development of technical skills and knowledge, both of which should boost domestic capital creation and GDP growth.

Nigeria, like other developing countries, elected to fix its exchange rate using a basket of currencies; the naira was tied to the US dollar and the pound in order to ensure that the rate had some influence on the elements of the balance of payment and domestic economy.

Nigerian economic history demonstrates that the country initially operated under a fixed exchange rate regime from independence in 1960 to 1986 before transitioning to a flexible rate regime.

These changes were grounded as a result of the sorts of disruption to which economies are exposed, the structural characteristics of the economy, the commonality of the risks to which they are vulnerable, and the aims they seek (Guitan 1994). Agbevlic et al., 1991; Frankel 1992.

In this regard, the consideration is that where the problems are external shocks and domestic real stocks, such as an imbalance in the goods market as the country experienced in the 1980s

the best policy regimes become flexible rates because shocks to domestic demand will lead to a change in the rate that will bring about an off-setting movement in foreign demand so that domestic output is not severely affected” ceteris paribus (Guitan 4: 19).

The analysis will cover the following time period:

– Prior to SAP, an exchange rate control policy existed.

– SAP’s Exchange Rate Management Policy.

– Exchange rate management policy following SAP.

– A review of monetary policy.

1.3 Statement of Problems

– The justification for various macroeconomic policies implemented under the structural adjustment programme (SAP) has failed to effect Nigerian exports and imports, hence affecting our foreign reserves.

– Why have the various foreign exchange regimes (policies) not had a substantial impact on macroeconomic variables such as balance of payments, employment, inflation, and so on?

– The amount to which the exchange rate can be controlled through proper management of the country’s export index and foreign reserves.

– The extent to which other macroeconomic indexes rely on exchange rates.

1.4 Objects of the Study

However, the purpose of currency rate management strategies are to achieve macroeconomic goals. This study aims to determine;

– To what extent have these objectives been achieved?

– Determine how such aims have been attained in the past, the current situation, and potential future directions.

– Investigate potential difficulties and constraints, and make recommendations for factors that impede successful foreign exchange management in Nigeria.

– To review the monetary policies and various measures employed to achieve its goals.

1.5 Research Question and Hypothesis.

This study focuses on discovering the impact of foreign exchange rate management policies on developing economies, using Nigeria as a case study. The following questions will be considered in order to complete the study.

– Is there a link between Nigeria’s exchange rate and its monetary policy?

– To what extent do SAP instructions and other economic reforms affect foreign exchange management in Nigeria? To evaluate the monetary, policies, and other measurements utilised to achieve its goals.

– What is the link between demand and supply of foreign exchange among different users?

The hypothesis will be tested as follows:

Ho: Foreign exchange rates do not contribute to net exports.

Hello: The foreign exchange rate affects net exports.1.6 Scope and Limitations of the Study

This research focuses on the effectiveness of foreign currency management strategies and the implementation of monetary policy in a developing country. This research is also limited to the Nigerian economy, which serves as a case study for a developing economy.

1.7 Significance of Study

The findings of this research would be useful to academics, investors, financial institutions, and the government, all of whom may benefit from the data and information included therein.

It will notably help finance students understand the impact of foreign exchange on the economy, as well as inform the general public on how foreign exchange management policies affect their daily business and governance. It will also act as a dimension for future research and provide recommendations for essential changes.

1.8 Definition of Unfamiliar Terms.

1) Direct Investment: This is when a local firm invests in a foreign country as a subsidiary of its parent company.

2) First-Tier Foreign Exchange Market: This is a market for government reservations in transactions in which naira valves are pegged and remain reasonably strong.

3) Fiscal policy is the employment of measures such as taxation, government expenditures, and budgetary variables to achieve desired economic goals.

4) Fixed Rate Regime: This is a time in which the monetary authorities use administrative means to fix the value of the national currency in reference to major currencies.

5) Floating Rate Regime: During this period, national currencies were allowed to fluctuate in response to the forces of demand and supply in the foreign exchange market.

6) Inflation: A continuous rise in price or a decrease in the worth of money.

7) Legal Tender: Any product that is widely acknowledged as a way of exchanging and settling debt.

8) Overvalued Exchange Rate: This refers to an excessively high-valued currency, making imports cheaper than exports.

9) Second-Tier Foreign Exchange Market: This is a market in which the naira exchange rate is determined or valued based on market demand and supply.

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