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PROJECT TOPIC- FOREIGN EXCHANGE MARKET: PROBLEMS AND PROSPECTS IN NIGERIA ECONOMY (A STUDY OF UNION BANK OF NIGERIA PLC)

PROJECT TOPIC- FOREIGN EXCHANGE MARKET: PROBLEMS AND PROSPECTS IN NIGERIA ECONOMY (A STUDY OF UNION BANK OF NIGERIA PLC)

ABSTRACT

The Nigeria economic prior to the period of deregulation was one characterized by increased deficit financing by the government, low external reserves and unfavourable balance of payments. The acquisition of foreign exchange of finance the importation of industrial imports poses a serious problem to the industries. The inadequacy of foreign exchange needed, led to capacity under-utilization in most developing countries. Lack of raw materials locally, led to dependency on imported raw materials. Also, differences in natural endowments of different nations necessitate importation of raw materials from countries with surplus. This study seeks to determine the extent at which foreign exchange market has helped in the growth of the Nigerian economy. It is a survey method of research with 105 as the sample size. Simple percentage was used as the method of data analyses. At the end of the study, it was found out that the use of Letters of Credit (LC) as means of financing import via foreign exchange market have increased the level of economic activities in Nigeria. Again, the Domiciliary Account Operation contributed a great deal to the level of economic activities in Nigeria. It should equally be noted that the Nigerian environment is such that does not encourage capital investment, which implies that a de-regulatory interest rate economy will not help in the growth of the economy. From the foregoing, it is crystal clear that the value of naira is comparatively weak thereby turning the economy into a cargo economy with its attendant effect on import dependency which lead primarily to huge debt, affecting socio-political environment of business in Nigeria. It is therefore, recommended that the Federal Government should remove all the subsidy on sales of foreign currencies at all level irrespective of the transaction involved as this will remove disparity between the official and parallel market rate of price without government having to intervene. The federal government should equally abolish the existence of parallel market (that is black market) by legislation and strongly implement the dictate of the law to the later on any offender without discrimination.

CHAPTER ONE

1.0 INTRODUCTION

1.1 Background of the Study

Industrial firms are very important component of any developing nation due to economic and social benefits they confer on the nation, which include aiding the government in achieving its economic and social objectives such as creation of employment opportunity, simulation of indigenous entrepreneurship, improvement of Gross National Product (GNP) and provision of ready market for agricultural products. The Nigeria economic prior to the period of deregulation was one characterized by increased deficit financing by the government, low external reserves and unfavourable balance of payments (Adeoti, 2000).

The acquisition of foreign exchange of finance the importation of industrial imports poses a serious problem to the industries. The inadequacy of foreign exchange needed, led to capacity under-utilization in most developing countries, (Ayokunle, 1999). Lack of raw materials locally, led to dependency on imported raw materials. Also, differences in natural endowments of different nations necessitate importation of raw materials from countries with surplus (Okafor, 1997).
Although, the manufacturing sector which is the main user of foreign exchange ironically contribute little to the pool of foreign exchange resources, (Okafor, 1997). The importance of industrial firms in a nation’s economy bred the need for the deregulation of Foreign Exchange Market. Foreign exchange is needed by the industrial firms to import investment goods used in manufacturing consumer goods and also to import capital goods (machine tools) to make both investment and intermediated goods (Adeoti, 2000).

Foreign exchange in Nigerian context, is defined as any currency other than the Nigerian currency, which has at any time been legal tender in any territory outside Nigeria. A Foreign Exchange Market is a market for the sale or purchase of foreign currencies. It provides a framework and opportunity to trade in, deal on, off-load or procure foreign currencies for effecting or closing international transaction (Okafor, 1997).

Deregulation of Foreign Exchange Market entails the relaxation or removal of some specific control, which has being in operation in the Foreign Exchange Market (Falegan, 1987). Exchange control according to Nwaraohe (1982), was defined as a “mechanism by which a country seeks to harness its foreign exchange resources and rationalize them for settlement of international indebtness while ensuring economic activities without diminishing the international value of its currency”.
Most regulations placed on foreign exchange transaction have less economic undertone. The controls include – the exchange control act of 1963, the import licensing system, compulsory advance deposit scheme of the early eighties, the foreign exchange (Anti sabotage) Decree of 1984 and the placement of all imports under Open General License. All exchange controls conflicts in principle with the primary aim of international economic policies (Nwaraohe, 1982).

The deregulation of Foreign Exchange Market would affect the determination of exchange rate, increase the supply of foreign exchange, minimize the role of parallel market and create more sources for foreign exchange (Okafor, 1997). The Foreign Exchange Market in Nigeria can be viewed under period before the Structural Adjustment Programme and the period of Structural Adjustment Programme (SAP) Period before Structural Adjustment Programme The Pre-SAP ear occurred within 1970-1986, but prior to 1970, the Nigerian Currency (Pound) was tired to the British Pound Sterling, as the country was then a Colony of British.

After independent, the Nigerian local currency (Naira) exchange rate was fixed to the US dollar exchange rate. This led to the over valuation of Naira exchange rate after the devaluation of US dollar.
The pre-SAP era (1970-1986) marked the period of price control and import licensing. There was too much intervention in the system, the exchange rate was administratively determined and was not an active instrument for foreign exchange management. Olufe noted that the import licensing system “created bureaucratic bottle necks in accessing foreign exchange and also a huge debt burden on government because imports were financed through lines of credit before the release of foreign exchange for cover”.

The trade and exchange control of the period were cumbersome, ineffective, led to corruption of government officials, foreign exchange leakages, overvaluation of the Naira and inflating of import invoicing by government officials. The inadequate supply of foreign exchange to the official segment of the market due to low receipt led to spill over of demand from the official market to the parallel market. The need to set an appropriate clearing price in the Foreign Exchange Market, that would guarantee adequacy of supply in relative to the demand for foreign exchange led to SAP era.

The control period (pre-SAP) was replaced with a market base system with the introduction of Structural Adjustment Programme in July 1986. Source: Falegan, S. (1987): Redesigning the Nigerian Financial System The Structural Adjustment Programme Period Under the Structural Adjustment Programme (SAP), the exchange control on currency account transaction has been dismantled and exchange of Naira is now determined through an auction system based on market forces.

The non-satisfaction of the interest of investing public and small time buyers of foreign exchange in the country through the authorized foreign exchange dealer made federal government to establish other avenue of sourcing foreign exchange during SAP period. These include the introduction of second-tier Foreign Exchange Market (SFEM) on 26th September, 1986.

The main aim of (SFEM) was finding a realistic exchange rate for Naira which moderate importing activities and also brings about the efficient allocation of the nation’s scarce foreign exchange. The introduction of (SFEM) has been extremely beneficial to the productive sectors of the economy. The government also established the Bureaux de change in September 1989. They were meant to compliment efforts of the authorized dealers by trading in the Foreign Exchange Market.

The Inter-Bank Foreign Exchange Market was also introduced. This allows dealer banks to trade in Foreign Exchange among themselves and also source for foreign exchange from autonomous sources. The Second-tier Foreign Exchange Market has helped in correcting the hitherto overvalued Naira exchange rate.
The establishment of various Foreign Exchange Market led to an efficient and less cumbersome approach to foreign exchange allocation to different sector of the economy. The main achievements of the new system are the elimination of payments in arrears that prove difficult to tackle during the exchange control era. The increase in domestic capacity utilization due to the increased local sourcing of raw material, elimination of overvalued Naira exchange rate and relatively more relaxed atmosphere in foreign exchange operation.

When foreign exchange expenditure is lower than receipts, the surplus is added to the reserve. The reserve is used for importing raw material, spare parts for the purpose of economic development and for the correction of balance of payment. The deregulation of Foreign Exchange Market has led to sourcing of foreign exchange autonomously by the other markets established to break the monopoly of the Central Bank in foreign exchange dealing. Source: Falegan, S. (1987): Redesigning the Nigerian Financial System.

PROJECT TOPIC- FOREIGN EXCHANGE MARKET: PROBLEMS AND PROSPECTS IN NIGERIA ECONOMY (A STUDY OF UNION BANK OF NIGERIA PLC)

1.2 Statement of the Problem

The Administrative and exchange control regulation in force before the SAP era: Prevent easy access to foreign exchange needed for investment purposes. The controls created avenue for corruption of government officials. Again, administratively determined exchange rate, encouraged importation of all sort of goods, which made the country a dumping ground. The control period equally led to increase in the national debt of the nation. It created a stiff competition between the parallel market and official market.

1.3 Objectives of the Study

The following are the objectives of the study.
1. To determine the extent at which Foreign Exchange Market has helped in the growth of the Nigerian Economy.
2. To ascertain the specific factors of foreign exchange policies that have inhibited the growth of the economy
3. To identify the factors that are responsible for the non-attainment of the objectives for which foreign exchange market was established
4. To find out the effect of the unrealistic exchange rate on the economy
5. To identify measures and or alternatives that are available for the growth and success of the economy vis-à-vis Foreign Exchange Market (FEM)
6. To find out whether Foreign Exchange Market provides efficient allocation of scare foreign exchange resources.
7. To ascertain whether deregulation of Foreign Exchange Market equate the demand-side to the supply of foreign exchange.

1.4 Research Questions

i. To what extent has the Foreign Exchange Market (FEM) contribute to the growth of the Nigerian Economy?
ii. What are the specific factors or foreign exchange policies (monetary or fiscal) that have inhibited the growth of the economy in realizing a feasible exchange rate for the Naira?
iii. What factors are responsible for the non-attainment of the objectives for which foreign exchange market was established?
iv. What measures and or alternatives are available for the growth and success of the economy vis-à-vis Foreign Exchange Market (FEM).
v. Does deregulation of Foreign Exchange Market provide efficient allocation of scare foreign exchange resources?
vi. Does deregulation of Foreign Exchange Market equate the demand-side to the supply side of foreign exchange?

PROJECT TOPIC- FOREIGN EXCHANGE MARKET: PROBLEMS AND PROSPECTS IN NIGERIA ECONOMY (A STUDY OF UNION BANK OF NIGERIA PLC)

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