COMPLETE SCHOOL PROJECT TOPICS & MATERIALS :
CHAPTERS: Chapter 1-5
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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 nonsatisfaction 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.
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.
- To determine the extent at which Foreign Exchange Market has helped in the growth of the Nigerian Economy.Other project topics and materials works you may like
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To ascertain the specific factors of foreign exchange policies that have inhibited the growth of the economy
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To identify the factors that are responsible for the non-attainment of the objectives for which foreign exchange market was established
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To find out the effect of the unrealistic exchange rate on the economy
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To identify measures and or alternatives that are available for the growth and success of the economy vis-à-vis Foreign Exchange Market (FEM)
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To find out whether Foreign Exchange Market provides efficient
allocation of scare foreign exchange resources.
- 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?
1.5 Formulation of Hypotheses
- Ho: There is no significant contribution by the Foreign Exchange
Market to the growth of the Nigerian Economy.
Hi: There is significant contribution by the Foreign Exchange Market to the growth of the Nigerian Economy.
- Ho: There is no significant relationship between the deregulation of Foreign Exchange Market and the efficient allocation of scare Foreign Exchange resources
Hi: There is significant relationship between the deregulation of
Foreign Exchange Market and the efficient allocation of scare
Foreign Exchange resources
- Ho: There is no significant relationship between the deregulation of the Foreign Exchange Market and equation for the demand-side to the supply-side of the Foreign Exchange.
Hi: There is significant relationship between the deregulation of the Foreign Exchange Market and equation for the demand-side to the supply-side of the Foreign Exchange.
1.6 Significance of the Study
The significance of the study cannot be over-emphasized. It is so significant in the following ways:
a. It will help to establish the significant contribution of the Foreign Exchange Market to world economy in general, and to Nigerian economy in particular.
b. It will help to identify the specific factors of Foreign Exchange Policies that have inhibited the growth of the economy and how such factors could be made favourable.
c. It will help to x-ray factors inhibiting the attainment of the objectives of the Foreign Exchange, and suggest possible ways by which these factors can be tackled so as to help realize the objectives for which the Foreign Exchange was established.
d. It will equally help to identify measures and or alternatives that are available for the growth and success of the economy vis-à-vis Foreign Exchange Market.
1.7 Scope of the Study
The research work focused on the activities of Bankers and Investors on the Foreign Exchange Market in Nigeria. The study has limited generalization because it was administered in Lagos Metropolis. Information was obtained from Head Office of Bank’s Treasury, Foreign/International Departments and selected manufacturing companies.
1.8 Limitation of the Study
Time Factor: The time allowed for this study or project did not permit for the coverage of all manufacturing companies and banks operation in the Nigerian context.
Finance: The financial requirement to produce the questionnaire for all companies and banks operating in Nigeria and cost of transportation to the various places is beyond the financial strength of researcher.
1.9 Definition of Terms and Concepts
The following terms and concepts in this study and their meaning are given below:
- Foreign Exchange: This refers to international convertible currencies, such as US$ (Dollar), STG £(Pound Sterling) etc.
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Exchange Rate: Exchange rate are the rate at which a country’s currency is exchanged or compared with other currencies e.g. N82 = US$1
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Policies: Policies are Federal Government monetary/fiscal guidelines concerning the operation of financial/monetary related affairs or issues within the economy over a period of time.
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Forex: Means Foreign Exchange between Nigeria and other countries within the frame work of the government regulation.
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FEM: Means Foreign Exchange Market – as promulgated by the Federal Military Government of Nigeria in 1986.
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SFEM: Means Second Tier Foreign Exchange Market as promulgated by the Federal Military Government of Nigeria in 1986.
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CBN: Means Central Bank of Nigeria i.e. the apex bank that
regulate/control the monetary policies and banks/financial institutions activities within the country.