N1000 note

Foreign Exchange In Nigeria

Exchange rate plays an increasingly significant role in any economy as it directly affects domestic price level, profitability of traded goods and services, allocation of resources and investment decision. Read more...

In Nigeria, the term foreign exchange has become a house hold expression due to the activities of the street hawkers of this very essential commodity. Foreign exchange is a financial asset usually denominated in foreign asset earned through exports of goods and services as well as inflows of foreign investments, external grants and loans. The quantum of foreign exchange available of any point in time constitutes foreign exchange resources or restores. The volatility and continued depreciation of exchange rate of the Naira is principal caused by the expansionary liquidity and the resultant persistent excess liquity in the banking system supply of inelastic of both domestic production and the foreign exchange market with its further destabilizing speculative activities need to be managed ineffectively.

The Exchange rate, which is a price of the domestic currency in terms of other currencies, is usually determined in principle by the interplay of supply and demand in a free market environment. In practice, however, no currency is allowed to float freely by the monetary authorities. Between the fixed and floating systems exchange rate management and other regimes such as the managed and dual exchange rate regimes.

Exchange rate plays an increasingly significant role in any economy as it directly affects domestic price level, profitability of traded goods and services, allocation of resources and investment decision. The stability of the exchange rate is today a formidable bedrock of all economic activities. Since the adoption of the Structural Adjustment Programme (SAP) in 1986, Nigeria has moved to various types of floating regimes of exchange rate from the fixed/pegged regimes between 1960s and the mid-1980s. Floating exchange rate has been shown to be preferable to the fixed arrangement because of the responsiveness of the rates to the foreign exchange market (Nwankwo, 1980).

The liberalisation of the exchange rate regime in 1986 has led to introduction of various techniques with the view of finding the most appropriate method for achieving acceptable exchange rate for the Naira. The frequency with which these measures were introduced and charged is informed by the determined efforts of the monetary authorities to unrelentlessly combat the unbating depreciation and instability of the Naira exchange rate.

To ensure effective management of foreign exchange, the fundamental problems of the nation’s economy must be addressed. This evolves an improvement in the state of infrastructure increase, local capacity utilization and a reduction of the cost of doing business in Nigeria. This should be done through the deregulation of the energy sector to enable private investors to participate in the provision of electric and telecommunication, locally produced goods should be encouraged.

Management Of Reserve Flows

Foreign exchange rate is the numerial value of the domestic currec=ncy of one country at any given time in relation to those countries with which the country has trade links indeed, the exchange rate is vendible instrument of economic management and therefore an important macro economy.

The requirement of a good external reserve management strategy usually compels a country to maintain an adequate level of reserve. The exchange rate has to be right as an over-valued exchange rate for instance, put pressure on the reserve as a result of the increased demand.

In the past current exchange rate policies have been used depending on the condition of the economy at easy given period and sometimes in response to the changing exchange rate policies in the rest of the world. The different policy stances of the countrys exchange rate regime and management date back to 1959 and have undergoes various changes to date.

In Nigeria, the exchange rate policy has undergone substantial transformation from the immediate post-independence period when the country maintained a fixed parity with the British pound, through the oil boom of the 1970’s, to the floating of the currency in 1986, following the near collapse of the economy between 1982 and 1985. In each of these epochs, the economic and political considerations underpinning the exchange rate policy had important repercussions for the structural evolution of the economy, inflation, the balance of payments and real income.

Analysis of Nigeria’s exchange rate movement from 1970-2010 showed that there exists a causal relationship between the exchange rate movements and macroeconomic aggregates such as inflation, fiscal deficits and economic growth. Consequently, the persistent depreciation of the exchange rate trended with major economic variables such as inflation, GDP growth, and fiscal deficit/GDP ratio. In this context, the exchange rate movement in the 1990’s trended with inflation rate. During periods of high inflation rate, volatility in the exchange rate was high, which was reversed in a period of relative stability. For instance, while the inflation rate moved from 7.5 per cent in 1990 to 57.2 per cent and 72.8 per cent in 1993 and 1995 respectively, the exchange rate moved from N8.04 to$1 in 1990 to N22.05 and N81.65 to a dollar in the same period.

When the inflation rate dropped from 72.8 percent in1995 to 29.3 per cent and 8.5 per cent, in 1996 and 1997 respectively, and rose thereafter to 10.0 per cent in 1998 and averaged 12.5 per cent in 1999-2009, the exchange rate trended in the same direction.

In a continued effort to stabilised the exchange rate, as well as ensure a single exchange rate for the Naira, numerous variants of market determined rates have been adopted since 1986. The Secondtier Foreign Exchange Market (SFEM) was introduced in 1986, while the First and Second tier markets were merged into enlarged Foreign Exchange Market (FEM) in 1987, this was later changed to the Inter-Bank Foreign Exchange Market (IFEM) in January 1989. This new system allowed for bureau de change to source for their foreign exchange requirement from the IFEM. This was later modified to the Autonomous Foreign Exchange Market (AFEM) in 1995 which allow the Central Bank to purchase foreign exchange from oil companies.

The fact that a fast depreciating local currency can create instability within other macroeconomic variables has necessitated the efforts by the Central Bank, the pivot monetary authority in Nigeria to put in place different measures at stabilizing the local currency. The Central Bank of Nigeria has over the years done a lot in the area of exchange rate and foreign exchange market management with a view to achieving a realistic exchange rate that will aid economic growth and achieve a relative stability in the value of the Naira against the dollar.

The US Dollar increased to 199.45 Nigerian Naira in February from 189.75 in January of 2015. The Nigerian Naira averaged 124 from 1960 until 2015, reaching an all time high of 204 in February of 2015 and a record low of 0.53 in September of 1980.