Project Topic:

A COMPREHENSIVE ANALYSIS OF THE EFFECT OF REGULATION AND DEREGULATION OF EXCHANGE RATE ON NIGERIA’S FOREIGN EXCHANGE

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 Format: MS WORD ::   Chapters: 1 - 5 ::   Pages: 80 ::   Attributes: Questionnaire, Data Analysis,Abstract  ::   1,426 people found this useful

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ACCOUNTING UNDERGRADUATE PROJECT TOPICS, RESEARCH WORKS AND MATERIALS

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CHAPTER ONE

2.0   LITERATURE REVIEW

2.1   INTRODUCTION

        Foreign exchange is defined by Samuelson and Mordhaus (1983) “as a currency or other financial institution that allows are country to settle amounts owed to another country”

According to lisped ((1982) “the term foreign exchange refers  to what is  traded actual foreign currency or various  claims on it.”

 These different definition of foreign exchange  all mean or refer to the effecting payment for  international transaction foreign exchange can be acquired by a country through the export of goods and service direct investment inflow draw down on external loans aids and grants and it can be extended to  settle international  obligations when foreign exchange expenditure is lower than foreign exchange  receipt  the surplus  is added to external reserves.  These external reserves which are also saving  from  foreign exchange  transactions are held by the authorities to finance short falls in foreign exchange receipts and to safe guard the international value  of  the domestic currency

        A country’s external reserves are the financial assets available to the monetary authorities to meet temporary imbalance in the external payments position and to purpose other policy objectives. External reserve management is the technique of optimizing  a  nations external resources to meet its economic needs.  As the nations apex financial institution the central bank of Nigeria (CBN) has the sole responsibility for the management of external reserves comprising monetary fund (IMT) holding of  special drawing right (SDRS) and foreign exchange (CBN) 1995.  The  bank started exercising this power in 1962 prior to this date the country’s  external reserves were held by the federal and regional governments as well as their parastatals.  This arrangement made is difficult to manage the external resaves with adverse imputations for the conduct of monetary policy in order to redress the problem the foreign exchange component of the external reeves was consolidated with   the CBN in January 1962 leaving only working balance  with other holders (CBN 1995).

        Nigeria  as a member of internal community has bilateral  and multilateral  relations with other countries and organization which necessitate the exchange of goods and services.  External reserves are kept and carefully managed to facilitate  such business and diplomatic transactions.  More importantly the management of the reserves effect the conduct of monetary policy and ultimately the performance of the nations economy. T his is because the exchange in net foreign assets.  Influence the total money supply.  External reserve management by the CBN involves the constant review of the country’s exchange position so that external financial obligation are met according

        One of the major objective of external reserve management is to maintain adequate level of reserves to facilitate international transaction from one asset to another incurs minimums cost in addition reserves  are managed to yield income measure of adequacy of reserves used by the bank is the reserves importation.  It is desired that external reserves be available to pay for at least four  months of imports at the   current rate of monthly import demand.  In practice the standard is a guide.  Another measure as adequately used by the CBN to monitor the reserves in the reserve is  total demand liabilities ration. Under the exchange control  act of 1962 the CBN was  required to maintain external reserves equivalent to 60 percent of total demand liabilities (CBN 1995) like the other  adequacy criterion the external reserves total demand liabilities ratio is implement by the bank according to the realities of the country’s foreign exchange earnings.

        When there is a disequilibrum in the foreign exchange market caused  by inadequate  supply of  foreign exchange  reserves pressure. If these reserves are not adequate this may deteriorate into  balance of payments problem there is therefore need to manage a nations foreign exchange resources so as to reduce the adverse effects of foreign exchange volatility

        The management of foreign exchange  resources is further informed by the  need to set an appropriate  clearing price in the foreign exchange market that  would guarantee adequacy of supply in relation to the demand for foreign exchange.  Therefore the art of foreign exchange management is a conscious attempt to control and use foreign  exchange resources dogleg  them to reserve the economy  and to meet  other international commitments while saving some to raise the level of the country’s international reserves so as to prevent the economy from experiencing shocks to foreign exchange. Volatility.

        Foreign exchange  resources are derived and a expanded I the course of affecting economic transactions between the residents of the country and the rest of the world in this sense there is a close the balance of  payments.  While foreign exchange transaction  reflects cash flows arising from international operations the balance of payment look at the actual movement of goods services and changes in financial assets and liabilities.  According to types (1983) foreign exchange transaction is the difference between  foreign receipts and foreign exchange disbursements. If receipts are higher than disbursements there  is a set inflow or an accretion  reserves.   On the other hand if receipts are lower there is a net outflow and reserves would be depleted. Balance of payment position is the  difference between the receipts by the residents of one economy from the rest  of the  world  . an excess of  receipt over the payment shows a balance of payment surplus while the reserves represents a deficit. When foreign exchange receipts and payment are adjusted for valuation changes in reserves the net position would be identical to the balance of payment position.

        Fisher et- a; (1987) defined foreign exchange  market as “the market where currencies are bought and sold it is where foreign  exchange rates are determined.    

Foreign exchange market can also be defined as the medium of interaction between the seller and buyers of foreign exchange in a bid to negotiate a mutually acceptable   price for the settlement of international transactions.

According to CBN 1993 the objective of  such a market include the provision of an avenue for the exchange of national currencies and the creation of an effective mechanism for the  allocation of  foreign exchange.  The foreign exchange (supply) and the buyers of foreign exchanged  (demand).  The major participant in the foreign exchange market are authorized  dealers (banks) the public  sector the private  sector and correspondent banks abroad.  In  Nigeria the supply of foreign exchange is derived from oil exports non- oil exports capital receipt including  draw- down no loans expenditure of foreign tourists in Nigeria  repatriation of capital be Nigeria resident abroad and other invisible receipts by the private sector.

        On the other hand the demand for foreign exchange reflect payment for imports external debt services obligations and financial commitment to international organization.

        Foreign exchange rate are determined.  Exchange rates have been defined in different ways by different authors.

Fishers etal (1987) defined exchange rate as “ the amount of one country’s currency (money) that it cost to buy one unit of another country’s currency”

        Exchange rate is defined by lapsey (1982) as “the price at which purchases and sales of foreign currency or claims on it such as cheque and promises to pay take place it is the price of the currency in terms of another.

        According to Samuelson and hardhats (1983)  “Exchange rate is the rate of price at which one country’s currency is exchange for the currency of another country.

        Exchange rate can also be defined as other currencies (CBN 1993 ) .The worth of a nations  currency depends on a number of factors including the state of the economy the  competitiveness of  and volume of export  the  level of domestic production and the quatum of  foreign reserves.  In a free  market environment the exchange  rate of a currency I determined by the inter  play of  supply and demand for that currency.  In  many cases the exchange  rate may be administratively  determined.

        This was the situation in Nigeria from independence until 1986 when a flexible  exchange rate mechanism was adopted  as part of the structure adjustment programme (SAP ) thereafter  exchange rate determination has been largely  influence by the force of supply and  demand  with occasional intervention by the authorities. 

        The main objectives of exchange rate policy in Nigeria according to Umeh (1985) are to preserve the value of the domestic currency maintain favorable external reserves  position and ensure price stability .  exchange rate policies applied in Nigeria  have traversed two main mechanism.

        The fixed and flexible regimes .  between 1960  and 1986 the fixed exchange rate system was  operated.  The liability of the system to achieve the major  objectives of exchange rate policy led to the reversal policy in September 1986 with the floatation of the Naira.  The flexible system countries until January 1994 when the fixed exchange rate system was  introduced with the pegging of the Naira relative  to  the us dollar  some of the main instrument used in pursuit of these objectively were maintaining parity  with the Birth pound sailing  and the  dollar  fixing the Naira  exchange rate independence with the dollar and sterling (depending on their relative strength) and the  use of dissection (CBN 1995)

        This chapter discusses the management of foreign exchange  in Nigeria including  the policy that  have  been applied to reform it in two categories. Foreign exchange management before. SAP and foreign exchange  management since SAP.

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