The Effect of Foreign Exchange Deregulation on Manufacturing Industries in Nigeria
Chapter One
Objectives of the Study:
Nigeria has so much depended on crude oil for too long and we have totally forsaken the other gifts of Nature endowed on us. Growth rate of the industries really fall low to the extent that we almost do not produce/refine our crude oil for usage in divers products.
Government also has negatively helped by imposing heavy regulations on the foreign exchange indirectly. This will in no way encourage the local industries and prepare them for the international setting. This paper now seeks to examine the main challenges of regulating the foreign exchange market which in turn could have effect on the local industries in the Nation either positively or negatively.
The objectives of this paper include the following:
- To find out the problems faced by business organization as a result of the imposed regulation in the business world.
- To recommend or proffer solutions for necessary foreign exchange regulations that will enable organizations achieving the organizational set goals and objectives
CHAPTER TWO
LITERATURE REVIEW
INTRODUCTION
The review will focus on the theoretical foundation of exchange rate policy, divergent views on exchange rate, concept of deregulation on Nigeria, foreign currency policy in Nigeria, types of exchange rate policy, problems with the Nigerian exchange rate system, adjustments and industrial performance in Nigeria and constraints to manufacturing production in Nigeria.
Foreign exchange refers to the revenue earned by a country in convertible currencies from exports of goods and services. It should be noted that the Nigeria’s principal source of foreign exchange earnings is from the export of crude oil. Other sources of foreign exchange flows include non-oil exports, capital importation, foreign investment flows, service income, other invisible items such as external borrowings and foreign aids. The totality of the foreign exchange earned and available at any given time for the settlement of Nigeria’s external obligations is referred to as the foreign exchange reserve.
It has been argued that the recent economic crises in Nigeria have been attributed to the misappropriation of money from the oil boom in the 70s. This view can be traced to a lot of writers like Olukole (2002), Ajayi (1988), Osagie (1985), Adeyinkinju (1980) and many others.
In Nigeria, Ajayi (1988) and Osagie (1985), while using the structuralist approach in their study of external trade flow, opposed the adoption of a more flexible exchange rate policy in Nigeria. Their arguments were based on the structuralist thesis that exchange
rate devaluation would create inflation and have no significant effects on the external trade balance in the less developed countries. This is because of low price elasticity generally associated with the excess import and export demand functions. (Taylor and Krugman, 1977). The findings of Ajayi (1988) and Osagie (1985) support an earlier study by Ojo (1978), who suggested that exchange rate changes need not play any significant role in the explanation of Nigerian import-export balance.
After the oil boom in the 1970s, Nigeria’s official foreign exchange reserves also experience an unprecedented growth when its figure stood at about US$10 billion. Effort was made by the authorities during the period to use the huge oil revenue in massive reconstruction of the economy and some identifiable progress was made in the areas of social and economic infrastructure. At this period, Nigeria solely relied on the exportation of oil and importation of goods and services to and from other Nations. Suddenly was the collapse of world oil market in the mid-1981. Moreover, this was the beginning of economic crises in Nigeria. The work of Olukole, (1991) in the CBN economic bulletin revealed that the foreign exchange reserve that used to be around US$10 billion fell at an alarming level of about US$3.81 billion at the end of 1981.
Since 1982, the Nigerian economy experienced various decline in external reserves when compared to end of December, 1981 figure, which itself, recorded a staggering shortfall. For example, the external reserve as at December, 1982 amounted to US$1.5 billion (Olukole, 1991). The exchange rate as at that time was N0.6702 to 1US Dollar. The external reserve as at December, 1983 totaled US$1.2 billion and the exchange rate was at N0.7486 to 1 US Dollar. Also the external reserve figure as at December, 1984 was US$1.4 billion while the exchange rate as at that time was N0.8083 to 1 US Dollar. Things were not better still for the economy when it recorded a reserve of US$1.6 billion as at the end of 1985.
However, as at December, 1985 the exchange rate was N1.0 to 1US Dollar. It would thus be seen that the exchange rate during the period 1982-1985 did not actually reflect the precipitous downturn in the economy even though there was a gradual depreciation of the Naira during the period.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
This paper deals with the effect of exchange rate deregulation on industrial produce/manufacturing output in the Nigerian economy. This Section tries to capture the factors that affect the productivity of the manufacturing sector, how it affects it and to what extent. This study also uses the econometric approach in estimating the effect and to be specific it uses the co-integration and error correction mechanism.
Model Specification
The main aim of this paper is to analyze the impact of Deregulation of Foreign Exchange on industrial output in Nigeria. In this paper, the variables needed to examine the effect of exchange deregulation on industrial output are industrial produce, exchange rates, inflation rates, labour force per time, capital stock and political regulations/instability.
CHAPTER FOUR
DATA PRESENTATION ANALYSIS AND INTERPRETATION
Introduction
Haven specified the model for this paper in the preceding section, this section focuses on presentation, estimation, and analysis of the data as well as the interpretation of the results obtained. To this effect, the data used is presented in section 4.1, while section 4.2 focuses on the analysis of data as well as the results. In section 4.3 the hypotheses earlier formulated in section one will be subjected to test and results will be discussed.
CHAPTER FIVE
SUMMARY AND CONCLUSION
The effect of exchange rate deregulation was express as a function of labour, capital stock, inflation rate, exchange rate and political instability/deregulation policy. The paper started by laying a background for the work in which various literatures related to the topic were being reviewed and analyzed. Section 1 dwells on the statement of the problem, objectives, statement of hypotheses, significance of the study, research questions and scope of the study.
Section 2 is mainly on the reviews of similar literatures relating to foreign exchange policies per time, the trend, management and other matters relating to foreign exchange.Setion 3 focus on the research methodology while Section 4 is the presentation, analysis and interpretation of the regression result. Chapter five is the final and the concluding part of the subject matter which simply try to give conclusion and recommendation on the entire work, as well as further readings for other researchers.
EMPIRICAL FINDINGS
The dependent variable, as analyzed in chapter three, is IQ (Industrial Produce) and the estimation was from 1970 to 2004. The co-efficient of determination, that is, the R2 reveals that over 78% of the total changes in manufacturing/industrial output are explained by the explanatory variables.
The F-statistics of 9.343633 is highly significant at the 10% level. This show that the entire slope co-efficient of the variables simultaneously explains variables in the manufacturing output. The D-W statistics of 2.050850 reveals that there is no autocorrelation in the model. This is because; the closer the D-W is to 2 the better the result. Judging by the soundness of the co- efficient of determination and the F-statistics, we can therefore proceed to the interpretation of the model.
The error correction factor has the correct sign and it is also highly statistically significant at the 5% level. This shows that there is a dynamic shift from the long run to the short run. The speed of adjustment is very high, that is, it will take a very short period of time for Industrial/manufacturing output to adjust to changes in the economy.
The variable L reveals that there is a positive relationship between labour and manufacturing output. More so, they are statistically significant for both L in the current period and in the 2nd lagged period. This conforms to a priori specification.
The result also shows that there is a positive relationship between K and manufacturing output in the current period, 2nd lagged period. They have also been found to be statistically insignificant at the 5%, 10% and 5% level respectively. This does not conform to a priori specification. Reason for this being that capital stocks are not managed properly in industries and allocation is very poor.
INFL depicts a positive correlation as well as the 2nd lagged value of EXR. They carry the correct signs, they have been found to be statistically significant. Contrary to the a priori specification, inflation is suppose to be negatively correlated to industrial produce, but probably because of techniques usually adopted by industrialist i.e. investors may not acquire factors of production oversea during inflation due to high cost during the time of inflation whose cost is lower than what is attainable in the local economy.
The dummy variable reveals a positive relationship between manufacturing output and the political instability/deregulation policy of the Nigerian economy. However, it is also statistically insignificant.
We can then conclude by saying that the major determinant of manufacturing output in the Nigerian economy is labour, capital and exchange rates. An increase in labour and capital would provoke an increase in manufacturing output.
RECOMMENDATIONS
In other to bring about an improvement in the situation of the economy with growth in the economy, a major factor or determinant of the level and growth of the economy is industrial breakthrough. This is clearly confirmed by the LDCs high importation of industrial goods which translates to foreign trade income to industrious nations. This has been the ability of rich nations to sustain high rates of economic growth without inflation. It follows that under present international economic relationships; LDC export performance is directly related to the growth and price stability of developed-country economies. The lessons of the past 40yrs have revealed to developing nations that no economic models could; there is need to make every effort to reduce their individual and joint economic vulnerabilities. One method of achieving this goal is to pursue policies of greater collective self-reliance within the context of mutual economic cooperation.
Though not denying their interdependence with developed nations and their need for growing export markets, many developing countries now realize that in the absence of major reforms of the international economic order, a concerted effort at reducing their current economic dependence and vulnerability is essential to any successful development strategy.
Official foreign exchange rates are not necessarily set at or near the economic equilibrium price for foreign exchange. In situations of excess demand, LDC central banks have three basic policy options to maintain the official rate of exchange;
- They can attempt to accommodate the excess demand by running down their reserves of foreign exchange or by borrowing additional foreign exchange abroad and thereby incurring further debt (as many African countries did in the 1980s).
- They can attempt to curtail the excess demand for foreign exchange by pursuing commercial policies and tax measures designed to lessen the demand for imports (like, tariffs, physical quotas, licensing).
- They can regulate and interfere in the foreign exchange market by rationing the limited supply of available foreign exchange to “preferred” Such rationing is more commonly known as exchange control. The policy has been prevalent through out the developing countries, although it is much less common today.
In my opinion, it is better to curtail the excess demand for foreign exchange. Other recommendations for this research include, improving the labour force through training and education, the Nigerian economy should encourage foreign investment and importation of technology which would help increase the technological know-how of the Nigerian labour force. Finally, the policy makers should indulge in policies that would help counteract the effects of the exchange rate policy that has been shown to cause the insignificance in it effect to the manufacturing output.
SUGGESTION FOR FURTHER STUDIES
The adoption of Ordinary Least square (OLS) method used in showing the relationship between effects of deregulation of exchange rate on industrial produce were analyzed through a model
interrelating manufacturing output and labour, capital stock, inflation, exchange rate and political instability/deregulation policy.
In the case of further studies extensive work can be done on capital utilization in the manufacturing sector as an agent for nation building. The study will need to focus on determining the most efficient and effective way of utilizing resources available for businesses to improve maximum productivity. (Case study being manufacturing companies in Nigeria)
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