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ANALYSIS OF THE EFFECT OF EXCHANGE RATE ON MANUFACTURING INDUSTRIES IN NIGERIA (1985-2006)

CHAPTER ONE

INTRODUCTION

1.0     BACKGROUND OF THE STUDY

Industrialization offers dynamic contribution to the restructuring of a less developed economy from a traditional to a more advanced state investment towards development. In 1986, the world oil market witnessed turbulence with a fall in prices and since them the economy has been dependent and largely vulnerable to external disequilibrium. The Nigerian manufacturing sector was then clipped by and large with instability in production targets, capacity utilization and revenue generation, three after, unemployment, inflation and all other economic and social problems triggered off (Atitebi 1992).

Giwa (1996) in his writing “thoughts on the Nigeria economy. Stipulated that the manufacturing industries in Nigeria had been majority characterized by low productivity in output production and the sector’s (manufacturing industries) contribution to the Gross Domestic Product (GDP) of Nigeria has been relatively low over the years. The low output production and the low contribution of the sector to the Gross Domestic Product (GDP) was largely due to the exchange rate instability caused by the changing exchange rate policy runned by the Nigeria government as at then. In his further investigation on how the rate of exchange affects the output production of manufacturing industries in Nigeria, Giwa stated categorically that the instability in the exchange rate affects the output production of manufacturing industries as a result of the fact that most of the manufacturing industries in Nigeria largely depended on imported raw materials for the production of their output. Industrial production, in its entire sectors including manufacturing, mining and electricity fell to a record low from 122.1% in 1987 to 118.1% by the fourth quarter of 1994.

However, it has been noted after examining the stunted growth of the Nigeria manufacturing sector that one of the most critical hindrance to industrialization in Nigeria was the inconsistency in the exchange rate. It has not been stable over the years thereby hampering cost and benefit projection of the Nigeria manufacturing sector. The federal government of Nigeria through the CBN in 1992 increased the funding of a foreign exchange market t0 $100 million from a Forman allocation of $ 60 million. This was another shift of government policy on exchange rate to redeem the plummeting value of the Naira. The increased funding of the Yam wing gap between the demand and supply of foreign exchange market. 

1.1     STATEMENT OF THE PROBLEM

Investment in the manufacturing sector is expected to give the economy a lift towards development, but unfortunately to the present gross Domestic Product (GDP) has been very poor due to the changing policies of exchange rate which disputes its accessibility to foreign exchange and thus the acquisition of raw materials (OLADEJI S.1, 1990). In developing countries such as Nigeria where out financial markets are still under developed and on economy still highly open in nature, allowing currency to float could produce fluctuations in exchange rate, thus creating a wide difference between other market clearing rate in the long run. A ceipical requirement for a freely floating exchange rate require is the absence of any form of economic rigidity.

The manufacturing industries in Nigeria are characterized by structural rigidities and battlement, most of our imports and imports are characterized by inelasticity either on demand or on the supply side or both. This hinders the free flow of goods and services between the manufacturing industries in Nigeria and their trading partness (MACDONALD Rol, 1989). Moreover, the flustering rate of exchange which cam as a result of the changing foreign exchange policy practiced by the government has led to inefficacy in the productivity of the manufacturing industries.

1.2     OBJECTIVES OF THE STUDY

The objectives of this study include the following:

i.  To appraise the performance of the manufacturing sector during the stipulation period and its contribution to the Gross Domestic Product (GDP) of the economy.

ii.  To evaluate the major strands of policy on exchange rte from 1985 – 2004 and its effects on the activities and performance of manufacturing industries in Nigeria.

iii.  To critically access the extent to which the variations in the foreign exchange policy have affected the structure and levels of raw materials imported by the manufacturing industries in Nigeria.

iv.  To find out how the variations in the rate of exchange over the years have offered the output production of manufacturing industries in Nigeria.

v.  To expose the relevance of having a more consistent exchange rate policy approach.

vi.  To critically examine the impact of the exchange rate policy inconsistency on the balance of payment (BOP) of the Nigeria economy.

1.3             STATEMENT OF HYPOTHESES

Data would be collected to test the hypothesis that these. Exist any relationship between the exchange rate and the manufacturing output.

i.  Ho: Exchange rate does not determine manufacturing output.

Hi: Exchange rate determines manufacturing output and thus these is a positive relationship between them.

ii.  Ho: Manufacturing output is not determined by interest rate, net export government expenditure globalization, Agricultural output, exchange rate and inflation.

Hi: Manufacturing output is determined by the interest rate, net export, government expenditure, globalization exchange rate, inflation and Agricultural output, and thus there is a position relationship between them.

iii.  Ho: Gross Domestic Product (GDP) is not determined by government expenditure, exchange rate, inflation Agricultural output, and manufacturing output.

Hi: Gross Domestic Product (GDP) is determined by government expenditure, exchange rate, inflation, Agricultural output and manufacturing output and thus, there is a positive relationship between them.

1.4     METHOD OF THE STUDY

The method of data collection will largely base on secondary. The figures which will be used are from various issues of the Central Bank of Nigeria (CBN), Economic and financial reviews and the annual report and statistical statement account. This study will also rely on secondary data that were got from relevant write ups, journals relating to the topic of research and other relevant text books.

1.5     SCOPE AND LIMITATIONS OF THE STUDY

This study will lay emphasis on the effect of exchange rate policies on the manufacturing industries in Nigeria. Also, the study will examine the impact of the fluctuating exchange rate on the manufacturing sector’s contribution to the Gross Domestic Product (GDP) of the economy. The scope of this study will cut access exchange rate regimes as well as issues and possible effects it has had on the manufacturing industries in Nigeria. This study will cover the period between 1985 – 2004 so as to give room for a wider scope of analysis. However, the relevance of this study cannot be over emphasized because it is inherently modified to prefer an enduring lasting solution to the stalemate in the manufacturing industries in Nigeria.

1.6     ORGANIZATION OF THE STUDY

The whole research work will, be divided into five (5) chapters as follows: Chapter one – This will be the introductory chapter containing the introduction, statement of problem, purpose of the study, importance of the study of the study, scope and limitation of the study, methodology of the study, organization of the study and references. Chapter two – This will understate a comprehensive survey of the literature review, theoretical frame work, where various opinions on the exchange rate esquires and system will be discussed, which include the effect of the Nigeria foreign exchange policy on the manufacturing sector. Chapter three – This chapter will show the research methodology, sources in which data were collected, method of data analysis, expectations etc. Chapter four – This chapter will focus on the data presentation, hence the various data collected will be analyzed. Chapter five – This chapter will show the summary of finding, conclusion and recommendation on the long essay.

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