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MAY, 2014


1.1 Statement of the Problem
Foreign exchange rate plays a key role in international economic transactions
because no nation can remain in autarky due to varying factor endowment. Movements in
the exchange rate have ripple effects on other economic variables such as interest rate,
inflation rate, unemployment, money supply, etc. These facts underscore the importance
of exchange rate to the economic well-being of every country that opens its doors to
international trade in goods and services. The importance of exchange rate derives from
the fact that it connects the price systems of two different countries making it possible for
international trade to make direct comparison of traded goods. In other words, it links
domestic prices with international prices. Through its effects on the volume of imports
and exports, exchange rate exerts a powerful influence on a countrys balance of
payments position. Consequently, nations in the pursuit of the macroeconomic goals of
healthy external balances as reflected in their balance of payments (BOP) position, find it
imperative to enunciate an exchange rate policy (Douglason, 2008).
Imimole, and Enoma (2011) opined that foreign exchange rate is a key
determinant of the balance of payments (BOP) position of any country. If it is judiciously

utilized, it can serve as nominal anchor for price stability. Changes in exchange rate have
direct effect on demand and supply of goods, investment, employment as well as
distribution of income and wealth. When Nigeria started recording huge balance of
payments deficits and very low level of foreign reserve in the 1980s, it was felt that a
depreciation of the naira would relieve pressures on the balance of payments.
Consequently, the naira was devalued. The irony of this policy instrument is that our
foreign trade structure did not satisfy the condition for a successful balance of payment
policy. The countrys foreign trade structure is characterized by export of crude
petroleum and agricultural produce whose prices are predetermined in the world market
and low import and export price elasticity of demand.
Exchange rate policies in developing countries are often sensitive and
controversial, mainly because of the kind of structural transformation required, such as
reducing imports or expanding non-oil exports, invariably mean a depreciation of the
nominal exchange rate (Imimole and Enoma 2011). Such domestic adjustments, due to
their short-run impact on prices and demand, are perceived as damaging to the economy.
Ironically, the distortions inherent in an overvalued exchange rate regime are hardly a
subject of debate in developing economies that are dependent on imports for production
and consumption (Ezirim, 2007).
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 1970s, to the floating of the currency
in 1986, following the near collapse of the economy between 1982 and 1985 Dada and
Oyeranti (2012). 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. This study
takes up the challenge to carry out an assessment of the Nigerian foreign exchange policy
from 1970-2012.
1.2 Objectives of the Study
The broad objective of this study is to carry out an assessment of the Nigerian
foreign exchange policy between the periods of 1970-2012. The specific objectives of the
study are as follows:
1. to characterize the various foreign exchange policy regimes adopted in Nigeria
2. to examine the trend of official exchange rate in Nigeria
3. to evaluate the extent to which the foreign exchange policy impacts on economic
aggregates such as output, Price level and balance of payments
4. To offer appropriate recommendations based on the findings of the study

1.3 Justification of the Study

The effects of the recent global economic crisis on Nigerias exchange rate have
reaffirmed the urgent need for protection of the economy from exchange rate risk.
Although, no country is immune to such global crisis, the over-reliance on oil export
revenue by Nigeria exposes her exchange rate and economy excessively to external
shocks. Therefore, there is the need to conduct a study of this nature to evaluate Nigeria
exchange rate policy with growth.
1.4 Methodology of the Study
In this chapter, the research process will be described. Specially, the sources of
data, method of data collection, method of data presentation, and method of data analysis
that will be used in analyzing the data to be collected.
Secondary data are the basis of data to be used in this study. They were sourced mainly
from the publications of the Central Bank of Nigeria (CBN) namely; CBN Statistical
Bulletin, CBN Annual Reports, CBN Economic and Financial Review Bullion, and
Bureau of Statistics publications etc. Extensive use will be made of the internet so as to
make use of e-journals.
This section presented the data available from 1970-2012 as at the time of study and the
synthesization of the results of our analysis will enable us to arrive at conclusions that
will aid future policy actions. The analysis of the study shall be based on content analysis
with relevance literature to be supported by descriptive statistical analysis.

1.5 Scope and Plan of the Study
Despite the liberalization of the exchange rate in Nigeria since the introduction
Structural Adjustment Programme (SAP) in 1986, no meaningful progress has been made
to improve economic performance of the country. Therefore, this study would focuses on
an assessment of Nigerian foreign exchange policy from 1970-2012 and its impact on
economic aggregates such as output, price level and balance of payments of Nigeria as
necessitated by the inflationary pressure generated by recent global economic crisis
through the exchange rate sensitivity. This project shall be divided into four chapters. The
first chapter shall provide the statement of the problem, objectives of the study,
justification of the study, methodology & source of data, and scope of the study. Chapter
two shall present related literature concerning foreign exchange policy and management.
Data presentation, analysis of data, discussion and interpretation would be made in
chapter three while the last chapter four shall give summary, recommendations,
conclusion and limitation of the study based on the findings.


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Bullion, Vol.26 No 1.Pp. 47 -64.

Ayodele, A. Sesan (1997). The Naira Exchange Rate Adjustment and the Promotion of
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Ayse Evrensel (2013). International Finance For Dummies, USA, Dickson Publication,
ISBN: 978-1-118-52389-6, Pp (3-10 )
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economic Stabilization." Tony Killick Edition. London: Heinemann Education
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Business Day (2010),CBN to study Inflation, Exchange Rates and Money Supply.
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Chandler L.V. (2003). The Economics of Money and Banking, Harper and Row, New
York Pp.1-5

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Monograph Series No. 7, pp.1-4

Central Bank of Nigeria, Statistical Bulletin (Various Issues) 2005-2010

Central Bank of Nigeria (Various Issues) Report & Statement of Accounts for the First
Half year in 2011

Compton, E.N. (2005) Principles of Banking, USA: Journal American Bankers
Association Pp2-5

Cooper, R.N. (2008). "Flexible Exchange rate and stabilization policy" Scandinavian
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Donovan, D.J. (1981). "Real response association with exchange rate action in selected
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Title Page i
Certification ii
Dedication iii
Acknowledgment vi
Table of Contents v
List of Tables vii
1.1 Statement of the Problem 1
1.2 Objectives of the Study 2
1.3 Justification of the Study 3
1.4 Methodology of the Study 3
1.5 Scope and Plan of the Study 4
2.1 Conceptual Issues: Exchange Rate Policy And Policy Objectives 5
2.2 Typology of Exchange Rate Policy 7
2.3 Evaluation of Exchange rate Policy 13
2.4 Exchange rate policy and Economic Growth 14
2.5 Theoretical Links Between Exchange Rate and Macroeconomics Performance 16


3.1 Exchange Rate Trends in Nigeria Between 1970 - 2012 22
3.2 Exchange Rate and Outputs in Nigeria 24
3.3 Exchange Rate and Price levels in Nigeria 28
3.4 Exchange Rate and Balance of payments (BOP) in Nigeria 32

4.1 Summary of Major Findings 35
4.2 Recommendations of the Study 35
4.3 Conclusion of the Study 37
4.4 Limitations of the Study 38