THE STATE AND POLICY EVALUATION IN NIGERIA: A CASE

STUDY OF FOREX TRADING BAN POLICY

BY

KWENTOH, Stellamaris Mwanneka

MATRIC NO: 199088178

A PROJECT SUBMITTEDTO THE DEPARTMENT OF PUBLIC AND

INTERNATIOAL AFFAIRS, UNIVERSITY OF LAGOS, IN PARTIAL
FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE
OF MASTER OF IN PUBLIC AND INTERNATIONAL AFFAIRS (MPIA)

MARCH, 2023
CERTIFICATION
I, KWENTOH, Stellamaris Mwanneka do hereby certify that the work embodied in this
research work was carried out by me and is original. It has not been submitted in part or in
full to this institution or any other institution for the award of a degree or diploma.

__________________________ __________
DR DELE ASHIRU Date

i
 DEDICATION
This work is dedicated to God Almighty, who saw me through and my parents for their moral
support and prayers.

ii
 ACKNOWLEDGEMENT
My immeasurable gratitude goes to the Almighty God, from whom every good thing comes.
In the same vein, my unflinching appreciation goes to my supervisor, DR DELE ASHIRU for
bringing his inestimable academic prowess to bear in the quality of this work. May God bless
him. I wish to equally register my indebtedness to the Head of Department of public and
international affairs, University of Lagos.
God bless you all

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 ABSTRACT
This study assessed the impact of the state and policy evaluation using the Fore as a case
study. This study was guided by the following objectives: to evaluate the extent to which the
Nigerian government conducts policy evaluation in monetary policies; examine the impact of
foreign exchange rate policy in the forex trading in Nigeria; evaluate the effect of the
parallel market on the foreign exchange market policies in Nigeria and examine the
challenges of monetary policy evaluation in Nigeria. Research questions were derived from
the objectives. Purchasing Power Parity Theory and Balance Of Payments (BOP) Theory
were used to substantiate the variables of the study. The study was a quantitative study in
which data were gotten from a primary source through the use of questionnaires. The study
revealed that there is a relationship between foreign exchange rate policy and forex trading
in Nigeria; it was also revealed that there is a relationship between parallel markets on the
foreign exchange market in Nigeria. It was therefore, among others recommended that there
is a need for the CBN to improve its capacity for policy evaluation in terms of the technology
and manpower needed to efficiently evaluate its forex policies; the CBN must ensure that it
trains its workers on the policy evaluation; the CBN need to create an environment for
innovation in the bank; there is need for better public relations of the issue of forex
management to enlighten the populace about policy actions

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 TABLE OF CONTENTS

Title Page i

Certification ii

Dedication iii

Acknowledgements iv

Abstract v

Table Of Contents vi

CHAPTER ONE: INTRODUCTION

1.1 BACKGROUND TO THE STUDY 1

1.2 STATEMENT OF THE PROBLEM 2

1.3 OBJECTIVES OF THE STUDY 3

1.4 RESEARCH QUESTIONS 4

1.5 RESEARCH HYPOTHESIS 4

1.6 SIGNIFICANCE OF THE STUDY 4

1.7 SCOPE OF THE STUDY 5

1.8 LIMITATION OF THE STUDY 5

1.9 DEFINITION OF TERMS 5

CHAPTER TWO: LITERATURE REVIEW

2.0 INTRODUCTION 7

2.1 CONCEPTUAL CLARIFICATIONS 7

2.2 HISTORY OF FOREIGN EXCHANGE 10

2.3 THE NIGERIAN FOREIGN EXCHANGE SYSTEM 12

2.4 THE NIGERIAN EXCHANGE RATE POLICY 14

2.5 THE OFFICIAL FOREIGN EXCHANGE MARKET 16

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2.6 BUREAU DE CHANGE MARKET 17

2.7 THE PARALLEL FOREIGN EXCHANGE MARKET (BLACK MARKET) 18

2.8 THE DEMAND FOR FOREIGN EXCHANGE 18

2.9 FACTORS AFFECTING DEMAND FOR FOREIGN EXCHANGE 20

2.10 THE SUPPLY OF FOREIGN EXCHANGE 22

2.11 FOREIGN RESERVES 23

2.12 THEORETICAL FRAMEWORK 24

CHAPTER THREE: RESEARCH METHODOLOGY

3.0 INTRODUCTION 26

3.1 RESEARCH DESIGN 26

3.2 STUDY LOCATION 26

3.3 STUDY POPULATION 26

3.4 SAMPLE SIZE 27

3.5 SAMPLING TECHNIQUES/METHODS 27

3.6 RESEARCH INSTRUMENT 27

3.7 ETHICAL CONSIDERATION 28

3.8 METHOD OF DATA ANALYSIS 28

CHAPTER FOUR: DATA PRESENTATION AND INTERPRETATION

4.0 INTRODUCTION 29

4.1 HYPOTHESES TESTING 39

4.2 DISCUSSION OF FINDINGS 41

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

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5.0 INTRODUCTION 43

5.1 SUMMARY 43

5.2 CONCLUSION 44

5.3 RECOMMENDATIONS 45

REFERENCES 46

APPENDIX 49

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 CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Over the years, public policies have indeed, gone far beyond new and naïve aspirations for

acquiring societally relevant knowledge, and there has been a growing scepticism and

criticism of the credibility of public policies to produce objective empirical and normative

truths. Essentially, it should be noted that the evaluation of public policy is an aspect of the

policy process; though it seems to be the most important segment in policy management and

yet the least taken care of (Nduba, Akam, & Ngonadi, 2019). Realistically, a policy in

practice seldom differs from the intentions with which it is made.

Policy evaluation appraises how policy intervention influences outcomes and whether these

consequences cum effects are intended or unintended. The proper analysis of impact requires

a counterfactual of what those outcomes would have been in the absence of the intervention.

It does establish whether the intervention had a welfare effect on individuals, households, and

communities and whether this effect can be attributed to the concerned intervention (Shehu et

al., 2022). Impact evaluation further seeks to present and determine the long-run results that

are generated by policy decision-makers, often through programs or projects and

interventions. Interestingly, impact evaluation may be direct or indirect, positive or negative,

intended or unintended.

Policy evaluation is important because it helps to strengthen the state’s ability to report on

policies and programs and use the information to improve future activities. It allows the

government to track program information related to whom, what, when and where questions:

To whom did you direct program efforts? What has your program done? (Ebeh, 2015).

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However, policy evaluation in Nigeria is not efficient enough. The government hardly

conducts it and even when it conducts it, it hardly uses its recommendations.

The role of policy evaluators in state policies is equal to the policy objectives. This implied

that they will bring to light the dream development or otherwise. How they evaluate policy

has a long way in determining state policies. Some evaluation policy theorists argued that in

order to determine the impact and effectiveness of a particular policy, the policy content

should be in the mind of policy evaluators (Ebeh, 2015). This can be done during policy

implementation, after implementation or both. Both are prepared in case of challenges. The

outcome, when negative, can be corrected with little modification in the course of

implementation (in the light of time, incentives etc) or making a new policy.

Social progress or otherwise is the manifestation of public policy (Shehu et al., 2022). When

implemented accordingly. In Nigeria, public policies have mixed results. Thus, it often tends

to produce a completely negative outcome. Hence public policy doesn’t solve the real

problem it is designed for. On this premise, this study intends to examine policy evaluation as

a tool used by the government to understand the impact of policy implementation with a

focus on the CBN forex trading ban.

1.2 STATEMENT OF THE PROBLEM

The past years have been dramatic in the banking industry, firms that had been performing

well suddenly announced large losses due to credit exposures that may or may not have been

assumed to hedge balance sheet risk. While banks have continued to report high profits,

economic growth continues to crawl.

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The policies initiated by the Central Bank of Nigeria (CBN) particularly on the Forex ban

have led to strains on the country’s economy with the naira falling against the much stronger

US dollar. This has contributed to rising inflation, worsening poverty and unemployment. In

February 2021, the CBN directed deposit money banks, non-bank financial institutions

(NBFIs), and other financial institutions (OFIs) to restrict forex through banks (TheCable,

2021). The underlying motive for the action of the apex bank indicated that the ban on the

sale of foreign exchange to the BDC operators was necessary because most of them have

become conduits for illicit forex flows and graft. Even though the intentions were good, the

policy brought a lot of strains to businesses as it became difficult for them to access need

forex to purchase goods from outside the country. This in turn drove up inflation in the

country.

The foregoing shows that even though the CBN introduced the policy to improve the

economy and check crime, the forex ban has created a challenge for businesses that depend

on forex and forex traders alike in the country.

1.3 OBJECTIVES OF THE STUDY

The general objective of the study is to assess the state and policy evaluation. Specifically,

the study intends to:

Evaluate the extent to which the Nigerian government conducts policy evaluation in

monetary policies

Examine the impact of foreign exchange rate policy on forex trading in Nigeria

Evaluate the effect of the parallel market on the foreign exchange market policies in Nigeria

Examine the challenges of monetary policy evaluation in Nigeria

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1.4 RESEARCH QUESTIONS

What is the extent to which the Nigerian government conducts policy evaluation in monetary

policies?

What is the impact of foreign exchange rate policy on forex trading in Nigeria?

What is the effect of the parallel market on the foreign exchange market in Nigeria\/

What are the challenges of monetary policy evaluation in Nigeria?

1.5 RESEARCH HYPOTHESIS

Hypothesis One:

H0: There is no relationship between foreign exchange rate policy and forex trading in

Nigeria

H1: There is a relationship between foreign exchange rate policy and forex trading in Nigeria

Hypothesis Two:

H0: There is no relationship between the parallel market and foreign exchange market policy

in Nigeria

H1: There is a relationship between the parallel market and foreign exchange market policy

in Nigeria

1.6 SIGNIFICANCE OF THE STUDY

The study would benefit the managers of the Nigerian economy and monetary policymakers.

The knowledge of the reason and effect of inadequate foreign exchange, inflow and balance

of payment would make the authorities able to address the fundamental imbalance in the

economic structure. They would be able to address exchange rate volatility, and the falling

value of the naira, and sustained an adequate Forex control system. The study would also

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contribute to the body of knowledge and serve as a point of reference to future researchers

who would be undertaking a study in this field or a similar one

1.7 SCOPE OF THE STUDY

The paper is restricted to the Nigerian economy over a period of time. The data to be used are

annually published data from the CBN statistical bulletin (input year). Also, the foreign

exchange would be limited to the United States dollar (USD) for the purpose of this study.

1.8 LIMITATION OF THE STUDY

Data for the study are presented at different intervals: monthly, quarterly and yearly. A

monthly analysis would have been more revealing but inability to conform some data to

monthly intervals has made these impossible. Also, the Nigerian foreign exchange market is

characterised by multiple exchange rates which include the official exchange rates, the

interbank foreign exchange rates and the parallel foreign exchange rates. A lot of foreign

exchange transactions are consummated in the parallel market with no official records of data

available.

1.9 DEFINITION OF TERMS

Policy: There are various definitions of policy and they address it from different perspectives

and with varying degrees of emphasis (Ikelegbe, 2006). Some emphasise policy as action,

while others see it in terms of scope of choice. A policy is simply actions taken or to be taken

and actions not taken or not to be taken by the government or private organisation. It can also

be regarded as general rules, regulations, guiding practices or actions and directives relating

to particular public activities or problems (Ikelegbe, 2006). The policy also entails a definite

course of actions selected from among alternatives and in the light of given conditions to

guide and usually determine present and future decisions.

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Foreign Exchange Market: The foreign exchange market (also known as forex, FX, or the

currencies market) is an over-the-counter (OTC) global marketplace that determines the

exchange rate for currencies around the world. Participants in these markets can buy, sell,

exchange, and speculate on the relative exchange rates of various currency pairs.

Foreign exchange markets are made up of banks, forex dealers, commercial companies,

central banks, investment management firms, hedge funds, retail forex dealers, and investors.

Monetary Policy: Monetary policy is a set of tools used by a nation's central bank to control

the overall money supply and promote economic growth and employ strategies such as

revising interest rates and changing bank reserve requirements.

Exchange Rate: An exchange rate is a rate at which one currency will be exchanged for

another currency and affects trade and the movement of money between countries.

Bureau De Change: A bureau de change is a business which, in competition with other

similar businesses, makes its profit by buying foreign currency and then selling the same

currency at a higher exchange rate. It may also charge, a commission or fee on the purchase

or sale. In setting its exchange rates, the business would keep an eye on changing market

conditions, as well as the rates quoted by competitors, and may be subject to government

foreign exchange controls and other regulations

Parallel Market: A secondary currency market where currency rates are different from those

applied in the official market. The term may sometimes also apply to the black market. It is

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an unofficial foreign exchange market tolerated by a government but not officially

sanctioned.

CHAPTER TWO

LITERATURE REVIEW

2.0 INTRODUCTION

This chapter presents a review of relevant literature. It contains a review of various literature

on the role of policy evaluation on CBN policies on Nigeria's Foreign Exchange Market. It

also contains a review of theories used in explaining the variables of the study.

2.1 CONCEPTUAL CLARIFICATIONS

2.1.1 FOREIGN EXCHANGE CONCEPT

Foreign exchange can be defined as foreign currency or any other financial instrument

acceptable as a means of payment or exchange for international transactions (Odusola 2006).

It is made up of convertible currencies that are accepted for the settlement of international

transactions- trade and other external obligations. Foreign exchange is the conversion of one

country’s currency into that of another. It is the purchase or sale of one currency in exchange

for another currency, usually conducted in a market setting. It makes international

transactions such as imports and exports and the movement of capital between countries

possible. In a free economy, a country’s currency is valued according to factors of demand

and supply. In other words, a currency’s value can be pegged to another nation’s currency

such as the United States dollar, or even to a basket of currencies. However, the government

can fix a country’s currency value.

2.1.2 EXCHANGE RATES

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Odusola (2006) describes exchange rates as the prices at which currencies trade for each

other: spot and forward rates. It is the value of a foreign currency expressed in terms of

domestic or other currencies. Mordi (2006) describes exchange rates as a vital price in an

economy which influences most other prices and indeed, the general price level. The rate of

exchange is the official value of a nation's monetary unit at a given date or over a given

period of time, as expressed in units of local currency per USD and as determined by

international market forces or official fiat. It is the price of one nation’s currency in terms of

another nation’s currency often termed the reference currency. For instance, the naira/dollar

exchange rate is the number of nairas that one dollar will buy. If a dollar will buy a

hundred and fifty naira, the exchange rate would be expressed as N150/1$ and the dollar

would be the reference currency.

Exchange rates can be expressed either in nominal or real terms. The nominal exchange rate

is a monetary concept that measures the relative price of two money or currencies_ the naira

in relation to the dollar for instance. The real exchange rate is a real concept that measures the

relative price of two goods- tradable goods (exports and imports) in relation to non-tradable

goods (goods and services produced and consumed locally). The study is focused on the

nominal exchange rate. Most exchange rates are determined by the foreign exchange market.

For this reason, exchange rates vary daily, depending on what traders think the currency is

worth. This depends on a lot of factors, including Central banks’ interest

rates, the country's debt levels, and the strength of its economy

2.1.3 CHANGES IN EXCHANGE RATES

The demand and supply of foreign exchange in the market are responsible for the movement

in flexible exchange rates along the demand and supply curves. Anything that shifts the

demand curve for the Nigerian currency to the right or the supply curve of the naira to the left

8
leads to an appreciation of the naira. Anything that shifts the demand curve for the naira to

the left or the supply curve of the naira to the right leads to a depreciation of the naira. There

are many reasons for the shifts in demand and supply of foreign exchange that lead to

changes in the exchange rates. Some are transitory and some are persistent. Lipsey and

Chrystal (2007) identified them to include:

● A rise in the domestic price of exports: If the price of exports increases and export

goods do not reduce commensurately (inelastic), then foreign buyers would pay more

for local products bringing about an increased demand and appreciation of the naira

which will shift the demand curve to the right. If the demand is elastic, lesser naira

would be demanded because close substitutes abound elsewhere. This would make the

demand curve for the naira shift to the left.

● A rise in the foreign price of imports: If the demand for imported products like phones

for instance is elastic, any increase in price would bring about lesser patronage of

such products for close substitutes. Hence the supply of naira would be reduced and

the demand for foreign exchange reduced. The supply curve of the naira shifts to the

left and the naira appreciates. If the demand were inelastic, the supply of the naira

would shift to the right leading to a depreciation of the naira.

● Capital movements: A significant movement of investment into a country has the

effect of appreciating the currency of the capital-importing country and depreciating

the currency of the capital-exporting country.

● Changes in Price level: If the general price level of one country is rising relative to

that of another country, the equilibrium value of its currency will be falling relative to

that of the other country. If Inflation is higher in Nigeria when compared to the United

States, for instance, Nigerian exports would become expensive in the American

markets while American exports to Nigeria would be less expensive. This would shift

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 the demand curve for the naira to the left and the supply curve to the right leading to

the depreciation of the naira. Indeed the price level and the exchange rate are both

measures of a currency’s value. The price level is the value of a currency measured

against a typical basket of goods while the exchange rate values a currency against

other currencies.

● Structural Changes: An economy can undergo structural changes that alter the

equilibrium exchange rate. Such changes could include a change in technology, the

invention of new products, consumer trends and anything else that affects the pattern

of comparative advantage. For instance, the production of oil and gas from the North

Sea in the United Kingdom (UK) reduced her demand for imported oil, leading to a

reduced supply of pounds in the foreign exchange market for oil purchase and an

appreciation of the British pounds.

2.2 HISTORY OF FOREIGN EXCHANGE

There was little need for foreign exchange when trade among nations was insignificant, and

when there was a need, it was served by gold. As trade expanded, there was a need to

exchange currency rather than gold because it is heavy and difficult to transport. The

challenge then was how a nation could equalize its currency in terms of other currencies. This

was accomplished by equalizing all currencies in terms of the amount of gold that they

represented.

Foreign exchange history can be traced to 1875 with the development of the gold standard

monetary system. Prior to this, countries had primarily used gold and silver to make

international payments (Holly: 2010). The gold exchange standard prevailed from 1879 to

1934. The value of the major currencies was fixed in terms of how much gold for which they

10
could be exchanged, and consequently were fixed in terms of every other currency. One of

the requirements that the countries adhering to the gold standard needed to follow was to

maintain their money supply to a fixed quantity of gold, so the government could only issue

more money if it had obtained more gold. This requirement, of course, was to prevent

countries from just printing money to pay foreigners, which had to be prevented if foreign

trade was to continue.

A corollary of this requirement was that gold had to flow freely between different countries;

otherwise, no country could export more than they import, and vice versa, and still maintain

its supply of currency to the gold it held in stock. implies higher income and output. This is

the basis of modern monetary policy, which is implemented by Central banks to stimulate a

sluggish economy by increasing the money supply or to reign in an overheating one by

contracting the supply of money.

Countries started abandoning the gold standard during the great depression of the 1930s by

reducing the amount of gold backing their currency so that they could increase the money

supply to stimulate their economies. This deliberate reduction of value is called a devaluation

of the currency. When some of the countries abandoned the gold standard, it just collapsed. It

was a system that could not work unless all of the trading countries agreed to it.

The leaders of the allied nations met at Breton Woods, New Hampshire in 1944, to set up a

better system of fixed exchange rates. An ounce of gold was fixed at thirty-five United States

dollars. This official fixed rate of exchange was known as the par value of the currency. The

new system required that each country value its currency in terms of gold or the United States

dollar and maintain an account at the International Monetary Fund (IMF) that was

proportional to the country's population, the volume of trade, and national income. It also

11
provided an adjustable peg that allowed the exchange rate to be altered under specific

circumstances.

Each country had to maintain the exchange rate within narrow limits, except when the

balance of payments deficit became too large. To maintain the limits, a country could use its

official reserves; borrow from the IMF or sell gold to a country for its currency. When the

imbalances became too large, it could adjust its rate to no more than ten per cent of the

current value. Any larger adjustment The reality of the gold standard was the possibility of an

economy losing more gold if it was not competitive in the world marketplace, as more goods

would be imported and less exported. With less gold in stock, the country would have to

contract the money supply, which would hurt the country's economy. Less money in

circulation reduces employment, income, and output; and more money required the approval

of the IMF board. This prevented countries from devaluing their currency for their own

benefit.

2.3 THE NIGERIAN FOREIGN EXCHANGE SYSTEM

Exchange rate management is characterized by official intervention in the foreign exchange

market because of the level of development. (Akanji: 2006) Nigeria has practised both fixed

and flexible exchange rates. Between 1960 and 2000, the exchange rate policy in Nigeria

fluctuated from a fixed exchange rate system (1960-1986) to a flexible exchange rate system

(1986-1993). However, there was a regulation in 1994 with the pegging of the official

exchange rate and the reversal of policy in 1995, which has been tagged ‘guided

deregulation’ of the exchange market.

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This exchange rate was liberalized and a dual exchange rate mechanism was instituted in

1997 and 1998. This policy thrust was retained except that all official transactions, other than

those approved by the President were undertaken at the Autonomous Foreign Exchange

Market (AFEM). As a result, transactions at the pegged official exchange rate were relatively

minimal.

Due to market imperfections and continuous instability in the exchange rate of the naira, the

AFEM was replaced with an Interbank Foreign Exchange Market (IFEM) in October 1999,

after a short period of co-existence. Under the IFEM system, oil companies were allowed to

place their foreign exchange resources in commercial banks of their choice.

The Dutch Auction System (DAS) of foreign exchange management was introduced to

replace IFEM in July 2002. The main objective of IFEM was to devalue the naira, moderate

imports, and consequently strengthen the balance of payment while at the same time reducing

the parallel market premium. Since the introduction of DAS, the naira has lost value

significantly, and the parallel market premium, narrowed, but it has not limited the appetite of

Nigerians for foreign goods and persistent demand for foreign exchange. When the

government deregulated the economy as a result of serious economic predicaments in 1986,

the foreign exchange market was equally deregulated to allow market forces to determine the

appropriate exchange rate for the naira. It was in this era that the activity of parallel markets

flourished because the government through the Central bank could not adequately provide

enough foreign exchange to meet the increasing demand in the market and coupled with the

stringent procedures that were involved. A lot of foreign exchange users then resorted to

patronizing the parallel market in which the rate was usually higher than the Interbank rate. In

spite of the risk associated with transacting business in the black market, which included

buying fake currency, people still continue to patronize the market since the official market

was not able to provide enough foreign exchange to the market (Adebiyi: 2007).

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In order to ensure the stability of the naira, the Central bank introduced the wholesale Dutch

Auction System (WDAS) in 2006 and licensed more Bureau de Change and empowered them

to sell foreign exchange to interested importers. The bank was able to ease out the problem of

scarcity of foreign exchange faced by genuine importers by designating their branches to sell

directly to customers. With these, the bank was able to stabilize the naira against other

currencies.

Apart from the institution of an appropriate mechanism for exchange rate determination,

other measures increasingly applied in managing Nigeria's foreign exchange resources

included demand management and supply-side policies. The Central bank and the

government have actively fostered the development of institutions such as the Nigerian

Export Promotion Council (NEPC) and the Nigerian Export-Import Bank (NEXIM) in the

drive to earn more foreign exchange.

2.4 THE NIGERIAN EXCHANGE RATE POLICY

Mordi (2006) describes exchange rate policy as encompassing the design and deployment of

strategies to ensure the achievement of a stable and realistic exchange rate for the country’s

domestic currency, consistent with overall macroeconomic policy objectives. The main

objectives of the exchange rate policy in Nigeria are to preserve the value of the domestic

currency, maintain a favourable external reserves position and ensure external balance

without compromising the need for internal balance and the overall goal of macroeconomic

stability (CBN Website).

Economic theory, in the quest for simplicity, assumes that the exchange rate is any other

price that is determined by the forces of demand and supply in a perfectly competitive market

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and in a world where free international exchange is the rule. An extension of this theory is

that such factors as net foreign exchange earning [exports - imports], current account

balances, productivity and its growth among others, determine the exchange rate of a

currency (Elumelu: 2002). Odusola (2006) put the specific objectives of exchange rates into

two broad categories: traditional and non-traditional objectives. Traditionally, foreign

exchange management in Nigeria is aimed at three mutually exclusive objectives:

● Conservation of available foreign exchange resources so as to check expenditure and

undue depletion of external reserves.

● Ensuring adequacy of reserves consistent with current and future international

commitment; and

● Preserving the value of external reserves through appropriate portfolio diversification

and optimal deployment into strong currencies.

The non-traditional objectives include:

● Reduction of excessive demand for foreign exchange;

● Removal of distortions in the economy;

● Stimulation of non-oil exports; and

● Promotion of efficient allocation of foreign exchange resources through reduction of

dependence on imports and oil exports;

● Elimination of unfavourable capital flight and stimulation of inflows of capital; and

reduction and possibly elimination of exchange rate misalignment and exchange rate

premium.

In recent times, achieving exchange rate convergence has therefore become one of the

intermediate objectives of Central banks in many countries. In order to achieve these, the

Central bank of Nigeria has over the years adopted different mechanisms for regulating the

15
exchange rates. This however has not been short of challenges. For instance, the existence of

parallel foreign exchange markets in Nigeria is primarily borne out of the inadequate supply

of foreign exchange and the desire to make an illegal profit (round-tripping). With these

markets and different modes of operation come differences in the rates of exchange.

On the foreign exchange market, Nigeria maintains four exchange rates; the Wholesale Dutch

Auction System (WDAS) at which the CBN transacts; an interbank the exchange rate quoted

by a group of commercial banks — the Nigerian Inter-Bank Foreign Exchange Fixing

(NIFEX); the bureaux de change rate; and the parallel market rate.

2.5 THE OFFICIAL FOREIGN EXCHANGE MARKET

The Central bank buys foreign exchange from the Nigerian National Petroleum Corporation

and sells foreign exchange to members of the public through their official representatives_

the commercial banks and bureau de change operators. The Central bank actually provides

foreign exchange through auction sessions at which authorised dealers buy foreign exchange

on behalf of importers. Within the basic framework of market determination of the naira

exchange rate, various methods have been applied and some adjustments carried out to fine-

tune the system. Various pricing methods have been used in Nigeria, such as marginal,

weighted average and Dutch auction systems and the Wholesale Dutch auction system. The

official market has a way of impacting the interbank and unofficial or parallel markets. The

Wholesale Dutch Auction System (WDAS) has been in use since February 2006. The

exchange rate under the WDAS has stabilized and continued to improve the operations of the

foreign exchange market. It has been responsible for the unification of exchange rates

between the Official and Inter-bank Markets and resolution of the multiple currency

problems. This was achieved by bringing the Bureau de change operators into the official

market in order to ensure adequate supply at the BDC/Parallel markets. It has also facilitated

16
greater market determination of exchange rates for the Naira in relation to other currencies.

The rates are usually lower at the official market but inaccessible to businesses and

individuals.

The Central bank also engages in intervention policies. Intervention is defined as official

purchases and sales of foreign exchange to achieve one or more of the following objectives.

Akanji (2006) listed them as:

● Moderating exchange rate fluctuations and correcting misalignment

● Addressing disorderly market conditions characterized by sharp fluctuations in the

exchange rate, high exchange rate volatility, wide bid-offer spreads relative to calm

periods and sudden change in foreign exchange turnover.

● Accumulating foreign exchange reserves and;

● Supplying foreign exchange to the market.

2.6 BUREAU DE CHANGE MARKET

The licence of a Bureau De Change (BDC) in Nigeria confers on the holder the rights and

privileges of an approved buyer of foreign exchange in keeping with the standard of the

financial services industry and in order to generate and maintain public confidence in the sub-

sector (CBN).

The liberalization opened the market for the operations of private BDCs and authorised

dealer BDCs. The operations of these BDCs with Central bank window are basically cash

operations. Each licensed BDC was required, to open a Naira Current Account with an

Authorized Dealer of its choice, for the purpose of buying foreign exchange. A Bureau-de-

Change is allowed to purchase foreign exchange from the Central bank through a

17
presentation of the bank’s cheque issued by their banks twice a week. The foreign currencies

dealt in by a Bureau De Change shall be derived from private sources or such other sources,

including the Interbank foreign exchange market, as the Central Bank of Nigeria shall define

from time to time for the purpose of Business Travel Allowance [BTA] and Personal Travel

Allowance [PTA]. Selling foreign exchange to BDCs by the Central bank was a major factor

in the convergence of the foreign exchange market rates.

2.7 THE PARALLEL FOREIGN EXCHANGE MARKET (BLACK MARKET)

The parallel market for foreign exchange has been in existence since the exchange control era

of 1962. Their activities were not so pronounced nor of any significant impact on the stability

of the exchange rates before the deregulation of the foreign exchange market in 1986. When

the government deregulated the economy due to serious economic predicaments, the foreign

exchange market was equally deregulated to allow market forces to determine the appropriate

exchange rate for the naira. It was in this era that the activity of the parallel market

flourished. It has been established that scarcity in the official sector and bureaucratic

procedures necessitated the growth and development of the parallel market. Importers and

exporters of non-oil commodities were prior to 1986 required to get appropriate licences from

the Federal Ministry of Commerce before they could participate in the foreign exchange

market. Foreign exchange users then resorted to patronizing the parallel market in which the

rate was usually higher than the foreign exchange market rate. In spite of the risk associated

with transacting business in the black market, which included buying fake currency, people

continued to patronize the market since the official market was not able to provide enough

foreign exchange to the market.

2.8 THE DEMAND FOR FOREIGN EXCHANGE

18
The demand for foreign exchange arises from all international transactions that require

payments in foreign exchange and debits in the balance of payment accounts. It is represented

by external debt service obligations; personal home remittance by foreign nationals resident

in the country; financial commitments to international organizations and the country's

embassies overseas; purchasers of foreign securities and investments; payment for imports

and other invisible out payments by the private sector. Other factors that induce the demand

for foreign exchange are the activities of speculators and the Central bank. The bank might

decide that its holdings of a particular currency are too low, and then decide to buy that

currency on the open market. They might also want to have the exchange rate for their

currency decline relative to another currency. They put their currency on the open market and

use it to buy another currency. Official information shows a steady increase in the demand for

foreign exchange in Nigeria. From a figure of 49.52(US$ Million) in December of 1996, it

rose to 259.89(US$ Million) and 768.09(US$ Million) in December of 1999 and 2001

respectively. It also rose from 786.22(US$ Million) in December 2002 to 805.63(US$

Million) and 1,401.40(US$ Million) in December 2003 and 2006 respectively. A lot of

increase in foreign exchange demand in recent times is also traceable to the almost near

dependence on fuel and food imports for local consumption.

It is no more an assumption that the various foreign exchange management process in the

country in the past twenty years have met without stable results. The reason is that many of

the plans to achieve the desired targets were based on factors which are not under the control

of the economy. The continued application of the process has reflected mere gestures as the

variables in the economy have remained largely beyond the capacities of the trends that ruled

the Nigerian economy. The relative weakness of Nigeria's entire economy does not seem

favourable to the status quo. The GDP is relatively small compared to industrialized nations

19
and this negates the stability and international purchasing power of the naira. The amount of

importation overwhelms the economy and a low return of foreign exchange due to inadequate

exports to generate foreign exchange.

The crux of the matter is that the demand for dollars is extremely high among Nigerian

banks. Nigeria does not generate enough foreign exchange to satiate local consumption.

Therefore the demand for dollars drives the value of the Naira which is ubiquitous and weak.

Nigerian source of dollars and foreign exchange comes only from the export of oil and its

overdependence on foreign exchange from the oil can be largely unstable due to unsteady

international oil prices. Increasing demand for foreign exchange puts unusual pressure on the

available supplies which leads to a rise in exchange rates.

2.9 FACTORS AFFECTING DEMAND FOR FOREIGN EXCHANGE

The demand for foreign exchange is a derived demand. Foreign exchange is not demanded

for its own sake but for the services, it could be used to render or for the foreign products it

could acquire. The demand for foreign exchange is affected by a myriad of factors which

includes the foreign exchange rate as earlier highlighted. At the most fundamental level, a

currency price will change because there is more or less demand for it. Increased demand for

foreign exchange places pressures on the available supply bringing about an increase in the

rates of foreign exchange. The higher the rates, the lower the quantity of foreign exchange

demanded and vice versa. Other factors which affect foreign exchange demand include the

following:

● Changes in total income and employment: When people receive more income they

would have more money to spend after satisfying their basic needs. Such increased

20
 income would be used to acquire foreign products (cars and electronic gadgets, etc)

and engage in foreign tours thereby increasing the demand for foreign exchange.

● Interest Rates: The interest rate influences the demand and supply of currencies on the

foreign exchange markets. A good deal of the trade in foreign currencies is for

speculative purposes - traders moving funds from one currency to another to take

advantage of price movements or to take advantage of better returns in different

countries. If the rate of interest in Nigeria is three per cent and that of the United

States is six per cent for instance, there may be advantages gained from transferring

funds in naira-based securities to those denominated in dollars. (Like moving money

from a bank account paying three per cent to another bank account paying a higher

rate of interest.) If this happened, there would be a move towards selling naira on

foreign exchanges and buying dollars, with the result that the demand for dollars

would rise and the supply of naira would also go up. This would put pressure on the

price of the dollar and push its value up against the naira.

● Inflation: Changes in inflation rates can affect international trade activity, which

influences the demand and supply of currencies. If inflation is high, prices of products

are rising fast and the economy will have a lot of money to buy foreign products. If

they buy foreign products, there is a need for currencies other than the currency they

have, so demand for foreign exchange rises.

● Views on Impending government regulation: Many activities in the foreign exchange

market are based on speculation about future events. If the participants believe that

there would likely be a devaluation of the local currency by the monetary authorities

for instance, they would buy more foreign exchange today to hedge up the possible

risk of losses, devaluation would bring to their businesses and vice versa.

21
 ● Availability of substitutes: The availability of competitive local substitutes can be a

deterrent to the importation or patronage of foreign products. If local substitutes are

now available and can compete favourably with international markets, consumers

would patronize local products in exchange for foreign substitutes reducing the

demand for foreign exchange indirectly by ensuring such foreign products are no

longer imported or importation is reduced.

● Population and changes in taste: An increase in the population generally leads to

increased demand for particular products over time including the demand for foreign

exchange. Also, consumer preferences and tastes for a variety of products change over

time. In Nigeria at present, there is usually a preference for foreign-made goods. This

is based on the belief that foreign goods are durable and of high quality. Such

consumer tendencies could marginally affect the quantity of foreign exchange

demanded in an economy at a given time.

2.10 THE SUPPLY OF FOREIGN EXCHANGE

Nigeria’s foreign exchange market is very broad on the demand side but very shallow on the

supply side. Unlike other jurisdictions, all licensed banks in Nigeria have also authorized

dealers in foreign exchange. The market is demand-driven and it is characterized by rent-

seekers and non-adherence to regulations. Between the years 2000-2003, a total sum of

US$53.9 billion was sold in the foreign exchange market of which 65% was supplied by the

CBN (Osaka et al 2004). The supply of foreign exchange is obtained from oil and non-oil

exports. It is equally obtained from capital receipts including drawdown on loans,

expenditure on foreign tourists in Nigeria, and repatriation of capital by Nigerians resident

overseas. Other invisible receipts by the private sector also constitute the supply of foreign

exchange. Nigeria’s foreign exchange is however mainly from the proceeds of crude oil

22
production and sales. Nigeria produces approximately two million barrels per day of crude oil

in joint ventures with some multinational oil companies. These companies pay different taxes

to the government through the Federal Inland Revenue Service which is deposited with the

Central bank. In the past, all foreign exchange earned by multinationals was paid into an

account with the Central bank. In recent times such gains made by these multinationals can

be deposited in their bank accounts or sold at the inter-bank foreign exchange market. Banks

have been permitted to contract foreign exchange from autonomous sources. These sources

are basically the foreign direct and portfolio investment, home remittances (western union,

money gram) multinational oil companies, NNPC and foreign institutional investors. Also,

three foreign banks which include Stanbicibtc Nigeria, Nigeria International bank (Citi bank)

and Standard Chartered bank are major sources of foreign exchange inflow into the country

through their parent companies.

2.11 FOREIGN RESERVES

The IMF defined international reserves as consisting of official public sector foreign assets

that are readily available to, and controlled by the monetary authorities, for direct financing

of payment imbalances, and directly regulating the magnitude of such imbalances, through

intervention in the exchange markets to affect the currency exchange rate and for other

purposes. The official foreign exchange reserves are the stock of foreign-currency-

denominated assets that the monetary authorities hold in order to be able to intervene in the

foreign exchange markets. Reserve management can be defined as a process that ensures that

adequate official public sector foreign assets are readily available to, and controlled by the

authorities for the purpose of meeting specific objectives of a country (Nda: 2006). The main

objectives of reserve management include safety (capital preservation), liquidity and returns.

23
Nigeria’s external reserves derive mainly from the proceeds of crude oil production and sales.

Nigeria produces approximately two million barrels of crude oil per day in a joint venture

with some international oil companies. From 1999, world oil prices began to rise again

resulting in another boom and unprecedented accumulation in the level of reserves from

USD4.98 billion in May 1999 to USD59.37 billion as of March 28, 2007 (CBN website).

Nigeria’s dependence on oil for over ninety per cent of its foreign exchange earnings makes

its capital account vulnerable to fluctuations in crude oil prices. This, in addition to its high

import bills, contributed to the fluctuations in the level of reserves over the years and

consequently the way the reserves are being managed.

2.12 THEORETICAL FRAMEWORK

2.12.1 PURCHASING POWER PARITY (PPP)

This theory holds that the average value of the exchange rate between two currencies depends

on their relative purchasing power in the long run. A currency would tend to have the same

purchasing power when spent in its home country as it would have if it were converted to

foreign exchange and spent in a foreign country. This precisely means that the ratio of the

price level of a fixed amount of goods and services of the two countries and the exchange rate

between those two countries must be equivalent. PPP is based on the law of one price. The

PPP exchange rate is determined by relative price levels in the two countries. If at existing

values of relative price levels and the existing exchange rate, a currency has a higher

purchasing power in its own country, it is said to be undervalued. There is then an incentive

to sell foreign exchange and buy the domestic currency in order to take advantage of the

higher purchasing power (cheaper goods). This will put upward pressure on the domestic

currency. The reverse is the case if a currency has lower purchasing power. If the inflation

rate within a country’s economy increases then the value of the currency needs to depreciate

24
to revive the PPP. In the absence of transportation and other similar expenses, the competitive

market will equalize the price of an identical object in two countries when the prices are

expressed in the same currency.

2.12.2 BALANCE OF PAYMENTS (BOP) THEORY

Every country needs to maintain a balance in their inflow or outflow of money.

Conventionally all financial influx is treated as a credit to the Balance of Payments (BOP).

A BOP is a term used to denote the cash balance of a country. The BOP is always maintained

in tune with the rest of the world. The BOP must equilibrate except for abnormal

circumstances like the bankruptcy of a country. Precisely the BOP must be ‘zero’ denoting

that an equal amount of inflow and outflow has taken place. According to this theory, the

demand and supply of a currency depend on the flow of money related to the Balance Of

Payments. Balance of payments can be achieved through trades in goods and services, direct

investment and portfolio investments. Equilibrium Exchange Rates are determined by the

equilibrium in the BOP. In the event of an imbalance in payments, the exchange rates will

shift to restore the Balance of Payments. Therefore the overall Balance of Payment acts to be

a good indicator of the pressure that goes into the valuation which is the appreciation or

depreciation of the currency.

25
 CHAPTER THREE

RESEARCH METHODOLOGY

3.0 INTRODUCTION

This section contains the research methods and procedures used in the course of the study. It

Includes research design; study location; sample size; sampling technique; study population;

research instruments and method of data analysis.

3.1 RESEARCH DESIGN

The research design that will be adopted for this study is the non-experimental research

design. A non-experimental study uses various methods to describe data and the relationship

among variables which will be adopted to assess the state and policy evaluation. In terms of

the nature of data to be collected, considering the nature of the study and respondents, the

26
quantitative data will be gathered from the respondents, which will be subjected to analysis

through statistical means.

3.2 STUDY LOCATION

The study location refers to the place where the study hopes to be carried out. This means the

area that is to be used by the researcher in the conduct of the study is a case study. The area

where this study was carried out is the Central Bank of Nigeria, Marina Lagos. This is

because it has a professional who can provide helpful information needed for the study.

3.3 STUDY POPULATION

Study population refers to the set of respondents that a researcher intends to study. The

population of the study comprises adult male and female workers of the Central bank office

at marina Lagos.

3.4 SAMPLE SIZE

Sample size can be seen as the number of respondents that a researcher wants to study. This

sample size was selected from the Lagos state metropolis. Seventy (70) and respondents were

selected from employees of the Central Bank of Nigeria.

3.5 SAMPLING TECHNIQUES/METHODS

The sampling method that will be used for drawing the sample is the convenience sampling

technique and the simple random technique. The sampling method to be used for drawing the

sample will be the convenience sampling technique. A convenience sample is a non-

probability sampling method where the sample is taken from a group of people that are easy

to contact or reach. In applying the convenience sampling technique, an effort will be made

27
by the researcher to reach out to the bank management in order to obtain approval for

participation. Thereafter, simple random sampling will be used to administer the instrument

3.6 RESEARCH INSTRUMENT

For the purposes of this study, the questionnaire will be used for collecting data. It will be

generated in a methodical manner, with questions that are designed and arranged in such a

way as to elicit detailed responses from respondents on certain themes. Questionnaires will be

distributed to CBN employees who are expected to participate in this research. It is built in

such a way as to provide selected respondents with appropriate information by making use of

questions that do not allow for open-ended responses. In order to clearly describe and

categorise the responses received from the various groups, the questionnaire will be broken

up into a number of distinct sections. The first section of the questionnaire will focus on

obtaining information regarding the socio-demographic characteristics of the respondents.

This inquiry is about the respondent's demographic information, including their age and

gender, among other things. The second component of the questionnaire will be comprised of

questions that are specifically geared at achieving the objectives of the study.

3.7 ETHICAL CONSIDERATION

It is important to consider ethical issues in studies involving human behaviour. For this study,

each respondent was duly informed about the study before his or her consent will be

obtained. Also, respondents were told that they could withdraw their participation at any

point in time during the course of the interview. The questions asked were fair and

reasonable. However, they were encouraged to answer all the questions, as it will only be

used for this research purpose only.

28
3.8 METHOD OF DATA ANALYSIS

Data collected were coded and analysed according to the order of the research questions

drawn up for respondents in the questionnaire using the software package for social sciences

(SPSS). A frequency table and simple percentage were used to present and analyse data

according to the research questions. Chi-square was used to test the hypotheses of the study.

CHAPTER FOUR

DATA PRESENTATION AND INTERPRETATION

4.0 INTRODUCTION

This chapter presents the data obtained in the course of the data collection exercise. The

intended sample for the study is seventy (70) but only sixty-three (63) copies of the

questionnaires administered were properly filled and returned. Thus, only sixty-three (63)

copies were used for analysis. Chi-square was used in testing the hypotheses of the study.

Table 4.1: Distribution of respondents by Sex

Sex Frequency Percentage

Male 37 58.7
Female 26 41.3
Total 63 100.0

29
Table 4.1 shows that 37 (58.7%) are male while 26 (41.3%) are female.

Table 4.2: Distribution of respondents by Age

Age Frequency Percentage

15-29 2 3.2
30-44 8 12.7
45-59 33 52.4
60-74 12 19.0
75 and above 8 12.7
Total 63 100.0
Table 4.2 shows that 2 (3.2%) are between the age 15-29, 8 (12.7%) are between the age 30-

44, 33(52.4%) are between the age 45-59, 12(19.0%) are between the age 60-74, 8(12.7%)

are between the age 75 and above.

30
Table 4.3: Distribution of Religion

Religion Frequency Percentage

Christianity 23 36.5
Islam 27 42.9
Traditional 13 20.6
Total 63 100.0
Table 4.3 shows that 23(36.5%) practice Christianity, 27(42.9%) practice Islam, 13(20.6%)

are traditional worshipper.

Tabl4 4.4: Distribution of respondents by Religion

Religion Frequency Percentage

Igbo 9 14.3
Hausa/Fulani 39 61.9
Yoruba 15 23.8
Total 63 100.0
Table 4.4 shows that 9 (14.3%) are Igbo, 39 (61.9%) are Hausa/Fulani, 15 (23.8%) are

Yoruba.

Table 4.5: Distribution of respondents by marital status

Marital status Frequency Percentage

Single 26 41.3
Married 33 52.4
Divorced 4 6.3
Total 63 100.0
Table 4.5 shows that 26(41.3%) are single, 33 (52.4%) are married, 4 (6.3%) are divorced.

31
Table 4.6: Distribution of respondents by the level of education

Level of education Frequency Percentage

Primary 6 9.5
Secondary 7 11.1
Tertiary 50 79.4
Total 63 100.0
Table 4.6 shows that 6(9.5%) have primary education, 7 (11.1%) have secondary education,

50 (79.4%) have tertiary education

Table 4.7: Distribution of respondents by job level

Job level Frequency Percentage

Management level 19 30.2
Mid-level 33 52.4
Entry level 11 17.5
Total 63 100.0
Table 4.7 shows that 19 (30.2%) are in management level, 33 (52.4%) are in mid-level,

11(17.5%) are in entry level.

Table 4.8: Distribution of respondents by whether the CBN conducts an evaluation on

the impact of its monetary policies on Nigerians

CBN conducts an evaluation on the

impact of its monetary policies on Frequency Percentage
Nigerians
Yes 31 49.2
No 32 50.8
Total 63 100.0
Table 4.8 shows that 31(49.2%) CBN conducted evaluation on the impact of its monetary

policies on Nigerians while 32(50.8%) CBN did not conduct an evaluation on the impacts of

its monetary policies on Nigerians.

32
Table 4.9: Distribution of respondents by whether evaluative measures are effective in

capturing the real impact of the policies

The Evaluative measures are effective in Percentage

capturing the real impact of the policies Frequency

Yes 20 31.7

No 32 50.8
Not sure 11 17.5
Total 63 100.0
Table 4.9 shows that 20(31.7%) Indicate that evaluative measures are effective in capturing

the real impact of the policies, 32(50.8%) indicate that evaluative measures are not effective

in capturing the real impact of the policies,11(17.5%) indicate that it not sure if evaluative

measure are not sure if capturing the real impact of the policies.

Table 4.10: Distribution of respondents by whether the capacity of the CBN to follow up
on the impact of its policies on the populace is sufficient
Capacity of the CBN to follow up on
the impact of its policies on the Frequency Percentage
populace are sufficient
Yes 18 28.6
No 31 49.2
Not sure 14 22.2
Total 63 100.0
Table 4.10 shows that 18 (28.6%) capacity of the CBN to follow up on the impact of its

policies on the populace are sufficient, 31 (49.2%) capacity of the CBN to follow up on

impact of its policies on the populace are not sufficient, 14 (22.2%) capacity of the CBN to

follow up on the impact of its policies on the populace are not sure if it sufficient.

33
Table 4.11: Distribution of respondents by capacity of the CBN to follow up on impact

of its policies on the populace are sufficient

Capacity of the CBN to follow up on

the impact of its policies on the Frequency Percentage
populace are sufficient
Yes 17 27.0
No 35 55.6
Not sure 11 17.5
Total 63 100.0
Table 4.11 shows that 17 (27.0%) capacity of the CBN to follow up on impact of its policies

on the populace are sufficient, 35 (55.6%) capacity of the CBN to follow up on impact of its

policies on the populace are not sufficient, 11 (17.5%) capacity of the CBN to follow up on

impact of its policies on the populace are not sure if it sufficient.

Table 4.12: Distribution of respondents by whether foreign exchange rate policies of the

government has improved forex trading in Nigeria

foreign exchange rate policies of the Percentage

government have improved forex trading Frequency

in Nigeria

Yes 13 20.6

No 39 61.9

Not sure 11 17.5

Total 63 100.0

Table 4.12 shows that 13(20.6%) indicate that foreign exchange rate policies of the

government have improved forex trading in Nigeria,39(61.9%) indicate that foreign exchange

of the government have not improved forex trading,11(17.5%) indicate that foreign exchange

of the government is not sure to have improved forex trading.

34
Table 4.13: Distribution of respondents by whether foreign exchange rate policies have

helped in improving ease of doing business in the country

Foreign exchange rate policies of the

government have improved forex trading Frequency Percentage
in Nigeria
Yes 14 22.2
No 36 57.1
Not sure 13 20.6
Total 63 100.0
Table 4.13 shows that 14(22.2%) indicate that foreign exchange rate policies have helped in

improving the ease of doing business in the country, 36(57.1%) indicate that foreign

exchange rates have not helped in improving ease of doing business in the country,13(20.6%)

indicate that it is not sure that foreign exchange rate policies have helped in improving ease

of doing business.

Table 4.14: Distribution of the respondents by whether foreign exchange rate policies of

the CBN helped in boosting the country’s forex earnings

Foreign exchange rate policies of the CBN

helped in boosting the country’s forex Percentage
earnings Frequency
Yes 16 25.4
No 37 58.7
Not sure 10 15.9
Total 63 100.0
Table 4.14 shows that 16 (25.4%) indicate that foreign exchange rate policies of the CBN

helped in boosting the country’s forex earnings, 37 (58.7%) indicate that foreign exchange

rate policies of the CBN did not help in bosting the country’s forex earnings,10 (15.9%)

35
indicate that it is not sure that foreign exchange rate policies of CBN help in boosting the

country’s forex earnings.

Table 4.15: Distribution of respondents by whether foreign exchange rate policies

helped in stabilizing the naira

Foreign exchange rate policies helped in

stabilizing the naira Frequency Percentage
Yes 12 19.0
No 37 58.7
Not sure 14 22.2
Total 63 100.0
Table 4.15 shows that 12(19.0) indicate foreign exchange rate policies helped in stabilizing

the naira,37(58.7%) indicate that foreign exchange did not help in stabilizing the

naira,14(22.2) indicate that it is not sure that foreign exchange rate policies helped in

stabilizing the naira.

Table 4.16: Distribution of respondents by whether the parallel market constitutes a

risk to the stability of the foreign exchange market

The parallel market constitutes a risk to the

stability of the foreign exchange market Frequency Percentage
Yes 22 34.9
No 35 55.6
Not sure 6 9.5
Total 63 100.0
Table 4.16 shows that 22(34.9%) indicate the parallel market constitute a risk to stability of

the foreign exchange market 35(55.6%) indicate that the parallel constitutes a risk to the

stability of the foreign exchange market 6(9.5%) indicate that it not sure that the parallel

market constitute a risk to stability of the foreign exchange

36
Table 4.17: Distribution of respondents by whether the ban on the parallel market

helped in stabilizing the stock exchange market

The ban on the parallel market helped in

stabilizing the stock exchange market Frequency Percentage
Yes 19 30.2
No 31 49.2
Not sure 13 20.6
Total 63 100.0
Table 4.17shows that 19(30.2%) indicate that a ban on the parallel market helped in

stabilizing the stock exchange market,31(49.2%) indicate that a ban on the parallel market

did not help in stabilizing the stock exchange market,13(20.6%) indicate that it not sure that

the parallel market helped in stabilizing the stock exchange market.

Table 4.18: Distribution of respondents by whether the CBN’s ban on the parallel

market helped in strengthening the naira

CBN’s ban on the parallel market helped

in strengthening the naira Frequency Percentage
Yes 17 27.0
No 31 49.2
Not sure 15 23.8
Total 63 100.0
Table 4.18 shows that 17(27.0%) indicate that the CBN ban on the parallel market helped in

strengthening the naira, 31(49.2%) indicate that the CBN ban on the parallel market did not

help in strengthening the naira,15(23.8) indicate that it is not sure that the CBN ban on

parallel market did not help in straightening the naira.

37
Table 4.19: Distribution of respondents by whether CBN’s evaluative measures helped

in capturing the impact of CBN policy on the parallel market.

CBN’s evaluative measures helped in Percentage

capturing the impact of CBN policy on
the parallel market Frequency
Yes 16 25.4
No 31 49.2
Not sure 16 25.4
Total 63 100.0
Table 4.19 shows that 16 (25.4%) indicate that CBN evaluative measures helped in capturing

the impact of the CBN policy on the parallel market, 31(49.2%) indicate that CBN evaluative

measure did not help in capturing the impact of CBN policy on the parallel market,

16(25.4%) indicate that it not sure if CBN evaluative measures helped in capturing the impact

of CBN policy on the parallel market .

Table 4.20: Distribution of respondents by whether insufficient staffs are a challenge to

monetary policy evaluation in Nigeria

Insufficient staffs are a challenge to Percentage

monetary policy evaluation in Nigeria Frequency
Yes 16 25.4
No 31 49.2
Not sure 16 25.4
Total 63 100.0
Table 4.20 shows that 16(25.4%) indicate that insufficient staffs are a challenge to monetary

policy evaluation, 31(49.2%) indicate that insufficient staffs are not a challenge to monetary

policy evaluation, 16(25.4%) indicate that it is not sure that insufficient staff are a challenge

to monetary policy evaluation

38
Table 4.21: Distribution of respondents by whether CBN has sufficient technical

capacity for efficient policy evaluation

CBN has sufficient technical capacity for Percentage

efficient policy evaluation Frequency
Yes 11 17.5
No 36 57.1
Not sure 16 25.4
Total 63 100.0
Table 4.21 show that 11(17.5%) indicate that CBN has sufficient technical capacity for policy

evaluation,36(57.1%) indicate that CBN does not have sufficient technical capacity for policy

evaluation,16(25.4%) indicate that it not sure that CBN has sufficient technical capacity for

policy evaluation.

Table 4.22: Distribution of respondents by whether political interference is a challenge

to effective monetary policy evaluation

Political interference is a challenge to Percentage

effective monetary policy evaluation Frequency
Yes 44 69.8
No 17 27.0
Not sure 2 3.2
Total 63 100.0
Table 4.22 shows that 44(69.8%) indicate that political interference is a challenge to effective

monetary policy evaluation, 17(27.0%) indicate that political interference is not a challenge

to effective monetary policy evaluation, 2(3.2%) indicate that it is not sure that political

interference is a challenge to effective monetary policy evaluation.

39
Table 4.23: Distribution of respondents by whether feedback mechanisms challenge

Feedback mechanisms challenging Frequency Percentage

Yes 22 34.9
No 28 44.4
Not sure 13 20.6
Total 63 100.0
Table 4.23 shows that 22(34.9%) indicate that there are feedback mechanism challenges.

28(44.4%) indicate that there is no feedback mechanism challenging, 13(30.6%) indicate that

it is not sure if there is a feedback mechanism challenging.

4.1 HYPOTHESES TESTING

Hypothesis One:

Ho: There is no relationship between foreign exchange rate policy and forex trading in

Nigeria

Hi: There is a relationship between foreign exchange rate policy and forex trading in Nigeria

Chi-Square Tests

Asymp. Sig.

Value df (2-sided)

Pearson Chi-Square 13.719a 4 .005

Likelihood Ratio 3.940 4 .414

Linear-by-Linear
1.743 1 .187
Association

N of Valid Cases 63

a. 4 cells (44.4%) have an expected count of less than 5. The

minimum expected count is 1.75.

40
The table above shows that the calculated value (X2) is 13.719a, the degree of freedom is 1,

and the ‘p’ value is 0.005 which is lower than the level of significance of 0.05. Hence, the

Null hypothesis (H0) is rejected and the Alternative hypothesis (H1) is accepted then we

conclude that there is a relationship between foreign exchange rate policy and forex trading in

Nigeria.

Hypothesis Two:

Ho: There is no relationship between the parallel markets on the foreign exchange market in

Nigeria

Hi: There is a relationship between the parallel market on the foreign exchange market in

Nigeria

Chi-Square Tests

Asymp. Sig.

Value df (2-sided)

Pearson Chi-Square 15.407a 4 .000

Likelihood Ratio 5.250 4 .263

Linear-by-Linear
1.687 1 .194
Association

N of Valid Cases 63

a. 4 cells (44.4%) have an expected count of less than 5. The

minimum expected count is 1.24.

41
The table above shows that the calculated value (X2) is 15.407a, the degree of freedom is 1,

and the ‘p’ value is 0.000 which is lower than the level of significance of 0.05. Hence, the

Null hypothesis (H0) is rejected and the Alternative hypothesis (H1) is accepted then we

conclude that there is a relationship between parallel markets on the foreign exchange market

in Nigeria

4.2 DISCUSSION OF FINDINGS

The first finding of the study shows that there is a relationship between foreign exchange rate

policy and forex trading in Nigeria. These findings tally with a Guardian (2016) report where

it was reported that when a country's exchange rate increases relative to another country's, the

price of its goods and services increases. The quality of the foreign exchange policy of a

country determines the behaviour of forex traders in the country. Thus, the exchange rate

policy of the country determines what traders do when trading. The scarcity of forex by the

current regime of the CBN explains the behaviour of those in need of forex such as importers

in the forex market.

The second finding shows that there is a relationship between parallel markets in the foreign

exchange market in Nigeria. This finding aligns with the reports of Ghei, & Kamin, 1996)

posited that arbitrage exists as a result of market inefficiencies. Where all markets are

perfectly efficient, arbitrage becomes a mere academic discourse. In light of the finding of

this study, the differential in Nigeria’s forex rates, which is almost as old as the market, is the

cause and effect of the management of the local currency. The Central Bank of Nigeria

(CBN), perhaps, also realized this damage last year when it muted the rate coverage plan. But

as usual, political willpower has persistently had the upper hand. Today, there is a black-

market or currency dealer from buying or selling bucks. But one cannot blame them because

42
they are merely filling a vacuum. This trade is not entirely new to Nigerians but there is an

aspect of it only the ‘dealers’ and their customers, as well as a few observers, know about.

The challenges discovered in the course of the study militating against the effective

evaluation of forex policies by the CBN in the country are: political interference is a

challenge to effective monetary policy evaluation; weak feedback mechanisms; insufficient

technical capacity for policy evaluation by the CBN and insufficient staff is a challenge to

monetary policy evaluation

43
 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.0 INTRODUCTION

This chapter contains a summary, findings, conclusion and recommendations. An attempt

was made to give a summary of procedures used throughout the study. More so, the findings

of the study were discussed and related through previous works done on the topic. The work

was concluded and recommendations were made based on the findings of the study.

5.1 SUMMARY

The research work's purpose was to assess state and policy evaluation, using CBN as a case

study. The work initially took a historical overview of policy evaluation in Nigeria to bring

about precognition of the study.

The study also took into account the challenges that come with policy evaluation of CBN in

light of its forex policies. The policies initiated by the Central Bank of Nigeria (CBN)

particularly on the Forex ban have led to strains on the country’s economy with the naira

falling against the much stronger US dollar. This has contributed to rising inflation,

worsening poverty and unemployment. In February 2021, the CBN directed deposit money

banks, non-bank financial institutions (NBFIs), and other financial institutions (OFIs) to

restrict forex through banks. The underlying motive for the action of the apex bank indicated

that the ban on the sale of foreign exchange to the BDC operators was necessary because

most of them have become conduits for illicit forex flows and graft. Even though the

intentions were good, the policy brought a lot of strains to businesses as it became difficult

for them to access need forex to purchase goods from outside the country. This in turn drove

up inflation in the country. The foregoing shows that even though the CBN introduced the

44
policy to improve the economy and check crime, the forex ban has created businesses that

depend on forex and forex traders alike in the country.

Various methods were employed during the exercise in order to extract the opinions and

perceptions of the targeted respondents on the assess the policy evaluation in the CBN. The

research method used is the quantitative method which involves the use of numerical and

statistical techniques. This means the questionnaire data collection instrument was used in the

course of data collection. A sample size of sixty-three (63) was drawn from selected

employees of CBN. The findings were compared and contrasted with related previous works

to the study.

5.2 CONCLUSION

The first finding of the study shows that there is a relationship between foreign exchange rate

policy and forex trading in Nigeria. These findings tally with a Guardian (2016) report where

it was reported that when a country's exchange rate increases relative to another country's, the

price of its goods and services increases. The quality of the foreign exchange policy of a

country determines the behaviour of forex traders in the country. Thus, the exchange rate

policy of the country determines what traders do when trading. The scarcity of forex by the

current regime of the CBN explains the behaviour of those in need of forex such as importers

in the forex market.

The second finding shows that there is a relationship between parallel markets in the foreign

exchange market in Nigeria. This finding aligns with the reports of Ghei, & Kamin, 1996)

posited that arbitrage exists as a result of market inefficiencies. Where all markets are

perfectly efficient, arbitrage becomes a mere academic discourse. In light of the finding of

this study, the differential in Nigeria’s forex rates, which is almost as old as the market, is the

cause and effect of the management of the local currency. The Central Bank of Nigeria

45
(CBN), perhaps, also realised this damage last year when it muted the rate coverage plan. But

as usual, political willpower has persistently had the upper hand. Today, there is a black-

market or currency dealer from buying or selling bucks. But one cannot blame them because

they are merely filling a vacuum. This trade is not entirely new to Nigerians but there is an

aspect of it only the ‘dealers’ and their customers, as well as a few observers, know about.

The challenges discovered in the course of the study militating against the effective

evaluation of forex policies by the CBN in the country are: political interference is a

challenge to effective monetary policy evaluation; weak feedback mechanisms; insufficient

technical capacity for policy evaluation by the CBN and insufficient staff is a challenge to

monetary policy evaluation.

5.3 RECOMMENDATIONS

Based on the findings of the research, it is recommended that the following measures be put

in place to boost the standards for compliance with protocols for pandemics:

There is a need for the CBN to improve its capacity for policy evaluation in terms of the

technology and manpower needed to efficiently evaluate its forex policies

It is important for CBN to ensure that it trains its workers on the policy evaluation

The CBN need to create an environment for innovation in the bank

There is a need for better public relations on the issue of forex management to enlighten the

populace about policy actions

46
REFERENCES

Adebiyi M A (2007), "An Evaluation of Foreign Exchange Intervention and Monetary

Aggregates in Nigeria (1986- 2003)" Munich Personal RePEc Archive Paper (MPRA)

No 3817, University of Lagos.

Adubi A, Okunmadewa F (1999), "Price, exchange rate volatility and Nigeria’s agricultural

trade flows: A dynamic analysis," African Economic Research Consortium (AERC)

research paper 87.

Akanji O (2006), "The achievement of convergence in the Nigerian foreign exchange

Market," CBN Bullion Volume 30 No 3.

Bailey M J and Taulas G S (1988), “Trade and investment under floating exchange rates: The

U.S. experience,” The Cato Journal, Volume 8: 2. Central Bank of Nigeria (2002),

"Guidelines for Bureaux de Change in Nigeria," Other Financial institutions

department.

Central Bank of Nigeria, "Reserve Consumptions and Future savings: What options,"

(International Operations: CBN Website). Central Bank of Nigeria (2008), "Section

D: External sector statistics," CBN Statistical Bulletin, Volume 17.

David, M. and Sutton, C. (2004) Social Research: The Basics. London: Sage.

Egwaikhide F O (1999), "Determinants of imports in Nigeria: A dynamic specification"

African Economic Research Consortium (AERC) research paper 91.

Elumelu T (2002), "Interest and Exchange Rates Management in Nigeria: A Macroeconomic

Implication". Excerpts from a speech delivered at the Inaugural Lecture of the

Alumnus Guest Lecture Series of the Department of Economics, Ambrose Alli

University, Ekpoma on June 24.

47
Ghei, N. & Kamin, S. (1996). The Use of Parallel Market Rate As a Guide to Setting The

Official Exchange Rate. International Finance Discussion Paper. 1996.

10.17016/IFDP.1996.564.

Holly J (2010), "History of foreign currency exchange," Ehow contributor

Hooper P and Kohlhagen S W (1978), "The effects of exchange rate risk and uncertainty on

the prices and volume of international trade” Journal of International Economics, 8:

483-511.

Hoy, W. (2009) Quantitative Research in Education: A Primer. London: Sage.

Itsede (2003), "Exchange Rates Behaviour and Competitiveness," Journal of West African

Institute for Financial and Economic Management (WAIFEM) Vol 1, No 1, p 1 – 34.

Kroner K F and Lastrapes W D (1991), "The impact of exchange rate volatility on

international trade: Reduced from estimates using the GARCH-in-mean model”

Manuscript, University of Arizona.

Lipsey R and Chrystal A (2007), "Economics," Eleventh edition, Oxford University Press,

pp. 37-63, 497-540, 610-633.

Mordi C (2006), "Challenges of exchange rate volatility in economic management in

Nigeria," CBN Bullion Volume 30 No 3, July-September.

Nda M (2006), "Effective reserves management in Nigeria: Issues, challenges and Prospects,"

CBN Bullion Volume 30 No 3.

Odusola A (2006), "Economics of exchange rate management," CBN Bullion Volume 30 No

3.

Oronsaye S (2010), "Foreign exchange demand falls as demand rises," Next, February 10th.

Osaka G C, Oputa N C, Tule M K, Sanni H T, Odey L I, Sanni G K (2004), "The impact of

Regulatory sanctions on banks for non- compliance with foreign exchange

48
 Guidelines: a case study of 25 banks," Research Department, CBN Copyright ©

2004.,

Qian Y and Varangis P (1992), “Does exchange rate volatility hinder export growth?" The

World Bank Working Papers on International Trade WPS 9 11, May. International

Economics department.

Soludo C (2006), "Programme for further liberalization of the foreign exchange market in

Nigeria," Press briefing in March.

Spaulding W (2005), "Foreign Exchange History," Copyright© 2005-2011.

The Guardian (2016). Parallel market witch-hunting and our sanity. Accessed from:

https://guardian.ng/opinion/parallel-market-witch-hunting-and-our-sanity/

49
Appendix:

UNIVERSITY OF LAGOS, AKOKA, LAGOS

MASTER OF PUBLIC AND INTERNATIONAL AFFAIRS (MPIA)

Dear respondents,

My name is Stellamaris Kwentoh, a postgraduate student of Master of Public and

International Affairs (MPIA), University of Lagos carrying out an academic research on “The

state and policy evaluation in CBN” as part of the partial fulfilment for the award of MPIA

degree. I hereby solicit your assistance as one of our respondents in this academic endeavour

to help filling of this questionnaire. You can be assured that no harm is meant, and that

confidentiality and anonymity are also ensured as this work is strictly for academic purpose.

Therefore, we shall be very grateful if you can help to fill this questionnaire appropriately and

sincerely.

Thank you very much for your expected cooperation.

PART A: Bio-Data
No Questions Response Code
1. Sex Male 1
Female 2
2. Age 15-29 1
30-44 2
40-59 3
60-74 4
75 and above 5

3. Religion Christianity 1
Islam 2
Traditional 3

4. Ethnicity Yoruba 1
Igbo 2
Hausa/Fulani 3
Others (please specify) 4

50
 5. Marital Status Single 1
Married 2
Divorced 3
6. Level of education Primary 1
Secondary 2
Tertiary 3

7. Job level Management Level 1

Mid-Level 2
Entry Level 3

The extent to which the CBN conducts policy evaluation in monetary policies
No Question Response Code
8. Would you say that the CBN conducts an Yes 1
evaluation of the impact of its monetary No 2
policies on Nigerians? 3
9. Do you think these evaluative measures are Yes 1
effective in capturing the real impact of the No 2
policies Not sure 3

10. Would the capacity of the CBN to follow up Yes 1

on the impact of it’s polices on the populace No 2
are sufficient? Not sure 3
11. Do you think the CBN evaluative measures Yes 1
are frequent enough to capture the real No 2
impact of its policies? Not sure 3

Impact of foreign exchange rate policy on forex trading in Nigeria

No Question Response Code
12. Would you say the foreign exchange rate Yes 1
policies of the government have improved No 2
forex trading in Nigeria? Not sure 3
14. Do you think the foreign exchange rate Yes 1
policies have helped in improving the ease No 2
of doing businesses in the country? Not sure 3
15. Would you say the foreign exchange rate Yes 1
policies of the CBN helped in boosting the No 2
country’s forex earnings? Not sure 3
16. Do you think the foreign exchange rate Yes 1
policies helped in stabilizing the naira? No 2

51
 Not sure 3

Effect of the parallel market on the foreign exchange market policies in Nigeria
No Question Response Code
17. Would you say the parallel market Yes 1
constitutes a risk to the stability of the No 2
foreign exchange market? Not sure 3
18. Do you think the ban on the parallel market Yes 1
helped in stabilizing the stock exchange No 2
market? Not sure 3
19. Do you think the CBN’s ban on the parallel Yes 1
market helped in strengthening the naira? No 2
Not sure
20. Would you say the CBN’s evaluative Yes 1
measures helped in capturing the impact of No 2
CBN policy on the parallel market?

Challenges of monetary policy evaluation in Nigeria

No Question Response Code
21. Do you think insufficient staffs are a Yes 1
challenge to monetary policy evaluation in No 2
Nigeria? Not sure 3

22. Would you say CBN has sufficient Yes 1

technical capacity for efficient policy No 2
evaluation? Not sure 3
23. Would you say political interference is a Yes 1
challenge to effective monetary policy No 2
evaluation? Not sure 3
24. Are the feedback mechanisms challenging? Yes 1
No 2
Not sure 3

52
53