Effect Of Exchange Rate On Manufacturing Industries In Nigeria

Project and Seminar Material for Economics

Abstract

This study is on the effect of exchange rate fluctuation on the Nigeria manufacturing sector. The total population for the study is 200 staff of Dangote group of company, Lagos state. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made production managers, engineers, administrative staff and junior staff were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies

Chapter One

Introduction

1.1 Background of the Study

Following the fluctuation of the naira in 1986, a policy induced by the structural adjustment programme (SAP), the subject of exchange rate fluctuation has become a topical issue in Nigeria. This is because it is the goal of every economy to have a stable rate of exchange with its trading partners. In Nigeria, this goal was not reached in spite of the fact that the country embarked on devaluation to promote export and stabilize the rate of exchange. The failure to realize this goal subjected the Nigerian manufacturing sector to the challenge of a constantly fluctuating exchange rate.

This was not necessitated by the devaluation of the naira but the weak and narrow productive base of the sector and the rising import bills also strengthening it. In order to stem this development and ensure a stable exchange rate, the monetary authority put in place a number of exchange rate policies. However, very little achievement was made in stabilizing the rate of exchange. As a consequence, the problems of exchange rate fluctuation persisted in macro-economic management, exchange rate policy as an important tool derives from the fact that changes in the rate of exchange have significant implications, for a country‟s balance of payment position and even its income distribution and growth. It is not surprising since its behaviour is said to determine the behaviour of several other macro-economic variable (Oyejide, 1985). It is even more so for Nigeria which had embarked on a course of rapid economic growth with attendant high import dependency.

The manufacturing sector plays a catalytic role in a modern economic and has many dynamic benefits that are crucial for economic transformation. In an advanced country, the manufacturing sector is a leading sector in many respects. It is a quest for increasing productivity in relation to import substitution and export expansion, creating foreign exchange earnings capacity, raising employment, promoting the growth of investments of a faster rate than any other sector of the economy, as well as wider and more efficient linkage among different sectors (Fakiyesi, 2005). But the Nigerian economy is under-industrializes and its capacity utilization is also low. This is in spite of the fact that manufacturing is the fastest growing sector since 1973/74 (Obaden, 1994).

The sector has become increasingly dependent on the external sector for import of non-labour input (Okigbo, 1973). In the ability to import therefor; can impact negatively on manufacturing production Oyejide (1985) posited that the breakdown of the Brelton woods system induce variability in the rate of exchange worldwide; Nigeria inclusive. Umubanwer (1995) has noted that three adverse consequence of this on ability to import. Devaluation which further aggravates the situation has not significantly affected economic performance in the positive direction in Nigeria (Ojo, 1990). The impact of fluctuation in exchange rate on manufacturing output had not receives adequate attention. This paper attempts to give attention to the issue.

1.2 Statement of the Problem

This research work is meant to emphasize on the issue of fluctuating exchange rate on the Nigeria manufacturing sector. Some of the problems which cause the fluctuation of exchange rate on the Nigeria manufacturing can be seen below. The exchange rate of the naira was relatively stable between 1975 and 1979 during the oil boom or (regulatory require). This was also the situation prior to 1990 when agricultural products accounted for more than 70% of the nation‟s gross domestic product (GDP) (Ewa, 2011:78), however, as a result of the development in the petroleum oil sector in 1970, the share of agriculture in total export declined significantly while that of oil increased.

Furthermore, more manufacturing companies are faced with the problem, not recognizing the fact that fluctuation in exchange rate adversely affect output of the manufacturing sector, this because Nigeria manufacturing sector is highly dependent on import of input and capital goods, this is in spite of the fact that manufacturing sector is the fastest growing sector since 1973 (Obadan, 1994), this sector has become increasingly dependent on the external sector for import of non-labour input. The impact of fluctuation in exchange rate on manufacturing output has not received adequate attention.

Instabilities of foreign exchange rate is also a problem to manufacturing sector; however, instability to import therefore can impact negatively on manufacturing production; furthermore, Jhingen (1997), emphasized that exchange rate fluctuation cause uncertainty and impede on international trade. Thus uncertainty in trade transaction post a lot of problems such as inflation, which determine the internet balance of a country, it has also tended to undermine the international competitiveness of non-oil export and make planning and projection difficult at both micro and macro levels of the economy, some small and medium scale enterprise have been strangled out as a result of low dollar naira exchange rate.

1.3 Objective of the Study

The objectives of the study are;

To ascertain the impact of exchange rate fluctuation on the Nigerian manufacturing sector
To ascertain the effect of exchange rate fluctuation on Nigerian import or export and capital goods.
To determine if the continuous fluctuation of exchange rate of naira have an impact on the quality and quantity of output of manufacturing firms.

1.4 Research Hypotheses

The hypothesis of the study includes the null hypothesis denoted as „H0‟ and alternative hypothesis as „H‟.

H0: Exchange rate fluctuations have no effect on the importation of input and capital goods.
H1: Exchange rate fluctuations have effect on the importation of input and capital goods.
H0: Exchange rate fluctuation has no significant effect on the quality and quantity of goods manufactured by Nigerian firms.
H1: Exchange rate fluctuation has a significant effect on the quality and quantity of goods manufactured by Nigerian firms.

1.5 Significance of the Study

The study would identify the strengths and weakness of exchange rate policy and management, identify those parts that are mostly affected by instability in exchange rate provide the general public with adequate information on the foreign exchange transaction and its impact on the manufacturing sector. In general, the study benefits the following;

The government will benefit as it will enable them ascertain the extent of the variation of exchange rate affect the quality of input and capital goods imported into Nigeria by manufacturing firms, the government can make policies that will help Nigerian manufacturers prosper in the business.
The manufacturers will be much aware of the impact of the exchange rate fluctuations on their firms.
To the students, it will be a work base for further research.
To the public it will be a thorough understanding of the exchange rate fluctuation and having taken appropriate measure will lead to a stable economy.

1.6 Scope and Limitation of the Study

The scope of the study covers the effect of exchange rate fluctuation on the Nigeria manufacturing sector. The researcher encounters some constrain which limited the scope of the study;

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational Privacy:

Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities

1.7 Definition of Terms

1. Exchange Rate:

This is the price of one country’s currency in terms of another

2. Foreign Exchange:

Foreign exchange is a means of payment for international transaction; it is made up of currencies of other countries that are freely acceptable in settling international transactions.

3. Dutch Auction System (DAS):

This is a method of exchange rate determination through auctions where the bidders pay according to their bid rates.

4. Exchange Control:

This is a foreign exchange arrangement in which the government purchase all coming foreign exchange and is the only source from which foreign exchange can be purchased legally.

1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
Chapter three deals on the research design and methodology adopted in the study.
Chapter four concentrate on the data collection and analysis and presentation of finding.
Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five

Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain the effect of exchange rate fluctuation on the Nigeria manufacturing sector. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of exchange rate fluctuation on the Nigeria manufacturing sector

5.2 Summary

This study was on the effect of exchange rate fluctuation on the Nigeria manufacturing sector. Four objectives were raised which included: To ascertain the impact of exchange rate fluctuation on the Nigerian manufacturing sector, to ascertain the effect of exchange rate fluctuation on Nigerian import or export and capital goods, to determine if the continuous fluctuation of exchange rate of naira have an impact on the quality and quantity of output of manufacturing firms. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of Dangote group of company, Lagos state.

The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made production managers, engineers, administrative staff and junior staff were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies

5.3 Conclusion

The study empirically verified the effect of exchange rate fluctuations on the manufacturing sector. This is against the backdrop of the fact that exchange rate is a crucial variable and the manufacturing sector is expected to be the moving force in the drive towards industrialization. It is observed that the fact that Nigeria is highly dependent on the external sector for import of inputs has made the effect of exchange rate devaluation worse especially in manufacturing because capacity to import was constrained by the depreciating currency leading to a corresponding decline in output. It is pertinent to note that the devaluation of exchange rate in association with factors such as technology and human skills are necessary for a country to be established in the export market which are lacking in the case of Nigeria. The country should therefore, embark on improving basic amenities like electricity, transportation, water supply, telecommunication, human resource development, instead of implementing policies in an unhealthy economic and social structure

5.4 Recommendation

The government should restrict the importation of similar products manufactured in Nigeria to increase the buying of Nigerian products.
Government should stimulate export diversification in the area of agriculture; agro-investment, and agro-allied industries, oil allied industries such will improve Exchange rate fluctuations on manufacturing sector in Nigeria Economy.
The government should therefore, embark on improving basic amenities like electricity, transportation, water supply, telecommunication, human resource development, instead of implementing policies in an unhealthy economic and social structure.
The government should encourage the made in Nigeria products by removing the exportation duties in order to increase exportation of Nigeria products.
The government should encourage foreign investors to invest in Nigeria to increase their gross domestic product in order to increase the standard of living of the citizen of the country.