Impact Of Exchange Rate Fluctuation On International Trade (Export) In Nigeria

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Impact Of Exchange Rate Fluctuation On International Trade (Export) In Nigeria


Abstract


International trade and other economic activities between nationalities have greatly expanded in modern times. Movements of goods and services over great distances have made possible the consumption of such goods and services even in place or countries where they are not produced. The implication being and improve the standard of living for many.

However, exporting countries and importing nations trace the enormous problems or exchange rates fluctuations. In this work an attempt have been made to examine the impact of exchange rates fluctuations and balance of payment (export position) in Nigeria. This is study was carried out through the use of a questionnaire, Oral, interviews and secondary data.

It was found that there is a positive relationship between foreign exchange earnings and volume of imports in Nigeria that the importers do not think favourable of the structural adjustment programme and some Bank do not pay interest on the delayed export proceeds of FEM deposit account. Based on the findings we re commend that government should intervene to the foreign regulation of the sharp fluctuations in the foreign exchange market by improving the real productive sector of the economy. The apex bank should punish severely banks who do not repatriate export proceeds.


Chapter One


1.1 Introduction

The historical development of international trade can be dated as back the period of world war 1 (1914-1918).
Though world trade was heavy during world I, that world depression of the 1930’s greatly brought a decline in world trade.

The actions of several governments aggravated the from in the level of the world trade.

After world war ii era, the long run trend has been toward a relaxation of trade barriers (Solomon, 1976).
International trade sprang up in both century courtesy of mergers, acquisitions, consolidation and formulation of new companies and various types of securities issued by co-operations from survival of expansion following the development of financial management system, international trade was accelerated (Ndu, 1991).

International financial developments are having an increased effect on people because all parts of the world are now more closely linked together than ever before. Communications throughout the world take place within a matter of minutes or even seconds (Weston and Copeland, 1986).

Trade and other economic contracts between countries have expended greatly in modern time, the mass movement of commodities often over great distance has made available many articles, which could nor be enjoyed, hitherto and this has raised standard of living. As a result of international trade rule now have both a greater amount and a greater variety of goods to consume. The growth of international trade has gone hand in hand with technological improvements in productions and with development in transportation. These advances have made possible the large increase in the volume and variety of goods produced and traded factories turn out large quantities of commodities which are not only consumed locally, but are immediately distributed to different parts of the world improvement in transportation and the expansion of world markets have made possible this large and economic production.

Before the advents of oil exploration in 1958, Nigeria was an exporter of some agricultural product such as palm oil, cocoa, palm kennel, groundnut. Rubber etc the exchange earner for the country was also the greatest employer of labour.the importance of Agriculture can be best appreciated when it is realized that if accounted for greatest proportion of our Gross Domestic product (GDP). In the immediate post independence years, Nigeria had about 72 percent of its total working population engaged in Agricultural sector.

As a matter of tract, export declined from 75.3 percent in 1960 to 3.6 percent in 1983, while import was from n56.7 million in 1962 to n2.05 billion in 1980 (Nwachukwu 1989).

Export promotion, structural adjustment programme (SAP) as was witnessed under the infamous Babangida regime. The main aim was to revitalize the economic system and get rid of economic propriety for Nigeria in which export revenues will as much from many other sources as from oil whose fluctuations in the world market have come a nightmare for all those who plan the economy. The deviation of the Naira was most instrumental in making prices of export Hughes in terms of Naira because foreign currencies when converted fetched more naira. As a result farmers now earn more for their crops than before and this clearly has been an unprecedented inducement to farmers to produce more for export. For instance, cocoa accounted for about 50 percent of Nigeria’s non-oil export in 1989). Maintaining a realistic exchange rate for exporters regardless of trade and foreign exchange rate regime is the first requirement for export development and for sound investment planning and for attracting meaningful foreign investment into the country. With the introduction of sound tier foreign exchange market (SFEM) in 1986, which gave rise to FEM and inter bank foreign exchange market (IFEM). The idea of shopping imported.
Thus, foreign exchange transactions are payment mechanism operated by commercial and merchant banks to for the purposes of exchange domestic money for foreign currency or vice versa (Ebony, 1989).

A foreign exchange market has several functions if others as a mechanism for clearing payment related to international trade or investment on multinational basis provide credits in different currencies including facilities against lodging exchange and determines exchange rates between convertible currencies (Abodo, 1989). The foreign exchange rate as well as means by which both exporters and importers can be protected against unexpected fluctuation in exchange rates. This could be seen by the way new companies are seting up factories across the country. Businessmen particularly from the Far East are now coming into the country because the exchange rate has been so attractive to them (Ayobola, 1989).

Reports put together by Nigeria trading partners inclusive of members of the European Economics April 1989 shows that Nigeria wa the recipient of goods valued N36.496 which fell short of her export profile at N724.7m (FEM) (Nwosu, 1989). The official exchange rate which was N1.55$1 just before the inception of SFEM in 1989 was 4.25 to (1.00 in June, 1989 (Nwachukwu 1989) it went on further in 1990 and 1991, as at December 30, 1991 it was N9.86 to $1.00. this deteriorated at N112 to $ 1 as at June 22, 2001. the Federal government of Nigeria is convinced that the exchange rate of Naira will not fixed by executive fact but will continue to be determined by the forces of demand and supply. The demand for foreign exchange exceeds the supply in Nigeria.

Consequently, we pay high price to obtain foreign currencies. To improve the value of Naira on the external front, we either increase supply or reduce demand for foreign exchange. But most countries like Nigeria, the monetary authorities, intervene from time to time on the side of either demand and supply so as top limit the range within the rate has to clear the market. When such intervention occurs it implies that the exchange rate is not being allowed to move sufficiency to maintain a continuous balance between normal external payments and receipts (Ebony, 1987).

The thrusts of the exchange rate policy under the structural Adjustment programme are to discourage imports and promote agricultural production, encourage local sourcing of raw materials something they had considered impossible before the introduction of structural adjustment programme. One cannot tail to notice that importation has decreased, exports other than crude oil has increase over the months.

Problems crisis in this international transactions because of the inefficiency in our financial system, which introduce “lag” between the time the importer and the time of the fund are actually remitted to the exporter. The remittance lag as we call it, introduces exchange rates risk into the transaction. For example the rate prevailing at the time of payment by imports may differ from the rate of which the commercial banks will use in remitting the funds. These exchange rate differential results in either exchange rate loss or gain on the part of the importers.


1.2 Statement of the Problems

The foreign suggestion that the exchange rate risk as it affects the importer as well as exporter is one that is enough to hinder development in the country, thereby detecting the laudable objective of the government.

The remittance lag problem has far reaching economic implications for the society at large especially because importers already has the business risk to worry about in international trade transaction. The question that this paper addresses is who bears the burden of delayed interest on transaction money caused by “remittance “lag” lasting for as long as four months?


1.3. Objective of the Study

The objectives of this research work as follows:

  1. To seek and determine as far as possible methods by which this risk associated with exchange fluctuations can be minimized.
  2. To determined who should equitably bear the burden of the delayed interest the commercial banks, the central bank or the importer.
  3. To discover whether government importers are given preferential treatment as regard the remittance of funds.
  4. iv. To ascertain whether it’s widely believe that the FEM policy has not achieve a realistic exchange rate for the Naira.
  5. To ascertain whether the introduction of structural adjustment programme by the government through foreign exchange market (FEM) is reducing the problems created by the dual nature of international trade and
  6. Based on the findings to make appropriate recommendations.

1.4. Statement of Hypothesis

This work will test the following hypothesis which shall form the core of this study.

Hi: There is a significant relationship between foreign earning and value of export in Nigeria.
Ho: There is a significant relationship between foreign earning and value of export in Nigeria.

Hi: Nigerian banks have been paying interest accruing on deposit exporters for letter s of credit.


1.5 Significance of Study

The significance of this study therefore, lies on the r recommendation made at the end of the study and their implementation.

In general, the research is immense benefit to the following:

  1. Importers and exporters who always trade and are in need of direct finance.
  2. Policy makers of the central bank of Nigeria who issue guideline governing international trade practices.
  3. Banks especially the commercial banks.
  4. Students of finance and banking who might take a cue from the work done have to further re search into the field of exchange rate fluctuations and international trade.
  5. The general public who have a right to contribute and informed to the activities of our banking institutions.

It is hoped that the, findings and recommendations of this study will be of great importance to the above mentioned group.


1.6. Limitation of Study

During the course of this research, we will experience a number of limitations and constrains.
We will be faced with the already known problem of gathering research materials from Nigeria organizations.

Almost every information classified and therefore, many of the companies and banks we will approach may feel reluctant in releasing financial information related to the topic. Also gathering information from public organization such as the federal ministry of statistics and the central bank of Nigeria will be difficult.

Apart from time constraint, which will be careful managed and apportioned, we have discovered that much has not been written on the topic of study. Most articles on the topic were newspaper articles, which were far from been in-depth and analytical.

However, inspite of these constraints we will assume full responsibility for any shortcoming in this study. We are however, confident that the study will be of a good degree of validity and readability.


1.7 Scope of the Study

This research will be organized into five chapters. The first will be devoted to a clear introduction of the concept. The second centers on the literature review of related articles written on the topic. In the third chapter the writer will examine the methodology to be used in the research. Chapter four will be exclusively for data analysis and presentations. Finally, chapter five will be devoted to recommendation and conclusion of the research.


1.8 Definition of Terms

Deposits:

The are money kept in the bank by the customers for purchase of foreign exchange. Multilateral and

Bilateral:

A state of freedom of trade. In Multilateral it involves all countries of the world, while Bilateral, it involves only two countries letters of credit: A document authorizing a bank to pay the bearer a specified sum of money. It provides a useful means of settlement for a credit on favor of his creditors at a bank.

Depreciation of Naira:

This is a situation where a given a mount of Naira buys less quantity of goods than it used to this is mainly brought about by higher demand than supply in the exchange market.

Foreign exchange:

This is the same with international liquidity. An amount kept by a country in world or convertible currency example dollar, with which such a country meets its international payment obligations.

External debts:

These are debt owned to external bodies or institutions by Nigeria.

Foreign Exchange Squeeze:

This is a situation where Nigeria has no foreign currency, for example dollar Dr. pound sterling to buy from droning to the dividend from export.

SFEM:

This is the market where buyers and sellers of foreign exchange meet to transact business. In Nigeria since the Naira cannot float effectively alongside with other currencies like U.S Dollars due to its non-convertibility and non- trading status, an alternative is create S (FEM) where the value of Naira can be determined by the forces of demand and supply. For example it N20 billion constitutes effective demand for Dollar and $ 10 billion currencies effective is supply would be N2$1. Most currencies now allow free movement of funds for ordinary trade and commerce, so called current account items since that is where such trade would appear in the country’s balance of payments statistics.

Deviation:

A demand change in the official parity of an exchange rate (often loosely used as synonymy for depreciation).

A Naira devaluation of 5% in terms of sterling means that a Niaira will buy 5% less sterling foreign exchange.

Exchange Market:

It is a situation where a given amount of Naira buys less quantity of goods. Than it used to but in this case it is mainly increased supply of Naira by printing more notes or borrowing from external bodies. Accrued interest in the FEM account of importers as a result of time lag between the time the importer makes deposit and time actual payment of good is made to the exporter Bureaux de change.

A systematic record of the economic transactions, during a given period between the residents of a country and the rest of the world it covers earning from flow of real resources change in country’s foreign assets and liabilities that arises from economic transactions. The balance of payments must always balance and it is therefore nonsense to speak of a balance of payment difficult.

Exchange Control:

The set of rules introduced by the government to prevent or just make more expensive, the ability of their residents to invest in their countries and occasionally to restrict the inward flow of investment.


Chapter Five


Summary of Findings, Conclusion and Recommendations.

5.1 Introduction

In this chapter, a summary of the questionnaire response and findings on the tested hypothesis were highlighted, followed by conclusion and recommendations.

5.2 Summary of Findings

The following observations were therefore made at the completion of this study.

  1. That a remittance lag actually exists in the Nigerian financial system.
  2. That the exporter bears the burden of delayed repatriation of proceeds from exports.
  3. That majority of Nigeria banks do not comply with the guidelines of repatriation exports market (FEM) deposit account.
  4. That most banks show fake evidence of repatriation of interest to the exporters to central bank of Nigeria (CBN)
  5. That government oil export was given preferential of exports proceeds.
  6. That after five years of foreign exchange auctioning, the true value of the Naira has not been established.
  7. That the introduction of the structural adjustment programme (SAP) has not alleviated the problems of the Nigeria export.

That the present exchange rates are complex to administer in forms of charging the rates or conditions or commodities to which different rates are to be applied that the frequent changes in the structure of exchange rate and in the transactions covered by the different exchange markets have created lags in imports and exports. Leads and lags refer to anticipated payment for import or delayed repatriation of proceeds from exports.

That the large differential that often arise among the various exchange rates encourage the over-involving of import and the under invoicing of exports in those markets with relatively low exchange rates.

That the implicit subsidies that arise from exchange rate structure defers the internal production of the subsidized import substitute that the exchange rate margin cause great reduction in the volume of trade since elasticity of demand for exports and imports are high and burden on exports is higher and the elasticity of supply of exports is less than the elasticity of demand for imports.

Finally, three hypothesis tested revealed that:

  1. There is a positive relationship between foreign exchange inflow and value of export.
  2. Nigerian banks have not been paying interest accruing as a result of repatriation delay.
  3. That the exporters funds has not be adequately met by (SAP).

5.3 Conclusion

Based on the result of the study the following conclusions are drawn at; that the Nigerian financial system has been unfair to exporters in international trade transactions.

That the bright prospects of enhanced non-oil export earnings were rampant by the practice of exporters depositing their export exchange earning, abroad instead of depositing than in the local domiciliary accounts.

That in the first quarter of 1990, banks have found their vaults bursting foreign exchange as most importers and exporters are not buying for exchange from them.

That before 1986, banks squeezed their customers dry through high interest and unreasonable demand for extra Naira per dollar before allocating foreign exchange to their customers.

The banks felt that non-purchase, of foreign exchange by firms is as a result of non-sale of their products.

That the collapse of the oil market in the late 1970’s and the ever fluctuating prices of non-oil exports in the international market have reduced foreign exchange earning at the country’s exports. Although in nominal terms the value of Nigeria’s exports rose significantly from N526.5million in 1965 to N11.2148 million in 1985. The real value, considering the foreign exchange rate remand very low.

The problems have been compounded by the debt burden from 1989 till date.

About 30 percent of the country’s export earnings is used to service external debt.

That structural adjustment programme has not been favourable to most non-oil products or exporters.

That the existing documentation and control system is a monster in Nigeria international trade.

That though exchange issue has put the economy into a kind of vicious circle thus the real value of Naira has not been established.

That the instability of the Naira is not due to foreign exchange speculation alone, but also as a result of other major factors. These include capital flight, financial fraud and trade malpractices, excessive dependence of modern production on imported technology, inputs and spare parts and import oriented demand for all kinds of goods and services with their low elasticities.

That the foreigners who come to Nigeria with highly overvalues dollar or pound sterling cart away our resources or enjoy our services at give away price.
That the bureaux de change has not serves it purpose of existence that is to get foreign exchange from tourists and

Hong Kong, Japan and Thailand, rather they serve as revenue for the banks to siphon foreign exchange from the official market to their countries.

That as at last year 1991, there was a wide gap between official market and parallel market rates. Though both markets sourced their foreign exchange from government. The gap was the unhealthy; if meant a distortion in the allocation of resources, due to a lot of foreign exchange was then being bought not for essential purpose, hence the new introduction in 1992.

That the mistake was made in this county, which we are trying to redeem rather late today, is that when government introduced it austerity package in 1988/87 it had the opportunity then to realign the exchange rate or domestic prices even though it was only touched to the extent that import licensing was abolished and that (FEM) was introduced. But there was not an important fundamental rethink of what should determine the exchange rate.

That, there is exactitude of information that it is bordering on as exercise in futility to try and determine the exchange rate.

That government is subsidizing certain sectors that are so imported to us as a country.

That the thing most disconcerting to manufacturers is that they cannot plan and so do not know the cost which they are going to source their raw materials.

In view of the out marshaled points the researcher therefore, stated that the future of international trade in Nigerian will be bright if government device ways of cushioning the impact of SAP on the exporters, importers and the economy in general.


5.4 Recommendations

Having examined the impact of exchange rate fluctuation on export position in Nigeria as well as its adverse effect on the economy, the researcher came up with the following recommendations with regards to encouraging export promotion on export drive through making available financing refers to wide ranging facilities available to an exporter to help him cover the risks of non-payment in this export business.

Merchant banks should therefore plan to computerize their export documentation in order to cope with increased volume and maintain quality standard.

Merchant banks could also assist in the identification of exportable products and services through their domestics and international contact.

Equally, merchants’ banks provide consulting service to exporters in the area of enlightenment in trade regulations, the desired product designs, packaging, and promotion as presentation requirement in foreign markets.

Merchant banks should periodically issue trade and economic bulleting, which will provide exporters with some of the cumbersome export procedures how to understand the boarder trade policies of western countries visa-vis third work countries.

The government should try to determine the process of reducing problem of delayed partition of export proceeds. Also government should drastic measure on prompt production of documents establishing that exporters deposited foreign exchange earnings from export proceeds on domestic domiciliary accounts.

It is recommended that board of inland revenue and Nigeria port authority responsible for issuing support of export and import documents should try to reduce the cost and time so as to reduce waste of foreign exchange.

Because, the government cannot fund the foreign exchange market beyond the limit of existing resources there is need for further rationalization of government’s expenditure to release more fund for finding. The Naira should be managed in a manner that would accord it the status of a market convertible currency, since the establishment of the bureaux de change and the merger of the Autonomous and the foreign exchange market would only marginally enhance the value of Naira.

We also recommend that government should be able to establish about fluctuate, within which government could come in and intervene.

We are of the view that demands in the parallel markets should be documented and reducing government losing revenue.

More over, we recommend that control of money supply particularly currency in circulation, by monetary authorities in such a manner that the quantity of Naira in the economy is kept in stable proportion to the foreign exchange earnings and receipts.

Finally, we say, let those who create the inefficiency, let those who remittance; lag bear the brunt of their cost.
These stringent recommendations we have made are certain in their effects given effective co-operation of monetary and fiscal authorities. They will enable the country benefit fully from the structural adjustment programme as well as expected role of the banks in this regard.


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