THE EFFECT OF EXCHANGE RATE FLUCTUATION ON THE NIGERIA MANUFACTURING SECTOR(1986-2010)

ABSTRACT

This paper examines the effect of exchange rate fluctuations on the Nigerian manufacturing sector during a twenty five 25 years period 1986 2010. The argument is that fluctuation in exchange rate adversely affects output of manufacturing sector. This is because Nigerian manufacturing is highly dependent on import of input and capital goods. The methodology adopted for this study is empirical. The econometric tool of regression was used for the analysis. The population target of this study is the total number of 25 years from 1986 2010 25 annual time series as data relating to other years after 2010 are not available. The used in this study is the secondary source of data. The data to be utilized in this study we be sourced through library research, publications of the Central Bank of Nigerian CBN i.e. statistic bulletin, National Bureau of StatisticNBS, on line information and economic journals. Based on the findings, the researcher found out that exchange rate has no significant effect on economic growth of Nigeria also that there is no significant effect of fluctuation on exchange rate on the manufacturing sector. Some recommendations for policy were made based on the findings. Amongst others is the need to strengthen the link between agriculture and manufacturings sector through local sourcing of raw materials thereby reducing reliance of the sector on import of input to a reasonable level

Chapter One

Introduction

1.1 Background ofthe Study 1

1.2 Statement ofthe Problem 3

1.3 Objectives ofthe Study 5

1.4 Research Questions 6

1.5 Formulation of Hypothesis 6

1.6 Significant Of the Study 7

1.7 Scope and Limitations Of The Study 8

1.8 Definition of Terms 9

Chapter Two

Introduction

2.1 Review of Related Literature 10

2.2 Theoretical Concept Of Exchange Rate 18

2.3 Theoretical Frame Work for Exchange Rate Fluctuation andManufacturing Output

2.4 The Objectives of Exchange Rate Policy in Nigeria 20

2.5 Types of Exchange Rate 23

2.6 Factors Affecting Rate Of Exchange 25

2.7 Fluctuation in The Exchange Rate Of The Naira 26

2.8 Factors Influencing The Determination Of Exchange Rates 27

2.9 Factors That Can Affect The Manufacturing Process 29

2.10 Factors That Causes The Currency Fluctuation 33

2.11 Manufacturing Sector 36

2.12 Overview of Manufacturing 49

Chapter Three

Introduction

3.1 Research Methodology 64

3.2 Research Design 65

3.3 Source of data 65

3.4 Research Instrument 66

3.5 Reliability And Validity Of Research Instrument 66

3.6 Population Of The Study 66

3.7 Sample And Sampling Procedure 67

3.8 Method Of Data Analysis 67

3.9 Decision Criterion For Validation Of Hypothesis 70

Chapter Four

Introduction

4.0 Presentation and Analysis of Data 71

4.1 Presentation of Results 72

4.2 Results 73

Chapter Five

Summary ofthe Findings, Conclusion and Recommendations

5.1 Summary ofthe Findings 77

5.2 Conclusion 78

5.3 Recommendation 79

BIBLIOGRAPHY 81

APPENDIX

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 macroeconomic management, exchange rate policy as an important tool derives from the fact that changes in the rate of exchange have significant implications, for a countrys 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 macroeconomic 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 underindustrializes 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 nonlabour 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.