Olumba Chibuzo Judith - University of Nigeria, Nsukka Chibuzo Judith.pdf · come out of the menace...
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THE IMPACT OF EXCHANGE RATE FLUCTUATIONS ON
INTERNATIONAL TRADE TRANSACTIONS IN NIGERIA BETWEEN
[1980 – 2008]
BY OLUMBA CHIBUZO JUDITH
PG.MBA/07/46864
DEPARTMENT OF ACCOUNTANCY
FACULTY OF BUSINESS ADMINISTRATION
UNIVERISTY OF NIGERIA
ENUGU CAMPUS
NOVEMBER 2008.
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TITLE PAGE
THE IMPACT OF EXCHANGE RATE FLUCTUATIONS ON
INTERNATIONAL TRADE TRANSACTIONS IN NIGERIA BETWEEN
[1980 – 2008]
BY OLUMBA CHIBUZO JUDITH
PG.MBA/07/46864
THIS THESIS IS ACCEPTABLE IN PARTIAL FULFILMENT OF THE
REQUIREMENTS FOR THE AWARD OF MASTER OF BUSINESS
ADMINISTRATION IN ACCOUNTING [MBA]
DEPARTMENT OF ACCOUNTANCY
FACULTY OF BUSINESS ADMINISTRATION
UNIVERISTY OF NIGERIA
ENUGU CAMPUS
NOVEMBER 2008.
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CERTIFICATION
The work embodied in this project report is original and has not
been submitted in part of full for any other Diploma of this or any other
University.
OLUMBA CHIBUZO JUDITH
PG/MBA/07/46864
This is to certify that Olumba, Chibuzo Judith, a postgraduate
student in the Department of Accountancy with the Registration
Number PG/MBA/07/46864 has satisfactorily completed the
requirements for the award of Master of Business Administration
[MBA] in Accountancy, University of Nigeria, Enugu Campus.
………………………….. ………………………………..
DR. C.M. ODOH DR. [MRS.] R.G. OKAFOR
[SUPERVISOR] [HEAD OF DEPARTMENT]
DATE……………………….. DATE………………………..
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DEDICATION
TO YAHWEH THE GREAT AND MIGHTY GOD, my husband Barr.
Casmir. I. Eme-Odunze, my Parents Elder and Mother H.O. Olumba
and my Siblings Barr. Chukwuemeka Olumba, Mrs Victoria. U. Mpieri
and Miss Ezinne Olumba. And my niece and Nephew Miss Onyeyechi
Mpieri and Master Ebubechi Mpieri and my brother-in-law Engr.
Micheal Mpieri.
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ACKNOWLEDGEMENT
I express thanks to many people for their contributions and
assistance especially Dr. C.M. Odoh my supervisor whom meticulously
proofread the manuscript and made very useful and significant
contributions. My appreciation goes to my Lecturers: R.U. Ugwuoke,
Aguolu, S.N. Kodjo, Mrs. Modebe, Igwillo J.N. (Mrs.), Prof. Mrs. U.
Modum. I also want to express my gratitude to my husband, my
parents, my siblings, my brother –in-law Dr. Cajethan Odunze, my
mother-in-law Mrs. Fidelia Odunze and my sisters-in-law Mrs. Florence
Onyeukwu, Mrs. Angela Nkemuakolam, Mrs. Ngozi Anuforom, Miss
Nkechineyere Odunze and Miss Eberechukwu Odunze, who
contributed to the success of my project.
May God bless you all in Jesus Name, Amen!
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ABSTRACT
The method used in the collection of data for this research
include information gotten from the responses of the questionnaires
distributed. Also there were secondary data which are from books and
magazines. There was analysis of the table involved. At the end of the
study, some of the finding include that actually a remittance lag
actually exists in the Nigerian financial system and that the fluctuating
exchange rate has an effect on the country’s balance of trade.
The recommendation include that external borrowing by, Nigeria
should be in different currencies so as to offset exchange rate risks.
There was also a recommendation that there should be the
establishment of official help to reduce the variability and increase the
incentives on exchange rates. In conclusion it was adjusted that
Nigeria as a developing country and economy needs to grow and
come out of the menace of chronic balance of payment disequilibrium
which is one of the causes of inflation. This could only be achieved
when there is adequate management of international trade and
payment.
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TABLE OF CONTENTS
Table page i
Certification
Dedication
Acknowledgement
Abstract
Table of Contents
CHAPTER ONE
1.1 Introduction
1.2 Statement of the Problem
1.3 Objectives of the Study
1.4 Research Hypothesis
1.5 Significance of the Study
1.6 Limitation of the Study
1.7 Definition of Terms.
1.8 References
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CHAPTER TWO
Literature review
2.1 Factors Determining Exchange Rate
2.2 Exchange Rate Policy
2.3 The Role of Commercial Banks in International Trade
2.4 Exchange rate Fluctuation, Influence on Letter of Credit in Nigeria
2.5 Comparative Advantage among Nations
2.6 Qualifications and Conclusion
2.7 International Trade
References
CHAPTER THREE
Methodology and analysis of Data
3.1 Sources of Data
3.2 Analysis of Data
References
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CHAPTER FOUR
Analysis and Presentation of Data
4.1 Analysis of Data
4.2 Test of Hypothesis
CHAPTER FIVE
Summary, Conclusion and Recommendation
5.1 Summary of finding
5.2 Conclusion
5.3 Recommendations
Bibliography
Appendix A
Appendix B
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CHAPTER ONE
1.1 INTRODUCTION
The process of globalization which is in vague is the rapid
integration of trade relation productive and investment decisions
across the globe by economic agents who employ and move
investment capital and technology around to take advantage of
environments where their competitive edge can manifest in high
returns.
This process which came about with Marshall plan for Europe
after the second world war has greatly expanded trade and economic
contact between nations. The mass movement of commodities often
over great distance have raised the standard of living world wide.
International trade has made available a greater amount and a greater
variety of goods for consumption. International trade has gone hand
with technological improvements in production and with development
of transportation, obviously this advanced in volume and variety of
goods produced and traded. Factories turn out quantities of
commodities large and small, which are not consumed locally but are
promptly distributed to different parts of the word.
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Virtually improvements in transportation and the expansion of
world markets have made possible this large scale of economic
production. The world is now a ‘global village ‘ because of the
continuous flaw of goods in and out of nations and the dependence by
every nations upon foreign sources for variety of goods, which are of
special importance. These nation economics, financial and cultural
activities have boundries. Trade between nations was formerly carried
out by private individuals, however in recent times government has
increasingly engaged in international trade transactions directly with
each other on the basis of governmental decisions.
1.2 STATEMENT OF PROBLEM
International trade involves the movement of goods and services
between two countries. Payment for such goods and services are
however made in an agreed currency between the exporter and the
importer. And because exchange rate are variant the before the
researcher is therefore to determines who bears the burden of the
incidence of the exchange rate fluctuation. More so, since the
exporter /importer cannot source the foreign exchange if not through
the financial institutions. The researcher therefore finds it imperative to
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investigate the rote played by the institutions in the exchange rate
fluctuation vis-à-vis the newly introduced Dutch auction by the central
bank of Nigeria. Furthermore, the world community is a global village
linked together by communications. The various exchange rate in the
international markers are usually influence by the economically viable
and strong economies of the world. The inter play of the economic
powers of the varying strong economic attracted the curiosity of the
researcher to investigate the impact of the world economic powers on
the international trade vis-à-vis balances of payment and of trade. As
we go about our daily lives, it is easy to over look the importance
trade. American ships enormous volumes of food, air planes computer,
and machinery to other countries; and in return we get vast quantities
of oil foot wear, car, coffee, and other goods and services. While
American pride themselves on their ingenuity it is sobering to reflect
how many of our products-including gunpowder, classical music,
clocks, railroads, penicillin and radar, arose from the ingenuity of long-
forgotten people in faraway places.
What are the economic forces that lie behind international trade?
Simply put, trade promotes specialization, and specialization increases
productivity. Over the long run, increased trade and higher productivity
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raise living standards for all nations gradually counties have realized
that opening up their economies to the global trading system is the
most secure road to prosperity.
International Vs Domestic Trade
At the deepest level, trade is trade, whether it involves people
within the same nation or people in different countries. There are,
however, the three important differences between domestic and
international trade, and these have important practical and economic
consequences.
1. Expanded Trading Opportunities
The major advantages of international trade are that it expands
trading horizons. If people were forced to consume only what
they produced at home, they would be poorer on both material
and the spiritual planes.
2. Sovereign Nations:
Trading across frontiers involves people and firms living in
different nations. Each nation is a sovereign entity which
regulates the flow of people, goods and finance cross its
borders. These contrast with domestic trade, where there is a
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single currency, where trade and money flow freely with the
borders and where people can migrate easily to seek new
opportunities. In international trade, political barriers to trade are
sometimes erected when affected groups object to foreign trade
and nations impose tariffs or quotas, this practice is called
protectionalism.
3. Exchange Rates:
Most nations have their own currencies. One may want to pay for
Japanese car in Naira while Toyota wants to be paid in
Japanese Yen according to the exchange rate, which is the
relative price of different currencies (such as the price of
Japanese Yen in terms of Nigerian Naira). The international
financial system must ensure a smooth flow and exchange of
Naira, Yen, and other currencies-or else risk a breakdown in
trade. The financial aspects of international trade are analyzed in
the chapters on macroeconomics.
4. Trends in Foreign Trade:
What are the major components of international trade for
Nigeria? The major components of international trade in Nigeria
are crude oil, cotton, cassava, maize, wheat, etc. Within a
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particular industry, Nigeria exports and imports at the same time
because a high degree of product differentiation means that
different counties tend to have niches in different parts of a
market.
SOURCES OF INTERNATIONAL TRADE
Trade in Goods and Services
Nations find it beneficial to participate in international trade for
several reasons: diversity in the conditions of production, differences in
tastes among nations and decreasing costs of large-scale production.
Diversity in Natural Resources
Trade may take place because of the diversity in productive
possibilities among counties. In fact, there are differences that reflect
the endowments of natural resources. One country may be blessed
with a supply of petroleum, while another may have a large amount of
fertile land. Or a mountainous country may generate large amounts of
hydroelectric power, which it sells to its neighbours, while a country
with deepwater habours may become a shipping centre.
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Differences in Trade
A second reason for trade lies in preference. Even if the
conditions of production were identical in all regions, countries might
engage in trade if their tastes for goods were different.
Differences in Costs
Perhaps the most important reason for trade is differences among
countries in production costs. For example, manufactory processes
enjoys economies of scale, that is, they tend to have lower average
costs of production as the volume of output expands. So when a
particular country gets a head start in producing a particular product, it
can become the high-volume, low-cost producer. The economic of
scale gives it a significant cost and technological advantage over other
countries, which find it cheaper to buy from the leading producer than
to make the product themselves.
1.3 OBJECTIVES OF THE STUDY
The objectives of this research work are as follows:
1. To seek and determine as far as possible methods by which
the risk associated with exchange rate fluctuations can be
minimized.
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2. To determine who should bear the burden of the delayed
interest - the commercial banks, the central bank or the
importer?
3. To ascertain whether the abolition of the compulsory advance
deposit requirement is being complied with and also
determine the implications of the advance full payment of
import duty with regards to importers.
4. To discover if the introduction of counter trade by the
government is alleviating the problems created by the delay of
international trade and to make appropriate
recommendations.
1.4 HYPOTHESIS
The hypotheses for this research work are formulated after
thorough in-depth analysis of secondary data collected and the
assessment of the result of the pilot survey conducted.
The hypotheses are tentative statements that are yet to be
proved; the hypothesis for the research takes its bearing from the
statement of problem and it is as follows:
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Ho: The purchasing powers of the consumers of the goods are not
affected by unstable exchange rate.
Hi: The purchasing powers of the consumers of the goods are
affected by unstable exchange rate.
Ho: Exchange rate fluctuation adversely affects the marketing of the
commodities.
Ho: The fluctuating exchange rate has no impact on the balance of
trade.
Hi: The fluctuating exchange rate has an impact on the balance of
trade.
1.5 SIGNIFICANCE OF THE STUDY
The unique role of importers and commercial banks in enhancing
international trade and economic development cannot be over
emphasized. A sound business idea remains a mere dream until
someone is able to organize the finances necessary to translate the
idea into a business reality, and more often than not, this finance
comes in the form bank credit.
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The significance of this study, the recommendations made at the
end of the study and their implementation make the research
immensely beneficial to the following:
1. Importers who are always trading and in dire need of
finances.
2. Policy makers of the Central Bank of Nigeria who issue
guideline to govern international trade practices.
3. Bankers especially commercial Bank guidelines.
4. Students of economics and other related fields that might take
a clue from this study to further research into the field of
exchange rate fluctuation and international trade.
5. The general public who can contribute and still be informed of
the activities of our banking institutions.
1.6 LIMITATIONS OF THE STUDY
During the course of this research, a number of constraints were
experienced. There was this already known problem of gathering
information – many of the banks approached were not ready to give
out financial information related to exchange rate gains or losses
suffered in the past.
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Gathering information from public organizations such as Federal
Office of Statistics was difficult. The usual Nigerian phrase ‘not on
seat’ nearly frustrated my efforts.
1.7 DEFINITION OF TERMS
International Trade
It is exchange of goods and services between two countries, it
brings increase in the economy.
Exchange Rate
This is the price one country’s currency expressed in another
country’s currency.
Balance of Payment
This means that a foreign exchange rate must be at its
equilibrium level with other countries.
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REFERENCES
Emzign, Paul, (1996): A Dynamic Theory of Forward Exchange, New York Macmillan and Company.
Loyness, J.B. (1962): The West African Currency Board, London.
Oluwanmu, H.O. (1996): Agriculture and Nigeria’s Economic Development. Ibadan, Oxford University Press.
Triffin, Robert (1998): Gold and the Dollar Enris the Future Covertibility. New Haven Vale University Press.
Uzoagu, W.O. (1981): Money and Banking in Nigeria, Enugu First Dimension Publishing Company Ltd.
Van Horne, Sanes, (1978): Financial Market Rates and Flows, Prentice Hall, Inc. Englewood Cliffs New Jersey.
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CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.0 INTRODUCTION
Practically every nation has a monetary unit different from that of
other nations. In a few instances, the units appear similarly as in the
case of the United States of America and Canada but the Canadian
dollar and the American dollar are not the same. In every nation, there
are people who continually want to covert their own money into that of
another country perhaps for goods imported or for a variety of other
reasons.
A rate of exchange can be defined as the number of units of one
currency that must be given to acquire one units of a currency of
another country. It is the price one pays in his home currency to
purchase a certain quantity of funds in another country. The exchange
rate thus becomes a link connecting different national currencies,
which makes international cost and price comparisons possible. In the
absence of official interventions, the exchange rates of these two
internationally traded countries are determined by the forces of
demand and supplying in the foreign exchange market. But in view of
the fact that exchange rate has some influences on the allocation of
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expenditures in between domestics and foreign exchange market. But
in view of the fact that exchange rate has some influences on the
allocation of expenditures in between domestics and foreign goods,
and thus, the flow of aggregate domestic output, income and sending
governments are loathed to allow it to be completely market-
determined. For the most developing countries including Nigeria,
however the national currencies are not market-determined, such
exchange rates are administered.
There are over one hundred national currencies in the world
today, although most of the world’s trade and investment transactions
are carried out in United Nation dollar, British pounds, German marks,
Japanese Yen, Italian Lira, etc.
In Nigeria, national currencies of other countries are generally
listed in terms of the number of Nigerian Kobo contained in each unit
of the foreign currency.
2.1 FACTORS DETERMINING EXCHANGE RATE
A complete explanation of the factors, which determine the rate
of exchange in a free market requires an analysis of such matters as
the conditions, which cause goods to be exported and in fact all the
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foreign trade and influxes which account for all the foreign trade and
financial transactions of a country, why they place and their amount is
what it is.
For present purposes, it is sufficient to note that factors of
production are distribute unevenly throughout the world and that in
some countries, land is in large supply as compared to labour and
capital, the forward rate is the rate that market expects to prevail in the
future or on which there is an agreement to receive or deliver and pay
for exchange at some specified time in future. For example, if a dealer
in foreign exchange agrees to deliver dollar six months from now, it is
known as forward rate. Fluctuations in the forward rate are due to
speculations by market participants.
There is a relationship between the spot exchange rate and the
forward rate is estimated on the basis of historical pattern of the spot
rate.
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2.2 EXCHANGE RATE POLICY: EVOLUTION, DEVELOPMENT
AND CURRENT PRACTICE
i. Global Exchange Rate
The gold exchange standard came into widespread use between
the two world wars. Before 1914 “sterling” was between the world’s
leading trading currency and still in 1931 when its devaluation
narrowed its domain to sterling Area. After World War II, the “Dollar”
became the principal supplement to Gold in international reserve due
to the stimulus provided by the United States through trade and aid to
the war-ravaged World.
The Post war monetary system was buttressed by the creation of
the International Monetary Fund (IMF). This was based on the Bretton
Woods conference of exchange rate within narrow margins. The US
Dollar was the major intervention currency, but the US on its part was
to use gold where necessary to effect settlement of its international
transactions.
By mid 1960’s, however, the system’s rigidity and hence its
potential vulnerability became apparent. There was the unwillingness
of both deficit and surplus countries to vary their exchange rate
policies. Consequently, the US began experiencing a gradual
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dimension of its competitive position and a growing reluctance by its
trading partners to hold their ever increasing dollar balance as the US
had undertaken to convert dollar for gold on request.
As a result of the successive currency crisis, there emerged a
major realignment of the principal currencies in December 1971 in the
form of the Smithsonian Agreement, which led to indenting of the
official margins within which exchange rates were to be maintained,
accompanies with an official price of gold, which meant the
devaluation of the US dollar.
The Floating Exchange Rate system provided the most plausible
alternative to the fixed exchange rate system of the post Bretton Wood
arrangements. Events of the 1960s had shown that the fixed
exchanging world economics and trading environments. Besides, the
fixed Exchange Rate system sometimes necessitates the massive
intervention on the part of the Central Bank in order to maintain
existing parties.
Under the floating exchange rate, demand forces primarily
determine the exchange rate among currencies. The floating rate
system had proved workable with only minimum disruptions on world
trade; international trades have expanded smoothly under this system.
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This system has also not discouraged the free flow of capital for
productive investments throughout the world and it has enabled the
world monetary system to avoid in recent times the current crisis of the
pre-August 1971 type. Because of the fore-mentioned advantages of
the floating system, the system is bound to prevail for sometime.
However, the world needs a dependable standard of value and a
reliable as well as a stable medium of exchange. But a greater degree
of stability need to be added to the present system of managed
floating of exchange rates, what one banker called “an enlargement of
the present areas of exchange rate stability”. The banking authorities
should intervene more on foreign exchange markets to smoothen out
day-to-day fluctuation as well as maintain the exchange rates at the
levels considered appropriate.
In this regard, the IMF has proceeded to restructure the
monetary system by creating Special Drawing Rights (SDR) whose
value is fixed daily, though the system tends to consolidate the floating
rates system. The adoption of the valuation of SDR is to minimize the
violent fluctuation of rate of exchange of SDR in terms of the
currencies of the member countries. The central argument for flexible
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exchange rates is that they would allow countries autonomy in their
use of monetary, fiscal and other policy instruments consistently with
the maintenance of whatever degree of freedom in international
transactions to permit exploration of the economies of international
specialization and division of labour. Flexible Exchange Rates are
therefore essential to the preservation of national autonomy and
independence consistent with efficient organization and development
of the world economy.
ii. Nigeria’s Exchange Rate System:
In Nigeria, the Central Bank of Nigeria (CBN) is responsible for
the determination of exchange rate policy. Prior to the establishment of
the CBN in 1959, the West African Currency Board (WACB) issued
notes and coins which calculated as a 100 percent “sterling”. The
WACB system was meant that the exchange rate of the West African
pound was at par with the pound sterling and the external value of the
currency depended solely on the sterling. The WACB system and the
Gold Exchange system were similar. The gold standard system was
one in which domestic currency in circulation was filling backed by
gold that is a 100 percent gold billion standard.
29
In 1982, there was an amendment to the CBN Act, which
included the provision for the part of the Nigerian pound be expressed
no longer in terms of sterling but in terms of gold. This means that
instead of the external value of the Nigeria pound fluctuating
automatically with the sterling, the Nigerian Monetary Authorities could
modify it.
Prior to the dollar crisis of 1971, when convertibility of US dollar
exchange rate policy was based entirely on the gold contents of the
US dollar. This same procedure was adopted to derive the exchange
rate of other currencies notably the pound sterling thus fixed exchange
rates were maintained for dollar and sterling, which were the two main
reserve currencies in Nigeria up to August 1971.
The exchange rate of the Nigerian currency was therefore
maintained until the dollar crisis of 15th August 1971 when the currency
balance was inconvertible and this led to sporadic floating of
currencies between 16th and 19th August of the same year, the sterling
dollar gross rates were used to determine Nigerian’s exchange rate.
From 20th August to 30th October, Nigeria introduced a two-tier system
of exchange rate. The Nigerian currency/sterling rate was kept
constant for transaction but verifying rates were used for the Nigerian
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currency dollar rates using sterling dollar gross rates for non-official
transactions. From 1st November to 18th December 1871 the two-tier
system ceased to operate and instead the official rate of one Nigerian
pound/sterling rate was also maintained devaluation exchange for a
lower given member of units of other currencies. Devaluation is usually
restored to, in order to correct a persistently a diverse trade balance.
When imports become dearer less would be demanded with the price
of exports becoming “cheaper” foreigners would demand more. The
result tends to make trade balances favourable to the devaluation,
which is necessary when a country’s currency gets over-valued. This
implies that external value of a country is higher than its internal value.
In a more practical language it means that the currency when
exchanged into other currencies buy more abroad than it buys at
home. Evidence of progressive over valuation of the Nigerian currency
changes that occurred between 1970 and 1982, the Nigerian currency
corresponding appreciated against of its trading partners such as the
United States and Britain whose currencies were the facts and the
tune devalued respectively. The Nigerian currency also appreciated
against the currencies of its completing supplies of Agricultural exports
such as Ghana, Indonesia, Malaysia, Brazil, whose currencies were
31
allowed to move with changes in the pound sterling and the U.S.
dollar.
In effect the evidence of over valuation of the Nigerian currency
was found in:
[1] Domestic inflation, which led to a fall in the internal value of the
Nigerian currency.
[2] The falling volume of non-oil exports
[3] A persistent averse balance on the non-oil sector.
[4] Capital flight which arose from above, pending the afore
mentioned Nigerian devalued Naira of February 1973 by reducing it’s
gold content by 10 percent.
The international value which might be placed on any currency,
depends on the level of the country’s reserves and the balance of
payment. It was on records that Nigeria’s external asset grew by leaps
and bounds to a height of N3,702.6m in 1975 resulting in a favourable
balance of payments position. The exchange rate policy pursued from
1974 to 1976 was managed, floating of the Naira vis-à-vis the pound
sterling and the U.S. dollar, which reflected the gradual appreciation of
Naira against either pounds sterling of U.S. Dollar, the two currencies
with which international payments are settled. The basic effects of this
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policy were the cheapening of imports as the costs of imports
demonstrated such money had been consequently reduced.
However, the exchange rate policy adopted between 1974 and 1976
by cheapening imports helped in no small measure in containing the
growing domestic inflation.
2.3. THE ROLE OF COMMECIAL BANKS IN INTERNATIONAL
TRADE.
Commercial banks play an important role in international trade.
Their international departments perform essentially three financial
functions, collection, lending, and the buying selling of foreign
exchange.
The collection function involves the bank in serving as agents for
making payments between its customers and foreign nationals. An
example is where a Brazilian exporter sold carbon black to a tyre
manufacturer in Nigerian, payment for sale would in all probability by
effected, through the international department of a bank located in
Brazil or Nigeria.
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The lending function for a bank’s international customer utilizes
the various financing instrument available at the bank for example the
bank awards long term and short term loans to international investors.
The purchase and sale of foreign exchange involves a
commercial bank in buying and selling of foreign exchange for may
purposes. Travelers going abroad or returning from a foreign country
may wish to purchase or sell foreign exchange. Residents of a country
wishing to invest elsewhere may have to buy foreign exchange from a
commercial bank. Finally commercial banks act as financiers and
Agents, her they ensure that the exporter gets his money and the
importer in turn receives the shipping documents.
2.4. EXCHANGE RATE FLUCTUATION: INFLUENCE ON
LETTERS OF CREDIT IN NIGERIA
When countries no longer redeemed t heir currencies freely in
gold nor permitted free gold exports, the stabilizing influence on gold
movements no longer existed and the rates prevailing in the market
were demand and supply rates with no limits on either side.
Governments or their Central Banks reduce fluctuation and maintain
rates relatively stable by various prices. According to this system the
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government would enter the market either as a buyer or seller of
currency and by large sales or purchases influence the rate.
Stabilization operations of this type were to a large extent
superseded by what is known as exchange market, a part from illegal
black market and sometimes a small free market for certain kinds of
transaction.
A shortage of foreign currency is usually main reason for
exchange controls, which are instituted in order to avoid rate
depreciation. Through controls the limited supply of foreign exchange
is rationed for the import of essential commodities. Although
exchange controls are sometimes necessary temporally, their effects
are usually harmful in that they tend to reduce the volume of trade and
to distant production from the most efficient patterns. When they
perpetuate uneconomic exchange rate, they interfere with international
price and cost relationships conclusive to a large and healthy trade.
In Nigerian, two types of license for exchange controls exist they
are:
[a] The specific import license
[b] The open general license.
35
Under the specific import license, the government spells out the
specific nature of goods to be imported, their quantity and value, and
sometimes their sources of supply.
On the other hand the open general license taken care of certain
types of goods whose values; quantity and source of supply are not
specified in the license. In other words, the open general license is not
subject to any quantitative restrictions. This import licensing system
was introduced to achieve a lot of aims, the main one begin to keep
imports in line with the requirements of domestic consumption and
invariably to achieve a favourable balance between the public and
private sectors of the economy, to till the balance in favour of capital
investment as against general consumption of goods.
There are different methods ussed by Nigeria in the settlement of
her international trace payments [i.e. imports] the chief method being
the opening of letters of credit in favour of the exporters. The letter of
credit entails that commercial bank substitute’s credit worthiness on
behalf of the importer. In other words the bank guarantees the
exporter. In other words, the bank guarantees the exporter the
payment of his goods as soon as he effects shipment or when the
foreign exchange is available. In the case of payment at sight the
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importer arranges with the exporter to make an initial part payment on
the invoice value of the shipment. The balance thus is paid on the
arrival of the goods at its port of destination the exporter forwards the
shipping documents through a commercial bank in the country of the
importer [unusually the importer’s bank and also instructs the bank to
obtain the outstanding balance from the importer before releasing the
shipping documents. The amount received from the importer is then
remitted to the exporter. At the time the importer wants to collect the
shipping documents he pays the naira equivalent of the invoice.
Problems arise in the international transaction because of the
inefficiency in our financial system which introduces delays or lags or
lags averaging between 60 -120 days between the times the funds are
actually remitted to the exporter. This remittance lag introduces
exchange risk in the transaction, which may result in either exchange
loss or gain on the part of the importer.
But what the commercial banks do is just to adjust the importer’s
account with the value of the gain or loss arising from exchange rat
fluctuation. Where there is an exchange rate loss, the commercial
banks simply debit the importer’s account and treat the amount of the
loss as an “overdraft” and charge interest accordingly. But where
37
there is exchange rate gain, the bank may not credit the importer’s
account with the amount of the gain. Importers were of the general
opinion that their accounts should be credited with the account of any
exchange rate gain and that the commercial banks in the case of
interest payments, should be reimbursed by the Central Bank.
Another discovery made was that government importers were
given priority as regards remittances there by suffering minimal
exchange rate losses. Most “ordinary” importers however, contend that
their activities were also of equal importance to the nation as a whole.
2.5. COMPARATIVE ADVANTAGE AMONG NATIONS
It is only common sense that countries with produce and export
goods for which they are uniquely qualified. But there is a deeper
principle underlying all trade in a family, within a nation, and among
nations that goes beyond common sense. The principle of
comparative advantage holds that a country can benefit from trade
even it is absolutely more efficient [or absolutely less efficient] than
other countries according to comparative advantage provides mutual
benefits to all countries.
38
Uncommon Sense
Take a world in which there are only two goods, computers and
clothing suppose that Nigeria has higher output per worker [or per unit
of input] that the rest of the world in making both computers and
clothing. But suppose Nigeria is relatively more efficient in the
production of computers than it is in clothing . For example, it might be
50 percent more productive in computers and 10 percent more
productive in clothing than other countries. In this case, it would
benefit Nigeria to export that good in which it is relatively more efficient
[computers] and import that good in which it is relatively less efficient
[clothing].
Or consider a poor country like workers use hand looms and
have productively that is only a fraction of that of workers in
industrialized countries, hope to export any its textiles? Surprisingly,
according to the principles of comparative advantage, Mali can
benefits by exporting the goods in which it is relatively less efficiently
[like turbines and automobiles].
The principle of comparative advantage holds that each country
will benefit if it specializes in the production and export of those goods
that it can produce at relatively low cost. Conversely, each country will
39
benefit it is imports those goods which it produces at relatively high
cost.
Thus simple principle provides the unshakable basis for
international trade.
2.6. QUALIFICATIONS AND CONCLUSIONS.
We have now completed our look at the elegant theory of
comparative advantage its conclusion applies for any number of
countries and commodities. More –over, it can be generalized to
handle many inputs changing factor proportions, and diminishing
returns. But we cannot conclude without noting two important
qualifications to this elegant theory.
[1] Classical Assumption
From a theoretical point of view, the major defect of comparative
advantage theory lies in its classical assumptions. Thus theory
assumes a smoothly working competitive economy. Trade might lead
to worsening environmental, problems if there are local or global public
goods. More over, inefficiencies might arise in the presence of
inflexible prices and wages, business cycles and involuntary
unemployment. When there are macroeconomic or microeconomic
40
market failures, trade might well push a nation inside its PPF. When
the economy is in depression or the price system malfunctions
because of environmental or other reasons, we cannot be sure that
countries will gain from trade.
Given there reservations there can be little wonder that the
theory of comparative advantage sells at a big discount during
business down turns.
In the Great Depression of the 1930s, as unemployment sourced
and real outputs fell nations built high tariff walls tariff borders and the
volume of foreign trade shank sharply. Additionally, during 1990’s,
free trade was increasingly attacked by environmental advocates, who
saw. It as a means of allowing companies to dump pollutants in ocean
or in countries who lax regulations labour unions and
environmentalists were among the leading critics of the latest attempts
to promote free trade.
[2] Income Distribution
A second proviso concerns the impact on particular people,
sectors, or factors of production. We should above that opening a
country to trade will raise a country’s national income the country can
41
consume more of all goods and services than would be possible if the
borders ere sealed to trade.
But this does not mean that every individual fir, sector, or factor
of production will benefit from trade. If, through imports, free trade
increases the supply of goods that are produced by particular factors
of production or in particular regions, those factors or regions may end
up wise, lower income than they had under restricted trade suppose
that free trade increase the supply of cheap cotton shirts in Nigeria we
would not be surprised to learn that textile firms suffered losses and
bankruptcies. Recent studies indicate that unskilled workers in high-
come countries have suffered reductions in real wages in the last three
decades because of the increased imports of goods from low-wage
developing counties. Wage losses occurred because imports are
produced by developing country factors that are close substitutes for
the unskilled labour in high –income countries.
The theory of comparative advantage shows that other sectors
will gain more than the injured sectors will lose. Moreover, over long
periods to time, those displaced from low wage sectors eventually
gravitate to higher-wage jobs. But those who are temporarily injured
42
by international trade are genuinely harmed and are vocal advocates
for protection and trade barriers.
Notwithstanding its limitation, the theory of comparative
advantage is one of the deepest truths in all the economies.
Nationals that disregard comparative advantage pay a heavy price in
terms of their living standards and economic growth.
2.7. INTERNATIONAL TRADE
Is the system by which nations export and import goods,
services and capital? International economics involves many of the
most controversial questions of the day. What does Nigeria benefit
from importing almost one quarter of its automobiles and half of the
petroleum? What are the advantage of free trade? How the
principles governing trade should be extended to intellectual property
rights such as patents and copyright? The economic states are high in
finding wise answers to these questions.
According to Reem, Heakal; [2008]: International Trade, the wall
Street Journal is the exchange of goods and services between
countries. This type of trade given rise to a world economy, in which
prices, or supply and demand, affect and are affected by global
43
events. For example political change in Nigeria could result in an
increase in the cost of labour, thereby increasing the manufacturing
costs for an American petroleum company based in Nigerian which
would then result in an increase in the price that you have to pay to
buy the petroleum at all local station. A decrease in the cost of labour,
on the other hand would result in you having to pay less fo your
petroleum products.
Trading globally gives consumers and countries the opportunity
to be exposed to goods and service, not available in their own
countries. Almost every kind of product can be found on the
international market: food, clothes, petroleum products, spare parts,
oil, jewelry, wine, stock, currencies and water. Services are also
traded: tourism, banking, consulting and transportation.
A product that is sold to the global market is an export, and a
product that is bought from the global market is an import. Imports
and exports are accounted for in a country’s current account in the
balance of payments [for more on this, see the articles “What is the
balance of payments” and “understanding Account in the balance of
payment” on http”//www investopedia.con
44
Increased Efficiency of Trading Globally:
Global trade allows wealthy countries to use their resources,
whether labour, technology or capital efficiently. Because countries
are endowed with different assets and natural resources [Land,
Industries and technology]. Some countries may produce the same
good more efficiently and therefore sell it more that other counties. If
a country cannot efficiently produce and items, it can obtain the item
by trading.
Exchange Rate
According to “Investment Dictionary” [2008] edition is the price of
one country’s currency expressed in another country’s currency. In
other works, the rate at which one currency can be exchanged for
another. For example, the higher the exchange rate for one euro
terms of one yen, the lower the relative value of the yen.
According to “Financial and Investment Dictionary” Exchange
rate is the price at which one country’s currency can be converted into
another’s. The exchange rate between Nigerian Naira and the U.S.
Dollar is different from rate between Nigerian Naira and Japanese yen.
45
A wide range of factors influence exchange rates, which generally
change slightly each day. Some rates are fixed by agreement.
Exchange rate is the price at which one countries currency can
be converted into another “Business Dictionary”. The exchange rate
between Nigerian Naira and German Mark is different from that
between Naira and British pound. Most exchange rates float freely
and change slightly each trading day some rates are fixed and do not
change as a result of market prices.
According to “Britannica Concise Encyclopedia”, exchange rate
is the price of one country’s money in relation to another’s Exchange
rate may be fixed or flexible. An exchange rate is fixed when two
countries agree to maintain a fixed rate through the use of monetary
policy. Historically the most famous exchange rate system was the
gold standard: In the late 1850s one ounce of gold was defined as
being worth 20 U.S. dollars and 4 pounds sterling, resulting in an
exchange rate is flexible, or “floating” when two countries agree to let
international market forces determine the rate through supply and
demand. The rate will fluctuate with a country’s exports and imports.
Most world rate currently takes place with flexible exchange rate that
fluctuates with relatively fixed limits.
46
According to Economics Dictionary, exchange rate is the price at
which one currency can be purchased with another currency or gold.
At any time, for example, one U.S. dollar can purchase a certain
number of Eureros of Japanese yen or Nigerian Naira.
According to “Wikipedia”, exchange rate also known as foreign
exchange rate, force rate or FX rate between two currencies specifies
how much one currency is worth in terms of the other. The foreign
exchange market is one of the largest markets in the world.
The spot exchange rate refers to the current exchange rate. The
forward exchange rate refers to an exchange rate that is quoted and
trade today but for delivery and payment on a specific future date.
Quotation
An exchange rate quotation is given by stating the number of
units of a price currency that can be bought in terms of 1 unit current
[also called base currency]. For example in quotation that says
EUR/NAIRA exchange rate is 125.3 [NAIRA per EUR], the price
currency is NAIRA and the unit currency is EUR.
Quotes using a country’s house currency as the price currency
[e.g 0.50593 = & 1 m the UK] are known as direct quotation or price
47
quotation [from that country’s perspective] LIJ] and are used by most
countries.
Quotes using a country’s home currency as the unit currency
[e.g & 1.97656 = E1 m the UK] are known as indirect quotation
or quantity quotation and indirect quotation or quantity quotation and
are used in British new papers and are also common in Australia, New
Zealand Nigeria and Euro.
- Direct Quotation: I home currency unit = X foreign currency
unit
- Indirect Quotation: I home currency unit = X foreign currency
units
Note that, using direct quotation, if the home currency is
strengthening [i.e appreciating, or becoming more valuable] then the
exchange rate number decreases conversely, if the foreign currency is
strengthening, the exchange rate number increase and the home
currency is depreciating.
Free or Pegged
If a currency is free-floating, its exchange rate is allowed to vary
against that of other currencies and is determined by the market forces
of supply and demand. Exchange rates for such currencies are likely
48
to change almost constantly as quoted on financial markets, mainly by
banks, around the world. A movable or adjustable peg system is a
system of fixed exchange rates but with a provision for the
devaluations of a currency.
Nominal and Real Exchange Rates
The nominal exchange rate is the price in domestic currency of
one unit of a foreign currency.
The real exchange rate [RER] is defined as
RER = e[P*]
P
Where P is the domestic price level and P* the foreign price level.
P and P* must have the same arbitrary value in some chosen base
year.
Hence in the base year, RER = e
The RER is only a theoretical ideal. In practice there are foreign
currencies and price level values to take into consideration.
Correspondingly, the model calculations become increasingly more
complex. Furthermore, the model is based on purchasing power parity
[PPP], which implies a constant RER. The empirical determination of
a constant RER value could never be realized, due to limitations on
49
data collection. PPP would imply that the RER is the rate at which an
organization can trade goods and services of one economy [e.g.
country] for those of another. For example if the price of a good
increase 10% in Nigeria and the Japanese currency simultaneously
appreciates 10% against Nigerian currency, then the price of the good
remains constant for some one in Japan. The Nigerians however
would still have to deal with the 10% increase in domestic prices. It is
also worth mentioning that government enacted tariffs can affect the
actual rate of exchange, helping to reduce price pressures. PPP
appears to hold only in the long term [3-5 years] when prices
eventually correct towards parity.
More recent approaches in modeling the RER employ a set of
macro economic variables, such as relative productivity and the real
interest rate differential.
NR = [RR + 1] [Expected Inflation + 1] - 1
Interest Rate Parity
[IRP] States that an appreciation or depreciation of one
currency against another currency might be neutralized by a change in
the interest rate differential. If Nigerian interest rate exceed Ghana
interest rates that Naira should depreciate against cedes, by an
50
amount that prevents arbitrage. The future exchange rate of the Naira
is said to be at a discount because its buys fewer cedes in the forward
rate that it does in the spot rate.
IRP showed no proof of working after 1990s. Contrary to the
theory, currencies with, high interest rate characteristically appreciated
rather than deprecated on the reward of the containment of inflation
and a higher yielding currency.
Balance of Payments Model
This model holds that a foreign exchange rate must be at its
equilibrium level. The rate which produces a stable current account
balance. A nation with a trade deficit will experience reduction in its
foreign exchange reserves which ultimately lowers [depreciates] the
value of its money/currency. The cheaper currency renders the
nations goods [exports] more affordable in the global market place
while making imports more are forced down and exports rise, thus
stabilizing the trade balance and the currency toward equilibrium.
Like PPP, the balance of payments model focuses largely on
tradable goods and services, ignoring the increasing role global capital
flows. In other worlds, money is not only chasing goods and services,
but to a larger extent, financial assets such as stocks and bonds. They
51
flows go into the capital account item of the balance of payments, thus,
balancing the deficit in the current account. The increase in capital
flows has given rise to the asset market model.
Asset Market Model
The explosion in trading of financial assets [stock and bounds]
has reshaped the away analysis and traders look at currencies.
Economic variables such as economic growth, inflation and
productivity are no longer the only divers of currency movements. The
proportion of foreign exchange transactions stemming from cross
border-trading of financial assets has dwarfed the extent of currency
transactions generated from trading in goods and services.
The asset market approach views currencies as asst prices
traded in an efficient financial market. Consequently, currencies are
increasingly demonstrating a strong correlation with, other markets,
particularly of equities like the stock exchange, money can be made or
lost on the foreign exchange market by investors and speculators
buying and selling at the right times. Currencies can be traded at spot
and foreign exchange options markets. The spot markets represents
current exchange rate whereas options are derivatives of exchange
rates.
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Fluctuation in Exchange Rate
A market based exchange rate will change whenever the values
of either of the two component currencies change. A currency will
tend to become more valuable whenever demand for it is greater than
the available supply. It will become less valuable whenever demand is
less than available supply [this does not mean people no longer want
money, it just means they prefer holding their wealth in some other
form, possibly another currency].
Increased demand for a currency is due to either an increased
transaction demand for money, or an increased speculative demand
for money. The transaction demand for money is highly correlated to
the country’s level of business activity, gross domestic product [GDP],
and employment levels.
The more people there are out of work, the less the public as a
whole will spend on goods and services. Central banks typically have
little difficulty adjusting the available money supply to accommodate
changes in the demand for money due to business transactions.
The speculative demand fo money is much harder for a central
bank to accommodate but they try to do this by adjusting interest rates.
An investor may choose to buy a currency if the return [that is the
53
interest rat] is high enough. The higher a country’s interest rates, the
greater the economic growth, in particular since large currency
speculators may deliberately create downward pressure on a currency
in order to force that central bank to sell t heir currency to keep its
stable [once this happens, the speculator can buy the currency bank
from the bank at a lower price close out their position, and thereby
take a profit.]
In choosing what type of Asset to hold, people are also
concerned that the asset will retain its value in the future. Most people
will not be interested in a currency if they think it will devalue. A
currency will tend to lose value, relative to other currencies, higher, if
the country’s level of output is expected to decline, or if a country is
troubled by political uncertainty.
Possible Benefits of Trading Globally
International trade not only results in increased efficiency but
also allows countries to participate in the economy, encouraging the
opportunity of foreign companies and other assets. In theory
economies can therefore efficiently and can more easily become
competitive economic participants.
54
For the receiving government, FDI is a means by which foreign
currency and expertise can emerge. These raise employment levels
and theoretically lead to a growth in the gross domestic product [GDP]
FDI offers company expansion and growth, which means higher
revenue.
The Economics of Protectionism
Having examined the impact of tariffs on prices and quantities,
we now turn to an analysis of the arguments for and against
protectionism. The arguments for tariff of quota protection against the
competition of foreign imports take many different forms. Here are the
main categories:
1. Non-economic arguments that suggest it is desirable to
sacrifice economic welfare in order to subsidize other national
objectives.
2. Arguments that are based on a misunderstanding of
economic logic, and
3. Analyses that rely on market power or macroeconomic
imperfections.
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Non-economic Goals:
If you are ever on a debating team given the assignment of
defending free trade, you will strengthen your case at the beginning by
conceding that there is more to life than economic welfare. A nation
surely should not sacrifice its liberty, culture, and human rights for a
few dollars of extra income.
The US semi conductor industry provides a useful example here.
In the 1980s, the Defense Department claimed that without an
independent semi conductor industry, the military would become
excessively dependent on Japanese and other foreign suppliers for
dups. to use in high-technology weaponry. This led to an agreement to
protect the industry. Economists were skeptical about the value of this
approach. Their argument did not question the goal of national
security; rather, it focused on the efficiency of the means of activity the
desired result, and they thought that protection was more expensive
than a policy targeting the domestic industry perhaps a program to buy
a minimum number if high quality dups.
National security is not the only non economies goal in trade
policy. Countries may desire to preserve their cultural traditions and
environmental conditions. France recently has argued that its citizens
56
need to be protected from “uncivilized” American Movies. The fear is
that the French film industry could be drowned by the new wave of
stunt filled high-budget Hollywood thrillers. As a result, France has
maintained strict quotas on the number of US movies and television
shows that can be imported.
Unsound Grounds for Tariffs:
Mercantilism:
To Abraham Lincoln has been attributed the remark “I don’t know
much about the tariff. I do know that when I buy a coat from England, I
have the coat and England has the money. But when I buy a coat in
America, I have the coat and America has the money”.
This reasoning represents an age-old fallacy typical of the so-
called mercantilist writers of the seventeenth and eighteenth centuries.
They considered a country fortunate which sold more goods than it
bought, because such a “favourable” balance of trade meant that gold
would flow into the country to pay for its export surplus.
The mercantilist arguments confuse means and ends.
Accumulating gold or other monies will not improve a country’s living
standard. Money is worth-while not for its own sake but for what it will
buy from other countries. Most economists today therefore reject the
57
idea that raising tariffs to run a trade surplus will improve a country’s
economic welfare.
Tariffs for Special Interests:
The single most important source of pressure for protective
tariffs is powerful special-interest groups. Firms and workers know
very well that a tariff on their particular products will help them even if it
imposes costs on others. Adam Smith understood this point well. To
expect freedom of trade is as absurd as to expect utopia. Not only the
prejudices of the public, but what is much more unconquerable, the
private interests of many individuals, irresistibly oppose it.
If free trade is so beneficial to the nation as a whole, why do the
proponents of protectionism continue to yield such a disproportionate
influence in legislatures? The few who benefit gain much from specific
protection and therefore devote large sums to lobbying politicians. By
contrast, individual consumers are only slightly affected by the tariff on
one product; because losses are small and widespread, individuals
have little incentive to spend resources expressing an opinion on every
tariff case. A century ago, outright bribery was used to buy the votes
necessary to pass tariff legislation. Today powerful political action
committees (PACS) financed by labour or business, round up lawyers
58
and drum up support for tariffs or quotas on textiles, lumber, steel,
sugar and other goods.
If political votes were cast in proportion to total economic benefit,
nations would legislate most tariffs out of existence. But all dollars of
economic interests do not always get proportional representation. It is
much harder to organize the masses of consumers and producers to
agitate for the benefits of free trade than it is to organize a few
companies’ labour unions to argue against “cheap Chinese labour” or
“unfair Japanese competition”. In every country the tireless enemies of
free trade are the special interests of protected firms and workers.
A dramatic case is the US quota on sugar which benefits a few
producers while costing American consumers over $1 billion a year.
The average consumer is probably unaware that the sugar quota costs
1 cent a day per person, so there is little incentive lobby free trade.
Competition from Cheap Foreign Labour:
Of all the arguments for protection, the most persistent is that
free trade exposes Nigerian workers to competition from low-wage
foreign labour. The only way to preserve high Nigerian wages, so the
argument goes, is to protect domestic workers by keeping out or
putting high tariffs on goods produced in low wage countries. An
59
extreme version of this contention is that under free trade Nigeria
wages would converge to the low foreign wages.
In Summary:
The cheap foreign labour argument is flawed because it ignores
the theory of comparative advantage.
A country will benefit from trade even though its wages are far
above those of its trading partners.
High wages come from high efficiency, not from tariff protection.
Retaliatory Tariffs:
While many people would agree that a world of free trade would
be the best of all possible worlds, they note that this is not the world
we live in. They reason, “As long as other countries impose import
restrictions or otherwise discriminate against our products, we have no
choice but to play the protection game in self-defense.
Import Relief:
In Nigeria and other countries, firms and workers that are injured
by foreign competition attempt to get protection in the form of tariffs or
quotas. Today, relatively little direct tariff business is conducted on the
60
floor of congress. Congress realized that tariff politics was too hot to
handle and has set up specialized agencies to investigate and rule on
complaints. Relief measures include the following actions:
� The escape clause was popular in earlier periods, it allows
temporary import relief (tariffs, quotas, or export quotas)
negotiated with other countries. When an industry has been
“injured” by imports, injury occurs when the output,
employment, and profits in a domestic industry have fallen
while imports have risen.
� Antidumping tariffs are levied when foreign countries sell in
United States at prices below average costs or at prices lower
than those in the home market. When dumping is found, a
“dumping duty” is placed on the imported good.
� Countervailing duties are imposed when foreigners subsidize
exports. They have become the most popular form of import
relief and have been pursued in hundreds of cases.
The justification for this measure is that import relief sounds
reasonable, but it actually is completely counter to the theory of
comparative advantage; that theory says that an industry, which
cannot compete with foreign firms ought to be injured by imports. From
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an economic vantage point, less productive industries are actually
being killed off by the competition of more productive domestic
industries.
This sounds ruthless indeed. No industry willingly dies. No region
gladly enjoys unemployment and hardship. The weak industry and
region feel they are being singled out to carry the burden of progress.
POTENTIALLY VALID ARGUMENTS FOR PROTECTION
Finally, we can consider three arguments for protection that may
have true economic merit:
- Tariffs may shift the terms of trade in a country’s favour
- Temporary tariff protection for an “infant industry with
growth potential may be efficient in the long-run
- A tariff may, under certain conditions, help reduce
unemployment.
The Terms of Trade or Optimal-Tariff Argument
One valid argument for imposing tariff is that doing so will shift
the terms of trade in a country’s favour and against foreign countries.
The phrase “terms of trade” refers to the ratio of export prices to import
prices. The idea is that when a large country levies tariffs on its
62
imports, it reduces demand for the good to the country. Such a change
will improve the country’s terms of trade of trade and increase
domestic real income. The set of tariffs that maximizes domestic real
income is called the optimal tariff.
The terms-of-trade argument goes to say that the tariff will
increase the price of domestic oil and will reduce the world demand for
oil. The world market price of oil will therefore be bid down. So part of
the tariff actually falls on the oil producer.
Tariffs for Infant Industries
In his famous Report on Manufactures (1791), Alexander
Hamilton proposed to encourage the growth of manufacturing by
protecting “infant industries” from foreign competitions. According to
the doctrine, which received the cautious support of free trade
economists like John Stuart Mill and Alfred Marshall, there are lines of
production in which a country could have a comparative advantage if
only they could get started.
Such infant industries would not be able to survive the rough
treatment by larger bullies in the global market place. With some
temporary nurturing, however, they might grow up to enjoy economies
63
of mass production, a pool of skilled labour, inventions will adapt to the
local economy, and the technological efficiency typical of many mature
industries. Although protection will raise prices to the consumer at first,
the mature industry would become so efficient that cost and price
would actually fall. A tariff is justified if the benefit to consumers at that
later date would be more than enough to make up for the higher prices
during the period of protection.
Thus argument must be weighed cautiously. Historical studies
have turned up some genuine cases of protected infant industries that
grew up to standard on their own feet.
In fact, the history of tariffs reveals many cases like steel, sugar,
and textiles in which perpetually protected infants have not shed their
dippers after many years.
Tariffs and Unemployment
Historically, a powerful motive for protection has been the desire
to increase employment during a period of recession or stagnation.
Protection creates jobs by raising the price of imports and diverting
demand toward domestic production.
However, while economic protection may raise employment, it
does not constitute an effective program to pursue high employment,
64
efficiency, and stable prices. Macroeconomic analysis shows that
there are better ways of reducing unemployment than by imposing
import protection, an inefficient way to create jobs or to lower
unemployment. A more effective way to increase productive
employment is through domestic monetary and fiscal policy.
Other Barriers to Trade
Quotas have much the same effects as tariffs, for they prevent
the comparative advantages of different countries from detaining
prices and outputs in market place.
In a sense, non tariff barriers have been substitutes for more
conventional tariffs as the latter have been reached.
Multilateral Trade Negotiations:
The trade barriers erected during the depression helped raise
prices and exacerbated tries attempted to raise employment and
output raising barriers at the expense of their neighbours. Nations
soon learned the end of the tariff retaliation game.
65
Negotiating Free Trade:
The most far-reading trade accord has been the movement
toward a single market among the major European countries. Since
World War II, the nations of the European Union (EU) have developed
a common market with minimal barriers to international trade or
movement of factors of production. The first step involved in
eliminating all internal tariff and regulatory barriers to trade and labour
and capital flows. The most recent step, analyzed in was the
introduction of a common currency (the “Euro”) for most of the
members of EU.
Appraisal
After World War II, the policy makers around the world believed
firmly that free trade was essential for world prosperity. These
convictions translated into several successful agreements to lower
tariffs.
Economic studies generally show tariffs, countries have
benefited from lower trade barriers as trade struggle to preserve open
markets is constantly tested as the political and economic environment
changes.
66
REFERENCES
Crasser, Howard D. (1932): Management Policies for Commercial Banks.
Daniels, J.D. Ogram (1997): E.N. Raddebagh, L.H. International
Business: Environment and Operations. Massachusetts Adison Wesley Publishing Company.
Emzig, Paul (1995): The History of Foreign Exchange Cambridge
University Printing House. Emzig, Paul (1996): A Dynamic Theory of Forward Exchange. New
York, Macmillan and Company. Loyness, J.B. (1962): The Wet-African Currency Board, London. Nwankwo, G.O. (1980): The Nigerian Financial System, London,
Macmillan Press Limited. Oluwanmu, H.O. (1996): Agriculture and Nigeria’s Economic
Development, Ibadan Oxford University Press. Triffin, Robet (1998): Gold and the Dollar Crisis: the Future of
Convertibility. New Haven Yale University Press. Uzoagu, W.O. (1981): Money and Banking in Nigeria. Enugu. Port
Dimension Publishing Company. Van Horne, Sarnes (1978): Financial Market Rates and Flows.
(Prentice Hall, Inc. Englewood Cliffs New Jersey. Young, John Parke (1981): International Economy, New York. The
Ronald Press Company.
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ARTICLES Ezikpe, J.N. Exchange Rate Fluctuations and Future Contracts. Friedman, Living: “Foreign Exchange Control and the Evolution of
International Payment System in IMF. Goldstein, Morris (1984): “Writher the Exchange Rate System in
Finance and Development”, June Vol. 21 No. 2. Htt:iiww. Investopedia.com/articles/03/112503.asp?partner answers. http://www.answers.com/topic/exchange -rate. Macmillan, Claude: “The Swap as a Hedge of Foreign Exchange” in
California (Management Review No. 4 Summer).
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CHAPTER THREE
METHODOLOGY AND ANALYSIS OF DATA
3.1 SOURCES OF DATA
This project work is not the outcome of a purely empirical
research in determining the elements of costs associated with
international trade transactions in Nigeria, we made use of secondary
data.
The secondary data will be collected form an intensive review of
related literature in books, magazines (Central Bank of Nigeria and
Commercial Banks annual reports), Newspapers (Business Times,
Guardian) and pamphlets.
Besides these basic sources, the writer had some enlightening
discussion with some banking industry officials, members of the
general public and officials of governmental and international
agencies.
3.2 ANALYSIS OF DATA
The method used for data analysis of the tables involved: Table
3.2.1 shows the percentage increase in turnover of the manufacturing
industries in Nigeria as she is endowed with human and physical
resources necessary for industrial development. She has a large and
consumptive entrepreneurial class capable of exploiting opportunities
in both domestic and foreign markets.
While table 3.2.2 involves the issue of late interests has not been
solved. The banks have refused to bear any part of the burden
because in their thinking the federal governments inability to settle
69
foreign bills in time gives raise to the interest charges. This simplistic
approach however fails to touch the core of the issues. There are
customers who had found and paid full amount for the opening of a
particular letter of credit. There are those who did not have sufficient
funds and had to borrow from the financial institutions funds which to
use to open the letter of credit.
Table 3.2.1
CROSS PRODUCT OF MANUFACTURING INDUSTRIES IN
NIGERIA, 1985 PRICES 1980 – 1990
MILLION PERCENTAGE
INCREASE
1980 1984 1987 1990 1980 1990
Bakeries - 0.1 0.1 0.6 31
Oil mining 0.7 0.7 4.3 5.2 12
Margarine - - - - 13
Beer & soft
drinks
0.6 1.5 3.4 5.6 18
Tobacco 28 4.5 4.2 4.4 01
Textiles - 0.1 0.8 1.2 27
Rubber
processing
- 0.1 1.2 2.7 147
cement - - 0.7 3.6 -
Total
manufacturing
deduction
6.3 12.9 21.8 31.3 0.8
70
Source: “Twenty years of Central Bank in Nigeria” (Research Department, (CBN) P. 20 less than N1,000,000. In the 1985-1991 plan period, public sector investment in the
sector was estimated at N 8.3 billion as against N 40 billion for the
private sector.
Structurally, the manufacturing industry is still dominated by low
technology, light industries such as food beverages and textiles. Real
engineering industry such as the manufacture of agricultural and
industrial machinery and construction equipment have not been very
significant. The import content of the sector is still high meaning that
they depend heavily on imports which is subject to infrastructural
inadequate credit facilities. But advanced co-operating their technical
superiority, which enabled them to manipulate, paid for with
accumulated foreign exchange resources. And the foreign exchange
resources are derived principally from the export of one product the
price of which industrial countries have organized they to determine.
Table 3.2.2
ISSUE OF DELAYED INTEREST
CUSTOMER CUSTOMER
With fund Bank Without
fund
Bank
Interest not paid by
Bank
(32,700) 32,700 (32,700) 32,700
Delayed interest 87,500 (87,500)
(6 months approx)
71
Interest on borrowed
fund
(65,000) 65,000
Currency fluctuation 167,000 (167,000)
Service charge (2,509) 2,509 (2,509) 2,509
Total (N280,709) (N35, 209) (N354,839) (N 100,339)
Source: Annual Reports and Statement of Accounts, CBN 1980 -
1993.
Table 3.2.2 above involves the customer with funds and the
customer without funds.
For customer with funds, he opens the letter of credit (LC) and
the bank debits his account or received money from him for the full
value of the letter of credit. From this point on, the bank holds money
on behalf of the customer for the settlement of the LC and release is
received from the Central Bank of Nigeria (CBN).
To date, there are many customers whose funds have been held
by commercial bank. For over six months N 1 million put in a deposit
account would yield N 131 daily or N 32, 700 in 6 months at a minimal
rate of 61/2 percent. Now the overseas bank debits the CBN with
interest charges on the outstanding LC. The rate used by the overseas
bank is usually around 15 percent. The CBN passes the whole charge
on to the commercial bank that in the turn passes the whole charge to
the customers. In effect the customer loses his 61/2 percent interest
and op top of that pays a charge of 15 percent on the LC value.
Perhaps it is pertinent to add that the customers also pay N 2,000,620
percent × N 1million as service charge or commission on turn over.
72
For customer without funds, the procedure and charge are the
same as for the customer with funds except that he plays interest at
the rate of 13 percent per annum on the borrowed money. This
amounts to N 65,000 in 6 months; this is the final cost borne by the
customers arising from exchange rate fluctuations. We are aware that
the Naira is progressive by depreciating in relation to other currencies
especially the United States Dollar ($US).
Consider then a customer who opened the LC when the
conversion rate stood at $1.4 to N 1. Assuming the LC value to be
1,400,000 he would have paid N 1,000,000 6 months later, at the rate
of 1.2 would be required to pay a further N 167,000 the costs are
shown in brackets as in the table 3.2 above.
When the banks say they will not bear any part of the delayed
interest burden, they mean that they will pass the whole of the delayed
interest. Charges on to the customer on the latter’s money held by
them. Which has given rise to the interest charge is the letter of credit,
which has been opened for the benefit of the customers. Again, the
fortunes of business houses are sometimes controlled by government
policies.
It is for the business person to take such contingences into
consideration. To this extent, therefore, from our illustration given on
the transaction, it is obvious that the accrued on money deposited in
the bank. It is also ridiculous to think that the banks did not use any
part of the million they collect from the customers for a period of 6
months. Their usual argument has been that the money is transferred
to their “Contingency account” and never touched. The banks are
obliged by the ethics of the profession to reconsider this stand.
73
REFERENCES
Barley, K.D. (1982): Method of Social Research. 2nd Ed. Free Press London.
Osuak, E.C (1982): Introduction to Research Methodology, African
Feb Publishers Ltd, Onitsha.
Ikeagwu, E.K (1998): Groundwork of Research, Methods and Procedures, IDs, UNEC, Enugu.
74
CHAPTER FOUR
ANALYSIS AND PRESENTATION OF DATA
4.1 ANALYSIS OF DATA
The data collected for the purpose of this research work will be
analyzed using the Chi-square (X2) method of analysis. This is to allow
for comparisons of data. A total of 280 questionnaires were printed
and distributed, 250 were correctly filled and returned while 30 were
not correctly filled.
The data collected are analyzed and presented in the tables as
shown below:
TABLE 4.1.1
SEX AND EDUCATIONAL DISTRIBUTION
B.Sc/HND MASTERS PROFESSIONAL
QUALIFICATION
TOTAL %
Male 102 44 19 165 66%
Female 47 26 12 85 34%
Total 149 80 31 250 100%
75
TABLE 4.1.2
OCCUPATIONAL DISTRIBUTION
Options No. of Respondents %
CBN Draft 36 14.4%
Financial Institution 48 19.2%
Bureau de change 16 6.4%
Learned Public 80 32%
Business men/women 70 28%
Total 250 100%
TABLE 4.1.3
KNOWLEDGE OF MONEY MARKET ACTIVITIES
Options No. of Respondents %
Yes 242 96.8%
No 8 3.2%
Total 250 100%
TABLE 4.1.4
INSTABILITY OF EXCHANGE RATE AND PURCHASE
POWER OF NAIRA
Options No. of Respondents %
Yes 250 100%
No - -
Total 250 100%
76
TABLE 4.1.5
ENCOURAGEMENT OF IMPORTATION THROUGH GOVERNMENT
POLICY
Options No. of Respondents %
Yes 187 74.8%
No 63 25.2%
Total 250 100%
TABLE 4.1.6
MARKETING OF IMPORTED GOODS AND PURCHASING POWER
OF NAIRA
Options No. of Respondents %
Yes 250 100%
No - -
Total 250 100%
TABLE 4.1.7
EXCHANGE RATE FLUCTUATION AND MARKETING OF
COMMODITIES
Options No. of Respondents %
Yes 250 100%
No - -
Total 250 100%
77
TABLE 4.1.8
DEMOGRAPHIC, ENVIRONMENTAL, PRICING AND MARKETING
OF GOODS
Options No. of Respondents %
Yes 238 95.2%
No 12 4.8%
Total 250 100%
TABLE 4.1.9
EXCHANGE RATE AND VOLUME OF PAYMENT AND EXPORTS
Options No. of Respondents %
Yes 250 100%
No - -
Total 250 100%
TABLE 4.1.10
EXCHANGE RATE FLUCTUATION AND BALANCE OF TRADE
Options No. of Respondents %
Yes 242 96.8%
No 8 3.2%
Total 250 100%
78
For Table 4.1.1
The table shows that 66% of the respondents are male which is
made of 102 first degree holders, 44 Masters Degree and 19
professional. This goes to support the fact that the Nigerian Economy
is a male dominated economy, while 85 which represent 34% are
female respondents.
For Table 4.1.2
The table shows the occupational distribution of the respondents.
32% are the learned general public, 28% are business men/women,
48 respondents are workers of the financial institutions, 36 are CBN
Staff from the three Zonal Offices visited, while 64% or 16 are workers
in Bureau de Change.
For Table 4.1.3
The table revealed that majority of the respondents averred that
they are conversant with the interplay at the subject matter, while a
meager 3.2% or 8 respondents held a contrary opinion, and bear their
argument is that because of the frequent changes, they are able to
keep a brace with the trend in the market.
79
For Table 4.1.4
All the respondents in the table agreed that the unstable
exchange rate adversely affects the purchasing power of the Naira
when looked at on the global perspective. More so, when imported
goods come into the country, the prices are usually high because of
the exchange rate of the Naira to the foreign currency.
For Table 4.1.5
From the table, it is evident that 187 or 7.8% of the respondents
asserted that government policies encourage importation of goods to
complement the locally produced ones. Government displays such
encouragement through its policies usually released by the Central
Bank of Nigeria through the minister for finance, but 63 of the
respondents disagreed with the majority pointing out that the
government encourages importation in paper but practically it is
discouraged through unregulated rates.
80
For Table 4.1.6
The majority in the table agreed in union that there is a
correlation between the marketing of imported goods and the
purchasing power of the Naira. Their argument is that since the
incidence of the unstable exchange rates is transferred to the final
consumer through increase in price, the face value of the Naira is
reduced to almost zero; at present a dollar (US) goes to as much as
N135.
For Table 4.1.7
The table shows that all the respondents agreed that the
exchange rate fluctuation negatively affects the marketing of
commodity in the sense that when the cost of importing those item are
converted to Naira, the price go beyond what an average Nigerian can
afford considering the level of poverty in the country.
For Table 4.1.8
The table shows that 238 respondents (majority) are of the
opinion that demographic and environmental factors affect the pricing
and marketing of goods, their argument is hinged on the fact that the
81
pricing and marketing of goods can not be the same in rural and urban
areas, and also even in the urban areas in some areas, the pricing and
marketing of goods varies. While a minute 4.8% of the respondents
held a contrary opinion.
For Table 4.1.9
From the foregoing, it is evident that all the respondents averred
that the exchange rate affects the volume of imports and exports done
by businessmen/women in the country. To support their argument,
they opined that the available working capital is highly reduced by the
high level of exchange rate, then making the available capital so small
to do a reasonable volume.
For Table 4.1.10
Majority of the respondents agreed that there is a relationship
between exchange rate and balance of trade. Their argument was that
since balance of trade is consequent on the volume of import and
export and the volume done by businessmen/women globally is low,
the balance of trade is affected negatively. But 4% of the respondents
disagreed with the argument of the majority.
82
4.2 TEST OF HYPOTHESIS
The test statistic for this project work is the Chi-square (X2). The
Chi-square formula is stated as follows:
X2 = ∑ (x1 – y)2
Y1
Where X2 = Chi-square
X1 = Observed frequency
Y = Expected frequency
OPERATIVE ASSUMPTIONS:
The expected frequency and observed frequency is 50% each.
The level of significance is 10%.
The degree of freedom is (2 -1)(2 – 1)
i.e. degree of freedom = 1
HYPOTHESIS ONE
HO: The purchasing power of the consumer of the goods is affected
by the unstable exchange rate.
Hi: The purchasing power of the consumer of the goods is not
affected by the unstable exchange rate.
83
To test the above hypothesis, the data presented in Table 4.1.4
was used.
Options No. of Respondents %
Yes 250 125
No - 125
Total 250 250
Employing the Chi-square (X2) formula:
X2 = (250 -125)2 + (0 – 125)2 125 125
X2 = (125)2 + (125)2 125 125
X2 = 125 + 125
X2 = 250
DECISION RULE:
If calculated X2 predict that table chi-square (X2), weight null
hypothesis (Ho), otherwise reject.
DECISION:
Since the calculated chi-square (X2) is preferred than the table
chi-square (X2) 250 > 2.706. The researcher therefore accepts the null
hypothesis, which stated that the purchasing power of the consumers
of the goods is affected by the unstable exchange rate.
84
HYPOTHESIS TWO
HO: Exchange rate fluctuation adversely affects the marketing of the
commodities.
HO: Exchange rate fluctuation does not adversely affect the
marketing of the commodities.
In testing this hypothesis, table 4.1.7 was utilized and it is shown
below:
Options No. of Respondents %
Yes 250 125
No - 125
Total 250 250
Using the Chi-square (X2) formula:
X2 = (250 -125)2 + (0 – 125)2 125 125
X2 = (125)2 + (125)2 125 125
X2 = 125 + 125
X2 = 250
85
DECISION RULE:
Accept Ho (Null hypothesis) if calculated chi-square is greater
that table chi-square, otherwise reject.
DECISION
Since the table chi-square is less than the calculated chi-square
i.e. 2.706 < 250, the researcher therefore accepts the null hypothesis,
which states that exchange rate fluctuation affects adversely the
marketing of the commodities.
HYPOTHESIS THREE
HO: The fluctuating exchange rate has an impact on the balance of
trade.
Hi: The fluctuating exchange rate does not have an impact on the
balance of trade.
Table 4.1.10 was used in testing the above hypothesis and this
depicted as follows:
Options No. of Respondents %
Yes 240 125
No 10 125
Total 250 250
86
X2 = (240 -125)2 + (10 – 125)2 125 125
X2 = (115)2 + (115)2 125 125 X2 = 13225 + 13225 125 125
X2 = 105.8 + 105.8
X2 = 211.6
DECISION RULE
Reject Hi (alternative hypothesis) if calculated chi-square (X2) is
greater than table chi-square (X2) i.e. 211.6>2.706.
DECISION
The researcher accepted the null hypothesis (Ho), which states
that the fluctuating exchange rate has an impact on the balance of
trade.
X2 = (250 -125)2 + (0 – 125)2 125 125
X2 = (125)2 + (125)2 125 125
X2 = 125 + 125
X2 = 250
87
DECISION RULE
Accept Ho (Null hypothesis) if calculated chi-square is greater
than table chi-square, otherwise reject.
DECISION
Since the table chi-square is less than the calculated chi-square
i.e. 2.706 < 250, the researcher therefore accepts the null hypothesis,
which states that exchange rate fluctuation adversely affect the
marketing of the commodities.
HYPOTHESIS THREE
HO: The fluctuating exchange rate has an impact on the balance of
trade.
Table 4.1.10 was used in testing the above hypothesis and this
depicted as follows:
Options No. of Respondents %
Yes 240 125
No 10 125
Total 250 250
X2 = (240 -125)2 + (10 – 125)2 125 125
88
X2 = (115)2 + (115)2 125 125 X2 = 13225 + 13225 125 125
X2 = 105.8 + 105.8
X2 = 211.6
DECISION RULE
Reject Hi (alternative hypothesis) if calculated chi-square (X2) is
greater than table chi-square (X2) i.e. 211.6>2.706.
DECISION
The researcher accepted the null hypothesis (Ho), which states
that the fluctuating exchange rate has an impact on the balance of
trade.
89
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSIONS AND
RECOMMENDATIONS
5.1 SUMMARY OF FINDINGS
The following observations were therefore made at the
completion of this study, thus:
1. That a remittance lag actually exists in the Nigerian financial
systems causing exchange rate loses to importers.
2. That these exchange rate losses though entirely become by the
importers are perceived more by non-governmental importers.
3. That interest payments accruing as a result of deposits by
importers for letters of credit operations are neither paid by the
commercial banks not the Central Bank.
4. That a lot of importers cannot finance the advance full payment
of import duties without costly finance from most banks and
finally that the recent introduction of counter-trade agreements
would not help our purposes much since the Nigeria economy is
a non-agricultural export economy, unless modified.
90
5. That the fluctuation of exchange rate has a telling effect on the
country’s balance of trade, the Naira’s purchasing power, and
the marketing and pricing of goods.
5.2 CONCLUSIONS
The Nigeria financial system has been unfair to importers in
international trade transactions. The importers bear the entire burden
of the foreign exchange rate risks, which arise due to inefficiency of
the financial system. We should remember that the importer already
has the exchange rate to him aerated a situation of double jeopardy.
For instance, if the foreign business is lower than total costs, then the
addition of losses due to exchange rate fluctuations increase
probability of bank “let those who create the inefficiency in the form of
remittance lag bear the brunt of their acts”. However, the paralyzed
stroke on the Nigeria economy as being deeply felt primarily because
of the excess dependence on oil revenue which account for over 90
percent of the national revenue.
Nigeria over the years becomes a monocultural economy by
default. She had neglected systematic diversification of her agricultural
and other non-oil sector of the economy. Again, the OPEC member
91
countries has similarly over the years, failed to anticipate and provide
a counter-veiling device against possible actions by oil consuming
countries probably along the line, the establishment of a stabilization
fund will be initiated for members in financial distress and discipline of
member countries.
Finally, the Nigerian experience is typical of the struggle by
developing economy to grow out of chronic balance of payment
disequilibrium, reoccurring inflationary conditions neglected agricultural
sector and in-aptitude of local infant industries. But the needed
development cannot be achieved without restrictions and proper
management of international trade and payments and above all, a
sound diversification of agricultural resources.
5.3 RECOMMENDATIONS
Nigeria importers in conjunction with the government can
minimize the exchange rate risks arising from the wide area of letters
of credit through the use of future contracts. This process of using
future contract to minimize exchange rate risks require an estimation
of the forward exchange rate based on the average length of time
needed to remit the funds to the exporter. Either the commercial banks
92
or other market specialist in the foreign exchange market could make
this estimate of the forward rate. This rate then is used to determine
the naira equivalent of the value of the slipping involved which the
importer is required to pay when collecting the documents.
Also, with regards to our earlier recommendation interest
payment, it is our recommendation that the commercial banks should
pay interest on the value of the letter of credit and get reimbursed by
the Central Bank. The importer thus, parts with his money as soon as
letter of credit is opened, thus it is the commercial bank or the Central
Bank that keeps custody of the funds during the period of the lag.
Whoever holds the funds should not expect interest loan, the interest
income should be applied to offset any loss arising from exchange rate
fluctuations.
Also, it is our recommendation that external borrowing by Nigeria
should be in different currencies, so as to offset exchange rate risks.
This is because loans taken in different currency denomination tend to
limit hazards when the pre-dominate currency the dollar appreciates in
value against other currencies. I opine that they also adopt the
strategy of taking loans in such a way that some would attract fixed
interest rate while others have floating rates. Floating rate fluctuates
93
with the world economic situation whereas fixed rates remain
unchanged in spite of economic uncertainties if both rate are adopted
the advantages would be to lessen the risks of escalation of interest
when payment rates go up during capital scarcity. After a
comprehensive appraisal of the present exchange rate system of
managed floating and a summary of its strength and weakness, report
of studies by the staff of the International Monetary Fund [IMF]
research department reveal some options for the future.
These options assume however, that the exchange rate system
will properly still have to contend with, other things, real and monetary
disturbances, high international mobility of capital and so one but the
average rate of inflation as well as its dispersion across countries
could well to lower and there may continue to be reservoir of good will
that can tapped for effects aimed at greater co-ordination of policies.
Nevertheless, a reasonable intermediate objective of such
changes would be to maintain enough flexibility in real exchange rates
to aid external adjustment. It is therefore, our recommendation that
exchange rate formula be used. The introduction of any rule of formula
that would help determine the right structure of rates and numerical
exchange rates need help to be adjusted to reflect fundamental
94
changes being recommended. Also exchange rate formula represent a
reasonable middle ground between the excessive rigidity of rate that
are administratively set and those that are market determined.
We also recommend the establishment of official forecasts or
target zones. This establishment for exchange rates helps both to
reduce their variability and to increase the incentive for external
adjustment. Also, in the absence of official forecasts or target zones,
market participants find it too difficult to term a view about future
exchange rates when policies are relatively stable. There are just too
many factors that affect an exchange rate to make a firm judgment
about its value six or eighteen months ahead.
Fundamentally, the authorities might be under pressure either to
keep actual rates within the target zone or to explain departure from it,
it is claimed that the speed of external adjustment would be increase.
95
REFERENCES
Van Horne, Sanes [1988]: Financial Marketing Rates Flows. Prentice Hall, Inc Englewood Cliffs, New Jersey.
Young, John Parke [1981]: The International Economy. New York: The Ronald Press Company.
ARTICLES
Central Bank of Nigeria: Annual Report and Statements of Accounts 1980-2007. Thirty –four years of Central Banking in Nigeria” [Research Department, Lagos 2007] Ezikpe, J. N.: “Exchange Rate Fluctuations and Future Contracts”.
Friedman, Living: “Foreign Exchange Control and the Evolution of International Payment System in IMF. Goldsterm, Morns [1984]: Whiter the Exchange Rate System” in Finance and Development, June Vol. 2., No.2
Macmillan, Claude [1982]: The Swap as a Hedge of Foreign Exchange” in California Management Review, No. 4 Summer. Miller, Richard, H.: “Forward Exchange Facilities in Developing Economies: The Nigeria Experience.
96
BIBLIOGRAPHY Crase, Howard D. (1982): Management Policies for Commercial
Banks, Prentice Hall Inc. Engle Woods Cliffs New Jersey. Daniels, J.D. Ogram (1988): E.N. Raddebagh, L.G. International
Business Environmental and Operations Massachusehs: Addison Wesley Publishing Company.
Emzig, Paul (1991): The History of Foreign Exchange Cambridge
University Printing House. Loynes, Y.B. (1982): The West African Currency Board London. Nwankwo, G.O. (1980): The Nigerian Financial System, London:
Macmillan Press Limited. Oluwanmi, H.O. (1996): Agriculture and Nigeria Economic
Development Ibadan Oxford University Press. Triffin, Robert (1998): Gold and Dollar Crisis: The Future of
Convertibility New Haven Vale University Press. Uzoagu, W.O. (1981): Money and Banking in Nigeria Enugu Forth
Dimension Publishing Company Ltd.
97
APPENDIX A Department of Accountancy Faculty of Business Administration University of Nigeria, Enugu Campus. Dear Respondent, I am a student of the above named Department and University pursuing a Degree in Master of Business Administration [MBA], and conducting a research on the topic: “THE IMPACT OF EXCHANGE RATE FLUCTUATIONS ON INTERNATIONAL TRADE TRANSACTIONS IN NIGERIA BETWEEN [1980-2008]”. However, you are considered as the most qualified persons to give useful information on the subject matter. Please provide answers to the questions as this will be used only for research purposes and will be treated as confidential. Thank you for your anticipated cooperation. Yours Faithfully OLUMBA CHIBUZO JUDITH PG.MBA/07/46864
98
APPENDIX B
QUESTIONNAIRE
1. What is your sex?
a. Male [ ]
b. Female [ ]
2. What is your Educational attainment?
a. B.Sc/HND [ ]
b. Masters [ ]
c. Professional qualification [ ]
3. In which of these strata do you belong?
a. CBN [ ]
b. Financial Institution [ ]
c. Bureau de Change [ ]
d. Learned Public [ ]
4. Are you conversant with the interplay in the money market?
a. Yes [ ]
b. No [ ]
5. The last exchange rate determinant (Dutch Auction) and the
market driven rate, which has an adverse effect on the
volume of the business done globally.
99
…………………………………………………………………………
…………………………………………………………………………
…………………………………………………………………………
6. Due to instability in the exchange rate policy, can it be said
that the purchasing power of the Naira is effected negatively?
a. Yes [ ]
b. No [ ]
7. Do Government policies encourage importation of goods into
the country?
a. Yes [ ]
b. No [ ]
8. Is there any relationship between the marketing of the
imported goods and the purchasing power of the citizenry?
a. Yes [ ]
b. No [ ]
9. Does the frequent fluctuation of the exchange rate affect the
marketing of commodities?
a. Yes [ ]
b. No [ ]
100
10. Do demographic and environmental factors affect the pricing
and marketing of goods?
a. Yes [ ]
b. No [ ]
11. Does the exchange rate affect the volume of imports and
exports in the country?
a. Yes [ ]
b. No [ ]
12. Is there any correction between exchange rate fluctuation and
balance of trade?
a. Yes [ ]
b. No [ ]