THE EFFECT OF EXCHANGE RATE FLUCTUATION ON THE NIGERIA MAUFACTURING SECTOR

ABSTRACT

This paper examines the effect of exchange rate fluctuations on the Nigerian manufacturing sector during a twenty five (25) years period (1986 – 2010). The argument is that fluctuation in exchange rate adversely affects output of manufacturing sector. This is because Nigerian manufacturing is highly dependent on import of input and capital goods. The methodology adopted for this study is empirical. The econometric tool of regression was used for the analysis. The population target of this study is the total number of 25 years from (1986 – 2010) (25) annual time series as data relating to other years after 2010 are not available. The used in this study is the secondary source of data. The data to be utilized in this study we be sourced through library research, publications of the Central Bank of Nigerian (CBN) i.e. statistic bulletin, National Bureau of Statistic(NBS), on line information and economic journals. Based on the findings, the researcher found out that exchange rate has no significant effect on economic growth of Nigeria also that there is no significant effect of fluctuation on exchange rate on the manufacturing sector. Some recommendations for policy were made based on the findings. Amongst others is the need to strengthen the link between agriculture and manufacturing‟s sector through local sourcing of raw materials thereby reducing reliance of the sector on import of input to a reasonable level           Table of content  Approval page                                                                               iDedication                                                                                    iiAcknowledgement                                                                         iii   Abstract                                                                                       iv Chapter One Introduction 1.1 Background of the Study                                                           1 1.2 Statement of the Problem                                                          3 1.3 Objectives of the Study                                                             5 1.4 Research Questions                                                                  6 1.5 Formulation of Hypothesis                                                         6 1.6 Significant Of the Study                                                            7 1.7 Scope and Limitations Of The Study                                           8 1.8 Definition of Terms                                                                9 Chapter Two Introduction 2.1 Review of Related Literature                                                    10 2.2 Theoretical Concept Of Exchange Rate                                      18 2.3 Theoretical Frame Work for Exchange Rate Fluctuation                andManufacturing Output                                                                      18 2.4    The Objectives of Exchange Rate Policy in Nigeria                   20 2.5 Types of Exchange Rate                                                          23 2.6 Factors Affecting Rate Of Exchange                                          25 2.7 Fluctuation inThe Exchange Rate Of The Naira                  26 2.8 Factors Influencing TheDetermination Of Exchange Rates           27 2.9 Factors That Can Affect The Manufacturing Process                   29 2.10 Factors That Causes The Currency Fluctuation                         33 2.11          Manufacturing Sector                                                   36 2.12 Overview of Manufacturing                                          49 Chapter Three Introduction 3.1 Research Methodology                                                            64 3.2 Research Design                                                                    65 3.3 Source of data                                                                       65 3.4 Research Instrument                                                              66 3.5 Reliability And Validity Of Research Instrument                          66 3.6 Population Of The Study                                                          66 3.7 Sample And Sampling Procedure                                              67 3.8 Method Of Data Analysis                                                         67 3.9 Decision Criterion For Validation Of Hypothesis                           70   Chapter Four Introduction  4.0 Presentation and Analysis of Data                                            71 4.1 Presentation of Results                                                           72 4.2 Results                                                                                 73 Chapter Five Summary ofthe Findings, Conclusion and Recommendations 5.1 Summary ofthe Findings                                                         77 5.2 Conclusion                                                                             78 5.3 Recommendation                                                                   79                 BIBLIOGRAPHY                                                                    81 APPENDIX

CHAPTER ONE

INTRODUCTION 1.1 BACKGROUND OF THE STUDY

Following the fluctuation of the naira in 1986, a policy induced by the structural adjustment programme (SAP), the subject of exchange rate fluctuation has become a topical issue in Nigeria. This is because it is the goal of every economy to have a stable rate of exchange with its trading partners. In Nigeria, this goal was not reached in spite of the fact that the country embarked on devaluation to promote export and stabilize the rate of exchange. The failure to realize this goal subjected the Nigerian manufacturing sector to the challenge of a constantly fluctuating exchange rate. This was not necessitated by the devaluation of the naira but the weak and narrow productive base of the sector and the rising import bills also strengthening it. In order to stem this development and ensure a stable exchange rate, the monetary authority put in place a number of exchange rate policies. However, very little achievement was made in stabilizing the rate of exchange. As a consequence, the problems of exchange rate fluctuation persisted in macro-economic management, exchange rate policy as an important tool derives from the fact that changes in the rate of exchange have significant implications, for a country‟s balance of payment position and even its income distribution and growth. It is not surprising since its behaviour is said to determine the behaviour of several other macro-economic variable (Oyejide, 1985). It is even more so for Nigeria which had embarked on a course of rapid economic growth with attendant high import dependency. The manufacturing sector plays a catalytic role in a modern economic and has many dynamic benefits that are crucial for economic transformation. In an advanced country, the manufacturing sector is a leading sector in many respects. It is a quest for increasing productivity in relation to import substitution and export expansion, creating foreign exchange earnings capacity, raising employment, promoting the growth of investments of a faster rate than any other sector of the economy, as well as wider and more efficient linkage among different sectors (Fakiyesi, 2005). But the Nigerian economy is under-industrializes and its capacity utilization is also low. This is in spite of the fact that manufacturing is the fastest growing sector since 1973/74 (Obaden, 1994). The sector has become increasingly dependent on the external sector for import of non-labour input (Okigbo, 1973). In the ability to import therefor; can impact negatively on manufacturing production Oyejide (1985) posited that the breakdown of the Brelton woods system induce variability in the rate of exchange worldwide; Nigeria inclusive. Umubanwer (1995) has noted that three adverse consequence of this on ability to import. Devaluation which further aggravates the situation has not significantly affected economic performance in the positive direction in Nigeria (Ojo, 1990). The impact of fluctuation in exchange rate on manufacturing output had not receives adequate attention. This paper attempts to give attention to the issue.

1.2 STATEMENT OF THE PROBLEM

This research work is meant to emphasize on the issue of fluctuating exchange rate on the Nigeria manufacturing sector. Some of the problems which cause the fluctuation of exchange rate on the Nigeria manufacturing can be seen below. The exchange rate of the naira was relatively stable between 1975 and 1979 during the oil boom or (regulatory require). This was also the situation prior to 1990 when agricultural products accounted for more than 70% of the nation‟s gross domestic product (GDP) (Ewa, 2011:78), however, as a result of the development in the petroleum oil sector in 1970, the share of agriculture in total export declined significantly while that of oil increased. Furthermore, more manufacturing companies are faced with the problem, not recognising the fact that fluctuation in exchange rate adversely affect output of the manufacturing sector, this because Nigeria manufacturing sector is highly dependent on import of input and capital goods, this is in spite of the fact that manufacturing sector is the fastest growing sector since 1973 (Obadan, 1994), this sector has become increasingly dependent on the external sector for import of non-labour input. The impact of fluctuation in exchange rate on manufacturing output has not received adequate attention. Instabilities of foreign exchange rate is also a problem to manufacturing sector; however, instability to import therefore can impact negatively on manufacturing production; furthermore, Jhingen (1997), emphasized that exchange rate fluctuation cause uncertainty and impede on international trade. Thus uncertainty in trade transaction post a lot of problems such as inflation, which determine the internet balance of a country, it has also tended to undermine the international competitiveness of non-oil export and make planning and projection difficult at both micro and macro levels of the economy, some small and medium scale enterprise have been strangled out as a result of low dollar naira exchange rate.

1.3 OBJECTIVES OF THE STUDY

In a highly import dependent economy like Nigeria, the naira exchange rate has become one of the most widely discussed topic in the country today. This is not surprising as this topic has had a lot of impact on the Nigerian manufacturing sector. It is therefore, the objective of this study to evaluate the effect of exchange rate fluctuation on the Nigerian manufacturing sector. To investigate empirically, the effect of exchange rate fluctuation on Nigerian import or export and capital goods. To determine if the continuous fluctuation of exchange rate of naira have an impact on the quality and quantity of output of manufacturing firms.