MANAGEMENT OF FOREIGN EXCHANGE BY CENTRAL BANK OF NIGERIA: PROBLEMS AND PROSPECTS

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MANAGEMENT OF FOREIGN EXCHANGE BY CENTRAL BANK OF NIGERIA: PROBLEMS AND PROSPECTS

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

It has already been stated that money is a common denominator in which the rate relative values of goods and services can be expressed. Throughout history any community which form itself into a nation for the purpose of self-government immediately introduces its own distinctive unit of account-monetary unit of account (legal tender). In the words of Endel (1973-77) in the international realm no legal tender exist vales must be measured, accounts kept and payments made by conversion of one currency not another, this conversion process is known as foreign exchange.

Foreign exchange can be acquired by a country through the export of goods and services, direct investment inflows, aids and grants. When foreign exchange receipts, the surplus is added to reserves. These reserves which are also savings from foreign exchange transactions are held by the authorities to finance short falls in foreign receipts and to safeguard the international value of the domestic currency.

When there is disequilibrum in the foreign exchange market which is caused by in adequate supply of foreign exchange reserves, pressure may be exerted on foreign exchange reserves. If the reserves are not adequate, it will deteriorate into balance of payments problems, hence the need to manage a nation’s foreign exchange resources so as to reduce the adverse effect of foreign exchange volatility. The management of foreign exchange resources is further informed by the need to set an appropriate cleaning price in the foreign exchange market. Therefore the act of foreign exchange management in a conscious attempt to harness foreign exchange resources, deploy them to service the economy so as to prevent the economy from experiencing shocks due to foreign exchange volatility. “The practice of managing the foreign exchange resources has therefore evolved broadly in line with the globalization and liberalization of economics and financial markets”. (Anifowose, 1997:19)

1.2 STATEMENT OF THE PROBLEM

The primary objective of foreign exchange management is to reduce foreign exchange instability and its adverse effect on the economy. Despite government efforts to achieve this objective through the central bank of Nigeria (CBN), foreign exchange (monitoring and miscellaneous provisions) Decree No promulgated in 1995 and the introduction of the use of forms A and 19 in 1996, a handful of problems are still identified with foreign exchange operations in Nigeria. These problems include

(i) Inadequate inflow of foreign exchange

(ii) Continuous depreciation in the value of the Naira

(iii) Balance of payment problems

(iv) Problem of finding Sectorial allocation of foreign exchange in the foreign exchange market

1.3 OBJECTIVES OF THE STUDY

The objectives of the study are:

(i) To examine the roles of the central bank of Nigeria in managing the country’s foreign exchange

(ii) To examine the impact of foreign exchange rate policy in the foreign exchange management.

(iii) To examine the effects of the activities of parallel market on the foreign exchange.

(iv) To examine the impact of foreign exchange decree No. 17 of 1995 and other control measures in managing foreign exchange in the country.

(v) Examine the problems facing exchange management in Nigeria.

1.4 SIGNIFICANCE OF THE STUDY

(i) This work is in partial fulfillment of the requirement for the award of Higher National Diploma (HND) in Accountancy.

(ii) The work will be immense help to future researchers who will make their own investigation into this subject area.

(iii) The work will help the Central Bank of Nigeria (CBN) regulate the activities of the banks with a view in gathering them to fund foreign exchange market adequately, increase foreign exchange inflow and Balance of payment surplus, determine a realistic exchange rate and adequate foreign exchange control system.

1.5 RESEARCH QUESTION

(i) How do you assess the role of the central bank of Nigeria in managing the country is foreign exchange.

(ii) Do you think that the impact of foreign exchange rate policy has been encouraging?

(iii) Is it true that the activities of the parallel market operators negatively affect the effective operation of the foreign exchange management in Nigeria?

(iv) How would you assess the impact of foreign exchange decree No 17 of 1995 and other control measures in managing foreign exchange in the country?

(v) What are the problem facing foreign exchange management in Nigeria.

1.6 HYPOTHESIS

The following hypothesis is have been designed for analysis:

(i) Ho: The role of Central Bank of Nigeria in managing the country’s foreign exchange is not impressive.

Hi: The role of central Bank of Nigeria in managing the country’s foreign exchange is impressive.

(ii) Ho: The impact of exchange rate policy in the management of foreign exchange in Nigeria is not encouraging.

Hi: The impact of foreign rate policy in the management of foreign exchange in Nigeria is encouraging

(iii) Ho: The activities of the parallel market operators negatively affect the effective operation f the foreign exchange management in Nigeria.

Hi: The activities of the parallel market operator do not negatively affect the effective operative of the foreign exchange management in Nigeria.

(vi) Ho: The impact of foreign exchange degree No 17 of 1995 and other control measures in managing foreign exchange in the country is not impressive.

Hi: The impact of foreign exchange decree No 17 of 1995 and other control measures in managing foreign exchange in the country is impressive.

1.6 SCOPE AND LIMITATION

SCOPE

The area of this project in Enugu, the research is to determine how foreign exchange could be effectively managed in Nigeria by CBN.

LIMITATION

In the process of carrying out this study the researcher encountered some problems which include: Finance the cost of transportation to area where data are to be collected was too high. The negative attitude of CBN officials toward disclosure of information was a limiting factor. Finally, time for data collection and attitude lectures was a limiting factor.

1.8 DEFINITION OF TERMS

EXCHANGE RATE: This is the number of units of one currency, which exchange for a given number of units of anther country.

FOREIGN EXCHANGE MARKET: This is a market in which one national currency is brought in exchange for another national currency.

FOREIGN EXCHANGE RESERVE: These are foreign currencies held by the Central Bank of Nigeria (CBN).