EMPIRICAL LITERATURE OF NIGERIAN EXCHANGE RATE

Exchange rate is the ratio at which the currency of one country can be changed for the currency of another country. Exchange rate are required to facilitate international trade including purchasing goods, services or capital from a country using that country’s currency. It is based on demand and supply for currency, for example, a high demand for Canadian goods allows the price that other countries must pay for the Canadian dollar to increase or set the exchange rate higher.

Also the international foreign exchange market is highly speculative. There are flows of “hot” (meaning highly mobile) money from one country to anther seeking high interest rate, capital profit or political security which a country reduce its exchange party. Its currency is worth less in relation currencies of other countries. The adjustment seeks to establish relative currency value at levels which reflect relative commodity or services, values and so at which import and export trade trends to stabilize. But the value prospect of an adjustment is enough to set off speculation which make. Devaluation or revaluation inevitable regardless of the trading merits of he case.

In exchange rate policies, the extent to which the policy instruments adopted by respective government were responsible for the worsening of economics depends in part on the fiscal and monetary instruments and their implications for the government budget deficit and inflation.

According to Nwosu (2005:26) one of the major policies of the structural adjustment programs in Nigeria is in policy formulations particularly as it relates to (SFEM) second-tier foreign exchange market and (IFEM). Inter-banking foreign exchange market. He states that when SFEM was introduced in September 1986 as a key measures in the structural adjustment some of the objectives are:

(1)  To effect gradual reduction of the degree of the naira is over valuation.

(2)  To effect efficient rationing of scarce foreign exchange among competing national users.

(3)  To discourage high import dependence.

(4)  To effect systematic corrections of the structural distortion in the domestic economy.

(5)  To provide a cash and carry platform for the procurement of foreign exchange. He concluded by asking whether the FEM policy has not succeeded in devaluating the currency for beyond that is economically positive.

According to Olukala (2006:12) writing on Nigeria exchange rate system traced the historical perspective. The series of events that culminated in Nigerian’s journey to (SFEM). He identified eight cycles in the study of Nigerian foreign exchange history, party with the pound starling.

The gold continent appeal, the (1971-1974) pegging against a basket approach, the use of the currencies, the import weighed basket approach, the use of currency intervention system (the u.s dollar as currency of intervention). The crawling peg, the second-tier foreign exchange market (SFEM).

Also, in the exchange rate system, there are three major things that are involved in it. They are:

The working of the gold standard, the case of ‘pure’ floating foreign exchange range and fluctuating from day to day according to market demand and supply. (this is quite like the case of wheat, which is available at a market price that fluctuates from day to day depending upon competitive supply and demand). In today’s managed exchange rate system which involves a mixture o some currencies that float or (fluctuate) freely along with others that are pegged to the dollar or are floating together.

The country’s exchange rate maintained, Parity with the pound sterling from 1959 until the devaluation of the sterling in November 1967.

In the purchasing power parity theory, which was used after the first World War to demonstrate that the fall in the exchange values of the German, polish, Naira and other currencies, was due mainly to inflation in those countries. This was quite true, because is equilibrium situation and price in country ‘A’ rise, say a hundred fold, while the remain stable in country ‘B’ people ‘B’ will want 100 times as many units of ‘A’s currency as before in exchange for ‘I’ unit of theirs, for 100 units of ‘A’s currency now buys only as much as I unit bought before. So if ‘Bs price have say doubled, then the unit of their currency as before, and so on, in general they should expect changes in the exchange value of different currencies (as compared with a previous position of equilibrium) to reflect the changes in their price levels.

Pegged exchange rate system was devised in 1994 in the Bretton wood conference. The plan was designed to provide the exchange rate stability considered to be conducive to the post, world war II growth of international trade. This system says that the exchange rate between two countries could not be held constant forever but would be made for valid reason under controlled condition.

Under the pegged rate system, each currency was defined in terms of gold or the U.S dollar (united state). Each nation was required to maintain (to peg) the market value of its currency with plus or minus (+) one percent of the defined (the par) value. The American dollar was defined in terms of gold at a rate of $1=1/35 ounce of gold and other currencies were defined in terms of the dollar. The U.S maintained the pegged value of the dollar by buying and selling gold at the fixed price of $35 per ounce of gold. If the Nigerian Naira is pegged at N=$1, the naira can change within given unit of naira plus one percent for upper band and minus one percent for the lower band will be $0.99 =N1. These pegging up and pegging down involve the maintenance of fixed exchange rate.