EXCHANGE RATE DEVELOPMENT | MARTINS LIBRARY

The recent developments clearly indicate that the IFEM is under severe pressure, which has resulted in exchange rate instability. For instance, the naira depreciated on the average by 6.5 percent to N101.65  to U.S $1.00 in 2000. similarly, it depreciated further by 10.2 percent to N111.44 to $1.00 by June, 2001. The IFEM has also been characterized by a widening arbitrage premium between the official and the parallel market segments. The period 1995-1998, witnessed a parallel market premium averaging 2.7 percent.

However, in 1999 and 2000, the premium expanded to 6.6 and 8.3 percent, respectively. In first six months of 2000, the parallel market premium widened to 16.6 percent. The demand pressure and the consequent depreciation of naira exchange rate under the IFEM can be attributed to the expansionary fiscal policy of the government and he resultant persistent excess liquidity in the banking system, a sticky supply structure in the economy generally and of foreign exchange in particular, capital flight, speculative activities output and high Import dependency.

Overall, moreover, it is not the quantum for demand that is worrisome, it is that the utilization of the forex has been largely inefficient and unsupportive of productive activities in the real sector. Available data reveals that over 80 percent of the forex have been utilized for the important of finished consumer goods. Depending on the degree of government intervention. The government is said to intervene in exchange markets when it buys or sells own currency in return for foreign currencies, a country buys or sells its own currency in order to affect its demand and supply.