THE MANAGEMENT OF FOREIGN EXCHANGE RISK AND CORPORATE PERFORMANCE IN NIGERIA
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1.1 BACKGROUND OF THE STUDY
International Trade and capital flows required a foreign exchange market because despite increased economic interdependence in the world, each country maintains its own national medium of exchange the official foreign exchange market in Nigeria is made up to the federal ministry of finance and the centre Bank of Nigeria as the Apex institution authorized dealers including commercial and merchant bank, development banks and bureau de change. The federal ministry of finance and the central Bank of Nigeria are jointly responsible for the formulation of exchange control policies and procedures while the banking system and bureau de change serve as channels for implementing official policy. Operating side by side with the official foreign exchange market is the parallel or “Black market (Agene, 1991).
Since 1985, the central bank of Nigeria (CBN) has attempted to evolve an optional exchange rate for local currency at the same time sought to achieve a system that preferentially allocates the available foreign exchange to the productive sectors that is agriculture and manufacturing. It has been reluctant to allow the inter-play of forces of demand & supply to determine of exchange rate and allocation of scarce foreign exchange resources. They consequently has been maintain of huge subsidy on the domestic official foreign exchange, this subsidy combined with the private biding system has created severe pressure on the domestic money market, as over N35 billion is subsidized foreign exchange in 1955. However, against the background that foreign” exchange market (FEM) was faced with problem, the federal government of Nigeria (FGN) took two economic measure of declaring the national economic emergency in October 1985 and adopted structural Adjustment Programme (SAP) in July 1986. The programme gave birth the second tier foreign Exchange market (SFEM), this legislation exchange regime in Nigeria since independence in terms of the dismantling of the restrictions and bureaucracies which plagued previous regime (Ayene, 1991).
Structural adjustment programme (SAP) refers to a set of comprehensive economic reform measure designed to correct imbalance in the economy arising from unfavourable external factors as well as in appropriate domestic policies. The objectives of (SAP) was to effectively restructure the consumption and production pattern of the Nigeria economy to eliminate price distortions and heary foreign exchange earner and imports of consumption and producer goods. The major thrust of structural Adjustment programme (SAP) includes the followings:
Allocation resources would be achieved.
- STATEMENT OF THE PROBLEM
The bretton woods conference (1944) established a fixed exchanged rate system where by each currency had a fixed parity (value) in relation to the dollar. In Nigeria, the manufacturing or better still corporate sector depended heavily on imported raw materials, machineries, spare parts and services however foreign exchange did not pose any problem then simply because of the exchange rate.
However, with deregulation of the foreign exchange market, this has resulted in high foreign exchange rate. Research in the past have neglected some specific issues that are capable of up-setting the whole economic system, one such issue and to which this research will address in the impact of foreign exchange policy on the Nigeria corporate sector depend on foreign input for their production.
- JUSTIFICATION OF THE STUDY
Monetary authorities, authorized dealers in the foreign
exchange market, market analysts, and professionals in both the private sectors of the nations economy agree that effective foreign exchange management serve the need to promote a given pattern of development, protect local industries prevent
- Achieve fiscal and balance of payment viable over the period.
- Restructuring and diversify the productive base of the economy in order to reduce dependence on a single major foreign exchange earner and imports.
- Lay the basic for a sustainable non-inflationary economic growth.
- Lesson the dominance of unproductive investment in the public sector, efficiency and encourage the growth potentials of the private sector.
The over-valued naira led to a flight of capital, it thus aided that naira was converted to harder currencies at rates that tended to give more value to the naira than it worth. Now in the regime of foreign market (FEM) and with more favourable exchange rate for foreign currencies would repatriate them back into Nigeria to benefit from the favourable rates now operating which earlier was possible only through black market rates, thus official channels are more to benefit from a net inflow of founds held by Nigerians abroad. The external value of naira is a fundamental value and one established, all other value in the economy since distortion are divergence from optimality once corrected, optional capital flight, promote insurance and stimulate re insurance transactions (Obisesan, 2002)
The importance of foreign exchange management to economic growth development and welfare cannot be over emphasized, as such a proper research work has been carried on the Nigeria foreign exchange market.
The importance of foreign exchange market (FEM) and corporation performance in Nigeria is to checkmate the foreign exchanged malpractices. This achievement is as follows:
To provide the mechanism for dealing in foreign exchange at market determined rates and ultiustely achieved simple equilibrium rates for naira.
Another is to enable Nigeria complete effectively with the financial centre for funds to finance industrial growth and development. To attract inflow of capital especially funds held abroad by Nigeria, to eliminate the illegal traffics in currency and commodity across the country’s boarders, to achieve the convertibility of the naira and even the optimal allocation of resources.
- OBJECTIVES OF THE STUDY
This research work focused on the risk associated with fluctuation in foreign exchange rates and its effect on the
performance of corporate organization in Nigeria.
The specific objectives of the study are as follows;
- To examine the risk fluctuation in exchange rates and control associated with currency management in a multi-currency settings.
- To investigate on the policies one government and corporation organization have and how effective this policies have been.
- To appraise the impact of the policy tools on the growth and development of the nations economy.
- To prefer recommendation based on the research findings.
- RESEARCH QUESTIONS
- Does the various exchange policies help your organization in it’s corporate performance?
- Does fluctuation in the foreign exchange rate affect your net income?
- Does profitability of your organization depends on the difference between the naira and the other major current?
- Do you feel the impact of competition in the faces of those developments.
- Does your unit cost fluctuate
- STATEMENT OF HYPOTHESIS
Based on the research questions and objectives of the study, the following hypothesis stated will be tested.
H0 – Change in exchange rate and control have on dramatic impact on profitability.
H1 – Changes in exchange rate and control have dramatic impact on profitability.
H0 – Variation in holding of currency is not determine by the manager
H1 – Fluctuating exchange rate control is not determined by the manager.
H0 – Fluctuating exchange rate control does not associate with management of currency in multi-currency setting.
H1 – Fluctuating exchange rate control associate with management of currency in multi-currency setting.
- SCOPE AND LIMITATION OF THE STUDY
It is essentially important important on state that the study focused on the general appraisal of the foreign exchange policy in Nigeria as this involve an assessment of how the objective have been realized and the attendants respect of the policy.
The research will be in historical and case-study research which may be limited by insufficient finance, lack of enough time, lack of co-operation from the respondent and the case study. This may hinder thorough research.
However, efforts will be made to ensure that the above constraints and limitations do not affect the effective completion of the research work. The time frame and resource of the study.
Our study will only cover a selected number of corporate organizations with high off-shore activities ranging between the year 1986 – 2005.
The organization of the right from chapter one comprises the introduction which is sub-divided into eight sub-sections as follows: back ground of the study statement of the problem, justification of the study objective of the study statement of research questions,
statement of hypothesis and scope of the study. While chapter two dealt with the literature review. The third chapter deal with research methodology and the forth chapter deals with Data Analysis and presentation while the last chapter comprises of the summery conclusion and recommendation.
- DEFINITION OF THE TERMS
Exchange Control: a mechanism by which a country scalesite harness it’s foreign exchange resources and rationalization for the settlement international indebtedness while ensuring their same favourable development of domestic economic activities without diminishing the value of it’s currency (Nwa ractie 1982).
Exchange Rate: the limit price of a currency in terms of currency of another country.
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