EXCHANGE RATE MANAGEMENT AND MANUFACTURING PERFORMANCE IN NIGERIA ( 1970 – 2018)
Background of the study
Exchange rate is a means through which a country determines its level of economic performance. Foreign exchange rate provides access to a country’s economic stability. Exchange rate fluctuates daily by the changes in market forces of demand and supply of currencies from one nation to another. Therefore exchange rate is constantly monitored and examined when one has a need to send or receive money from overseas (www.comparetemit.com). Exchange rate refers to the rate to which a currency exchanges for another currency. It is the price of a currency for another currency. Exchange rate is determined by the interaction of demand and supply of foreign exchange. Thus, if demand for a currency rises with the supply being constant, the exchange rate of the currency will appreciate. But if the demand for the currency falls with the supply remaining constant, the exchange rate will depreciate (Ezenwakwelu, 2017).
An exchange rate as a price relationship between a country’s currency and another is one of the most important prices in an open economy that controls the flow of goods, services and capital in a country and which exerts strong pressure on the balance of payments, inflation and other macroeconomic variables. Thus, to safeguard competitiveness, macroeconomic stability and economic growth, the choice and management of an exchange rate regime is essentia (Fahrettin, 2000 cited by Mohammed, 2016).
Exchange rates of most countries’ currencies are fixed in relation to other currencies. Thus, countries keep some reserves of other currencies which enable them to intervene at the foreign exchange market. If demand for US dollar rises against the Nigerian currency (naira), the central bank of Nigeria will therefore, supply the dollar which is in higher demand and withdraw the supply of naira which demand has dropped. As a result of this, naira exchange rate depreciates and dollar exchange rate appreciates. The rise and fall of real exchange rate reveals strength and weakness of a currency in relation to foreign currency and it is a means for illustrating the competitiveness of domestic industries in the global market (Razazadehkarsalari et al., 2011). Appreciation of exchange rate reveals increased imports and reduced exports while depreciation of exchange rate reveals increased export, reduced import and a shift from foreign goods to domestic goods (Aliyu, 2011). However, exchange rate reforms were expected to realize macroeconomic stability and sustainable development in Nigeria. But the country fails to meet the expectation because the different regimes of exchange rate have been with instability and uncertainties. A number of economic maladies with the exchange rate reforms are low level of savings and investment, high rate of inflation, high level of unemployment and poverty (Bakare, 2011). Nigeria’s economy has been characterized by low capacity utilization, high debt burden and inflation, high level of income inequality and unemployment, poverty, etc (Uniamikogbo & Ewanehi, 1998).