Key Features:

No of Chapters: 5
No of Pages: 43

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Introduction:

Foreign exchange is the means of payment for international transaction. It is made up of convertible currencies that are generally accepted for the settlement of international trade and other external obligation. Just like every other commodity, a market is established which works more like any other market having a supply curve, a demand curve and an equilibrium price and quantity. There are also conditions which are held constant (creteris paribus). When these conditions change, the curve shift and there is a change in the equilibrium price quantity. This market for currencies is known as the foreign exchange market.

The foreign exchange market according to the central bank of Nigeria is the medium of interaction between the sellers and buyers of foreign exchange a bid to negotiate a mutually acceptable price for the settlement of international transactions. The sellers of foreign exchange constitutes the supply while the buyers of foreign exchange constitutes its demand. The supply of foreign exchange is derived from oil exports, non-oil export, expenditure of foreign tourist in Nigeria, capital repatriation by Nigerians resident abroad etc.

The demand for foreign exchange on the other hand consist of payments for imports, fianacial commitments to international organizations, external debt service obligations etc.

Before 1958, when the central bank was established and the enactment of the exchange control act of 1962, foreign exchange was earned by the private sectors and held in balances abroad by commercial banks which acted as agents for local exporters. Another feature of this period was that agriculture exports contributed the bulk of foreign exchange receipts. The fact that the British pound sterling was at par with the Nigerian pound sterling with easy convertibility delayed the establishment of an active foreign exchange market.

However by 1958, when the central bank was established and subsequent centralization of foreign exchange authority. In banks, the need for a local foreign exchange market because paramount. Other factors that led to the evolution of the foreign exchange market in Nigeria include:

The changing pattern of international trade institutional changes in the economy. structural shift in production, etc.

By the early 1970’s, the official exchange receipt was enhanced following the sharp rise in prices and demand for crude oil exports which had by now displaced agricultural exports. The foreign exchange market experienced a boom during this period and there became a need for the management of foreign exchange resources. However, it was not until 1982 that comprehensive exchange controls were applied.

The exchange control system failed to evolve an appropriate mechanism for foreign exchange allocation. This led to the development of a dual exchange rate system, comprising of the first and second tier foreign exchange market which was adopted in September 1986. The first tier was managed while the second tier was subjected to market forces. Not only has there been a metamorphosis of the institutional frame work from second tier foreign exchange market (SFEM) to foreign exchange market (FEM) to inter bank foreign exchange market (IFEM) to Autonomous Foreign Exchange market (AFEM) etc, there have been frequent changes in operational guidelines and procedures. Various pricing methods, marginal and weighted average exchange rates determinations and the Dutch Auction System (DAS) among other have also been adopted .

All those aimed at ensuring more efficient allocation and utilization of scarce foreign exchange resources, to enhance the flow of capital into the country, stimulates domestic industrial production, promote export, increase revenue to the government, help reschedule our foreign debt at more profitable terms etc.

When there are fluctuations in foreign exchange rates, various economic activities are usually affected such as the purchasing power, balance of payment, prices of goods and services, import structure, export earning, government revenue, external reserves among others.

These prevailing instability in exchange rates and its effects on various economic variables, will be the areas of concentration of the research work.