THE IMPACT OF EXCHANGE RATE FLUCTUATIONS ON

INTERNATIONAL TRADE TRANSACTIONS IN NIGERIA BETWEEN

[1980 – 2008]

BY OLUMBA CHIBUZO JUDITH

PG.MBA/07/46864

DEPARTMENT OF ACCOUNTANCY

FACULTY OF BUSINESS ADMINISTRATION

UNIVERISTY OF NIGERIA

ENUGU CAMPUS

NOVEMBER 2008.

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TITLE PAGE

THE IMPACT OF EXCHANGE RATE FLUCTUATIONS ON

INTERNATIONAL TRADE TRANSACTIONS IN NIGERIA BETWEEN

[1980 – 2008]

BY OLUMBA CHIBUZO JUDITH

PG.MBA/07/46864

THIS THESIS IS ACCEPTABLE IN PARTIAL FULFILMENT OF THE

REQUIREMENTS FOR THE AWARD OF MASTER OF BUSINESS

ADMINISTRATION IN ACCOUNTING [MBA]

DEPARTMENT OF ACCOUNTANCY

FACULTY OF BUSINESS ADMINISTRATION

UNIVERISTY OF NIGERIA

ENUGU CAMPUS

NOVEMBER 2008.

3

CERTIFICATION

The work embodied in this project report is original and has not

been submitted in part of full for any other Diploma of this or any other

University.

OLUMBA CHIBUZO JUDITH

PG/MBA/07/46864

This is to certify that Olumba, Chibuzo Judith, a postgraduate

student in the Department of Accountancy with the Registration

Number PG/MBA/07/46864 has satisfactorily completed the

requirements for the award of Master of Business Administration

[MBA] in Accountancy, University of Nigeria, Enugu Campus.

………………………….. ………………………………..

DR. C.M. ODOH DR. [MRS.] R.G. OKAFOR

[SUPERVISOR] [HEAD OF DEPARTMENT]

DATE……………………….. DATE………………………..

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DEDICATION

TO YAHWEH THE GREAT AND MIGHTY GOD, my husband Barr.

Casmir. I. Eme-Odunze, my Parents Elder and Mother H.O. Olumba

and my Siblings Barr. Chukwuemeka Olumba, Mrs Victoria. U. Mpieri

and Miss Ezinne Olumba. And my niece and Nephew Miss Onyeyechi

Mpieri and Master Ebubechi Mpieri and my brother-in-law Engr.

Micheal Mpieri.

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ACKNOWLEDGEMENT

I express thanks to many people for their contributions and

assistance especially Dr. C.M. Odoh my supervisor whom meticulously

proofread the manuscript and made very useful and significant

contributions. My appreciation goes to my Lecturers: R.U. Ugwuoke,

Aguolu, S.N. Kodjo, Mrs. Modebe, Igwillo J.N. (Mrs.), Prof. Mrs. U.

Modum. I also want to express my gratitude to my husband, my

parents, my siblings, my brother –in-law Dr. Cajethan Odunze, my

mother-in-law Mrs. Fidelia Odunze and my sisters-in-law Mrs. Florence

Onyeukwu, Mrs. Angela Nkemuakolam, Mrs. Ngozi Anuforom, Miss

Nkechineyere Odunze and Miss Eberechukwu Odunze, who

contributed to the success of my project.

May God bless you all in Jesus Name, Amen!

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ABSTRACT

The method used in the collection of data for this research

include information gotten from the responses of the questionnaires

distributed. Also there were secondary data which are from books and

magazines. There was analysis of the table involved. At the end of the

study, some of the finding include that actually a remittance lag

actually exists in the Nigerian financial system and that the fluctuating

exchange rate has an effect on the country’s balance of trade.

The recommendation include that external borrowing by, Nigeria

should be in different currencies so as to offset exchange rate risks.

There was also a recommendation that there should be the

establishment of official help to reduce the variability and increase the

incentives on exchange rates. In conclusion it was adjusted that

Nigeria as a developing country and economy needs to grow and

come out of the menace of chronic balance of payment disequilibrium

which is one of the causes of inflation. This could only be achieved

when there is adequate management of international trade and

payment.

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TABLE OF CONTENTS

Table page i

Certification

Dedication

Acknowledgement

Abstract

Table of Contents

CHAPTER ONE

1.1 Introduction

1.2 Statement of the Problem

1.3 Objectives of the Study

1.4 Research Hypothesis

1.5 Significance of the Study

1.6 Limitation of the Study

1.7 Definition of Terms.

1.8 References

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CHAPTER TWO

Literature review

2.1 Factors Determining Exchange Rate

2.2 Exchange Rate Policy

2.3 The Role of Commercial Banks in International Trade

2.4 Exchange rate Fluctuation, Influence on Letter of Credit in Nigeria

2.5 Comparative Advantage among Nations

2.6 Qualifications and Conclusion

2.7 International Trade

References

CHAPTER THREE

Methodology and analysis of Data

3.1 Sources of Data

3.2 Analysis of Data

References

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CHAPTER FOUR

Analysis and Presentation of Data

4.1 Analysis of Data

4.2 Test of Hypothesis

CHAPTER FIVE

Summary, Conclusion and Recommendation

5.1 Summary of finding

5.2 Conclusion

5.3 Recommendations

Bibliography

Appendix A

Appendix B

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CHAPTER ONE

1.1 INTRODUCTION

The process of globalization which is in vague is the rapid

integration of trade relation productive and investment decisions

across the globe by economic agents who employ and move

investment capital and technology around to take advantage of

environments where their competitive edge can manifest in high

returns.

This process which came about with Marshall plan for Europe

after the second world war has greatly expanded trade and economic

contact between nations. The mass movement of commodities often

over great distance have raised the standard of living world wide.

International trade has made available a greater amount and a greater

variety of goods for consumption. International trade has gone hand

with technological improvements in production and with development

of transportation, obviously this advanced in volume and variety of

goods produced and traded. Factories turn out quantities of

commodities large and small, which are not consumed locally but are

promptly distributed to different parts of the word.

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Virtually improvements in transportation and the expansion of

world markets have made possible this large scale of economic

production. The world is now a ‘global village ‘ because of the

continuous flaw of goods in and out of nations and the dependence by

every nations upon foreign sources for variety of goods, which are of

special importance. These nation economics, financial and cultural

activities have boundries. Trade between nations was formerly carried

out by private individuals, however in recent times government has

increasingly engaged in international trade transactions directly with

each other on the basis of governmental decisions.

1.2 STATEMENT OF PROBLEM

International trade involves the movement of goods and services

between two countries. Payment for such goods and services are

however made in an agreed currency between the exporter and the

importer. And because exchange rate are variant the before the

researcher is therefore to determines who bears the burden of the

incidence of the exchange rate fluctuation. More so, since the

exporter /importer cannot source the foreign exchange if not through

the financial institutions. The researcher therefore finds it imperative to

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investigate the rote played by the institutions in the exchange rate

fluctuation vis-à-vis the newly introduced Dutch auction by the central

bank of Nigeria. Furthermore, the world community is a global village

linked together by communications. The various exchange rate in the

international markers are usually influence by the economically viable

and strong economies of the world. The inter play of the economic

powers of the varying strong economic attracted the curiosity of the

researcher to investigate the impact of the world economic powers on

the international trade vis-à-vis balances of payment and of trade. As

we go about our daily lives, it is easy to over look the importance

trade. American ships enormous volumes of food, air planes computer,

and machinery to other countries; and in return we get vast quantities

of oil foot wear, car, coffee, and other goods and services. While

American pride themselves on their ingenuity it is sobering to reflect

how many of our products-including gunpowder, classical music,

clocks, railroads, penicillin and radar, arose from the ingenuity of long-

forgotten people in faraway places.

What are the economic forces that lie behind international trade?

Simply put, trade promotes specialization, and specialization increases

productivity. Over the long run, increased trade and higher productivity

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raise living standards for all nations gradually counties have realized

that opening up their economies to the global trading system is the

most secure road to prosperity.

International Vs Domestic Trade

At the deepest level, trade is trade, whether it involves people

within the same nation or people in different countries. There are,

however, the three important differences between domestic and

international trade, and these have important practical and economic

consequences.

1. Expanded Trading Opportunities

The major advantages of international trade are that it expands

trading horizons. If people were forced to consume only what

they produced at home, they would be poorer on both material

and the spiritual planes.

2. Sovereign Nations:

Trading across frontiers involves people and firms living in

different nations. Each nation is a sovereign entity which

regulates the flow of people, goods and finance cross its

borders. These contrast with domestic trade, where there is a

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single currency, where trade and money flow freely with the

borders and where people can migrate easily to seek new

opportunities. In international trade, political barriers to trade are

sometimes erected when affected groups object to foreign trade

and nations impose tariffs or quotas, this practice is called

protectionalism.

3. Exchange Rates:

Most nations have their own currencies. One may want to pay for

Japanese car in Naira while Toyota wants to be paid in

Japanese Yen according to the exchange rate, which is the

relative price of different currencies (such as the price of

Japanese Yen in terms of Nigerian Naira). The international

financial system must ensure a smooth flow and exchange of

Naira, Yen, and other currencies-or else risk a breakdown in

trade. The financial aspects of international trade are analyzed in

the chapters on macroeconomics.

4. Trends in Foreign Trade:

What are the major components of international trade for

Nigeria? The major components of international trade in Nigeria

are crude oil, cotton, cassava, maize, wheat, etc. Within a

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particular industry, Nigeria exports and imports at the same time

because a high degree of product differentiation means that

different counties tend to have niches in different parts of a

market.

SOURCES OF INTERNATIONAL TRADE

Trade in Goods and Services

Nations find it beneficial to participate in international trade for

several reasons: diversity in the conditions of production, differences in

tastes among nations and decreasing costs of large-scale production.

Diversity in Natural Resources

Trade may take place because of the diversity in productive

possibilities among counties. In fact, there are differences that reflect

the endowments of natural resources. One country may be blessed

with a supply of petroleum, while another may have a large amount of

fertile land. Or a mountainous country may generate large amounts of

hydroelectric power, which it sells to its neighbours, while a country

with deepwater habours may become a shipping centre.

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Differences in Trade

A second reason for trade lies in preference. Even if the

conditions of production were identical in all regions, countries might

engage in trade if their tastes for goods were different.

Differences in Costs

Perhaps the most important reason for trade is differences among

countries in production costs. For example, manufactory processes

enjoys economies of scale, that is, they tend to have lower average

costs of production as the volume of output expands. So when a

particular country gets a head start in producing a particular product, it

can become the high-volume, low-cost producer. The economic of

scale gives it a significant cost and technological advantage over other

countries, which find it cheaper to buy from the leading producer than

to make the product themselves.

1.3 OBJECTIVES OF THE STUDY

The objectives of this research work are as follows:

1. To seek and determine as far as possible methods by which

the risk associated with exchange rate fluctuations can be

minimized.

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2. To determine who should bear the burden of the delayed

interest - the commercial banks, the central bank or the

importer?

3. To ascertain whether the abolition of the compulsory advance

deposit requirement is being complied with and also

determine the implications of the advance full payment of

import duty with regards to importers.

4. To discover if the introduction of counter trade by the

government is alleviating the problems created by the delay of

international trade and to make appropriate

recommendations.

1.4 HYPOTHESIS

The hypotheses for this research work are formulated after

thorough in-depth analysis of secondary data collected and the

assessment of the result of the pilot survey conducted.

The hypotheses are tentative statements that are yet to be

proved; the hypothesis for the research takes its bearing from the

statement of problem and it is as follows:

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Ho: The purchasing powers of the consumers of the goods are not

affected by unstable exchange rate.

Hi: The purchasing powers of the consumers of the goods are

affected by unstable exchange rate.

Ho: Exchange rate fluctuation adversely affects the marketing of the

commodities.

Ho: The fluctuating exchange rate has no impact on the balance of

trade.

Hi: The fluctuating exchange rate has an impact on the balance of

trade.

1.5 SIGNIFICANCE OF THE STUDY

The unique role of importers and commercial banks in enhancing

international trade and economic development cannot be over

emphasized. A sound business idea remains a mere dream until

someone is able to organize the finances necessary to translate the

idea into a business reality, and more often than not, this finance

comes in the form bank credit.

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The significance of this study, the recommendations made at the

end of the study and their implementation make the research

immensely beneficial to the following:

1. Importers who are always trading and in dire need of

finances.

2. Policy makers of the Central Bank of Nigeria who issue

guideline to govern international trade practices.

3. Bankers especially commercial Bank guidelines.

4. Students of economics and other related fields that might take

a clue from this study to further research into the field of

exchange rate fluctuation and international trade.

5. The general public who can contribute and still be informed of

the activities of our banking institutions.

1.6 LIMITATIONS OF THE STUDY

During the course of this research, a number of constraints were

experienced. There was this already known problem of gathering

information – many of the banks approached were not ready to give

out financial information related to exchange rate gains or losses

suffered in the past.

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Gathering information from public organizations such as Federal

Office of Statistics was difficult. The usual Nigerian phrase ‘not on

seat’ nearly frustrated my efforts.

1.7 DEFINITION OF TERMS

International Trade

It is exchange of goods and services between two countries, it

brings increase in the economy.

Exchange Rate

This is the price one country’s currency expressed in another

country’s currency.

Balance of Payment

This means that a foreign exchange rate must be at its

equilibrium level with other countries.

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REFERENCES

Emzign, Paul, (1996): A Dynamic Theory of Forward Exchange, New York Macmillan and Company.

Loyness, J.B. (1962): The West African Currency Board, London.

Oluwanmu, H.O. (1996): Agriculture and Nigeria’s Economic Development. Ibadan, Oxford University Press.

Triffin, Robert (1998): Gold and the Dollar Enris the Future Covertibility. New Haven Vale University Press.

Uzoagu, W.O. (1981): Money and Banking in Nigeria, Enugu First Dimension Publishing Company Ltd.

Van Horne, Sanes, (1978): Financial Market Rates and Flows, Prentice Hall, Inc. Englewood Cliffs New Jersey.

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CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.0 INTRODUCTION

Practically every nation has a monetary unit different from that of

other nations. In a few instances, the units appear similarly as in the

case of the United States of America and Canada but the Canadian

dollar and the American dollar are not the same. In every nation, there

are people who continually want to covert their own money into that of

another country perhaps for goods imported or for a variety of other

reasons.

A rate of exchange can be defined as the number of units of one

currency that must be given to acquire one units of a currency of

another country. It is the price one pays in his home currency to

purchase a certain quantity of funds in another country. The exchange

rate thus becomes a link connecting different national currencies,

which makes international cost and price comparisons possible. In the

absence of official interventions, the exchange rates of these two

internationally traded countries are determined by the forces of

demand and supplying in the foreign exchange market. But in view of

the fact that exchange rate has some influences on the allocation of

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expenditures in between domestics and foreign exchange market. But

in view of the fact that exchange rate has some influences on the

allocation of expenditures in between domestics and foreign goods,

and thus, the flow of aggregate domestic output, income and sending

governments are loathed to allow it to be completely market-

determined. For the most developing countries including Nigeria,

however the national currencies are not market-determined, such

exchange rates are administered.

There are over one hundred national currencies in the world

today, although most of the world’s trade and investment transactions

are carried out in United Nation dollar, British pounds, German marks,

Japanese Yen, Italian Lira, etc.

In Nigeria, national currencies of other countries are generally

listed in terms of the number of Nigerian Kobo contained in each unit

of the foreign currency.

2.1 FACTORS DETERMINING EXCHANGE RATE

A complete explanation of the factors, which determine the rate

of exchange in a free market requires an analysis of such matters as

the conditions, which cause goods to be exported and in fact all the

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foreign trade and influxes which account for all the foreign trade and

financial transactions of a country, why they place and their amount is

what it is.

For present purposes, it is sufficient to note that factors of

production are distribute unevenly throughout the world and that in

some countries, land is in large supply as compared to labour and

capital, the forward rate is the rate that market expects to prevail in the

future or on which there is an agreement to receive or deliver and pay

for exchange at some specified time in future. For example, if a dealer

in foreign exchange agrees to deliver dollar six months from now, it is

known as forward rate. Fluctuations in the forward rate are due to

speculations by market participants.

There is a relationship between the spot exchange rate and the

forward rate is estimated on the basis of historical pattern of the spot

rate.

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2.2 EXCHANGE RATE POLICY: EVOLUTION, DEVELOPMENT

AND CURRENT PRACTICE

i. Global Exchange Rate

The gold exchange standard came into widespread use between

the two world wars. Before 1914 “sterling” was between the world’s

leading trading currency and still in 1931 when its devaluation

narrowed its domain to sterling Area. After World War II, the “Dollar”

became the principal supplement to Gold in international reserve due

to the stimulus provided by the United States through trade and aid to

the war-ravaged World.

The Post war monetary system was buttressed by the creation of

the International Monetary Fund (IMF). This was based on the Bretton

Woods conference of exchange rate within narrow margins. The US

Dollar was the major intervention currency, but the US on its part was

to use gold where necessary to effect settlement of its international

transactions.

By mid 1960’s, however, the system’s rigidity and hence its

potential vulnerability became apparent. There was the unwillingness

of both deficit and surplus countries to vary their exchange rate

policies. Consequently, the US began experiencing a gradual

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dimension of its competitive position and a growing reluctance by its

trading partners to hold their ever increasing dollar balance as the US

had undertaken to convert dollar for gold on request.

As a result of the successive currency crisis, there emerged a

major realignment of the principal currencies in December 1971 in the

form of the Smithsonian Agreement, which led to indenting of the

official margins within which exchange rates were to be maintained,

accompanies with an official price of gold, which meant the

devaluation of the US dollar.

The Floating Exchange Rate system provided the most plausible

alternative to the fixed exchange rate system of the post Bretton Wood

arrangements. Events of the 1960s had shown that the fixed

exchanging world economics and trading environments. Besides, the

fixed Exchange Rate system sometimes necessitates the massive

intervention on the part of the Central Bank in order to maintain

existing parties.

Under the floating exchange rate, demand forces primarily

determine the exchange rate among currencies. The floating rate

system had proved workable with only minimum disruptions on world

trade; international trades have expanded smoothly under this system.

27

This system has also not discouraged the free flow of capital for

productive investments throughout the world and it has enabled the

world monetary system to avoid in recent times the current crisis of the

pre-August 1971 type. Because of the fore-mentioned advantages of

the floating system, the system is bound to prevail for sometime.

However, the world needs a dependable standard of value and a

reliable as well as a stable medium of exchange. But a greater degree

of stability need to be added to the present system of managed

floating of exchange rates, what one banker called “an enlargement of

the present areas of exchange rate stability”. The banking authorities

should intervene more on foreign exchange markets to smoothen out

day-to-day fluctuation as well as maintain the exchange rates at the

levels considered appropriate.

In this regard, the IMF has proceeded to restructure the

monetary system by creating Special Drawing Rights (SDR) whose

value is fixed daily, though the system tends to consolidate the floating

rates system. The adoption of the valuation of SDR is to minimize the

violent fluctuation of rate of exchange of SDR in terms of the

currencies of the member countries. The central argument for flexible

28

exchange rates is that they would allow countries autonomy in their

use of monetary, fiscal and other policy instruments consistently with

the maintenance of whatever degree of freedom in international

transactions to permit exploration of the economies of international

specialization and division of labour. Flexible Exchange Rates are

therefore essential to the preservation of national autonomy and

independence consistent with efficient organization and development

of the world economy.

ii. Nigeria’s Exchange Rate System:

In Nigeria, the Central Bank of Nigeria (CBN) is responsible for

the determination of exchange rate policy. Prior to the establishment of

the CBN in 1959, the West African Currency Board (WACB) issued

notes and coins which calculated as a 100 percent “sterling”. The

WACB system was meant that the exchange rate of the West African

pound was at par with the pound sterling and the external value of the

currency depended solely on the sterling. The WACB system and the

Gold Exchange system were similar. The gold standard system was

one in which domestic currency in circulation was filling backed by

gold that is a 100 percent gold billion standard.

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In 1982, there was an amendment to the CBN Act, which

included the provision for the part of the Nigerian pound be expressed

no longer in terms of sterling but in terms of gold. This means that

instead of the external value of the Nigeria pound fluctuating

automatically with the sterling, the Nigerian Monetary Authorities could

modify it.

Prior to the dollar crisis of 1971, when convertibility of US dollar

exchange rate policy was based entirely on the gold contents of the

US dollar. This same procedure was adopted to derive the exchange

rate of other currencies notably the pound sterling thus fixed exchange

rates were maintained for dollar and sterling, which were the two main

reserve currencies in Nigeria up to August 1971.

The exchange rate of the Nigerian currency was therefore

maintained until the dollar crisis of 15th August 1971 when the currency

balance was inconvertible and this led to sporadic floating of

currencies between 16th and 19th August of the same year, the sterling

dollar gross rates were used to determine Nigerian’s exchange rate.

From 20th August to 30th October, Nigeria introduced a two-tier system

of exchange rate. The Nigerian currency/sterling rate was kept

constant for transaction but verifying rates were used for the Nigerian

30

currency dollar rates using sterling dollar gross rates for non-official

transactions. From 1st November to 18th December 1871 the two-tier

system ceased to operate and instead the official rate of one Nigerian

pound/sterling rate was also maintained devaluation exchange for a

lower given member of units of other currencies. Devaluation is usually

restored to, in order to correct a persistently a diverse trade balance.

When imports become dearer less would be demanded with the price

of exports becoming “cheaper” foreigners would demand more. The

result tends to make trade balances favourable to the devaluation,

which is necessary when a country’s currency gets over-valued. This

implies that external value of a country is higher than its internal value.

In a more practical language it means that the currency when

exchanged into other currencies buy more abroad than it buys at

home. Evidence of progressive over valuation of the Nigerian currency

changes that occurred between 1970 and 1982, the Nigerian currency

corresponding appreciated against of its trading partners such as the

United States and Britain whose currencies were the facts and the

tune devalued respectively. The Nigerian currency also appreciated

against the currencies of its completing supplies of Agricultural exports

such as Ghana, Indonesia, Malaysia, Brazil, whose currencies were

31

allowed to move with changes in the pound sterling and the U.S.

dollar.

In effect the evidence of over valuation of the Nigerian currency

was found in:

[1] Domestic inflation, which led to a fall in the internal value of the

Nigerian currency.

[2] The falling volume of non-oil exports

[3] A persistent averse balance on the non-oil sector.

[4] Capital flight which arose from above, pending the afore

mentioned Nigerian devalued Naira of February 1973 by reducing it’s

gold content by 10 percent.

The international value which might be placed on any currency,

depends on the level of the country’s reserves and the balance of

payment. It was on records that Nigeria’s external asset grew by leaps

and bounds to a height of N3,702.6m in 1975 resulting in a favourable

balance of payments position. The exchange rate policy pursued from

1974 to 1976 was managed, floating of the Naira vis-à-vis the pound

sterling and the U.S. dollar, which reflected the gradual appreciation of

Naira against either pounds sterling of U.S. Dollar, the two currencies

with which international payments are settled. The basic effects of this

32

policy were the cheapening of imports as the costs of imports

demonstrated such money had been consequently reduced.

However, the exchange rate policy adopted between 1974 and 1976

by cheapening imports helped in no small measure in containing the

growing domestic inflation.

2.3. THE ROLE OF COMMECIAL BANKS IN INTERNATIONAL

TRADE.

Commercial banks play an important role in international trade.

Their international departments perform essentially three financial

functions, collection, lending, and the buying selling of foreign

exchange.

The collection function involves the bank in serving as agents for

making payments between its customers and foreign nationals. An

example is where a Brazilian exporter sold carbon black to a tyre

manufacturer in Nigerian, payment for sale would in all probability by

effected, through the international department of a bank located in

Brazil or Nigeria.

33

The lending function for a bank’s international customer utilizes

the various financing instrument available at the bank for example the

bank awards long term and short term loans to international investors.

The purchase and sale of foreign exchange involves a

commercial bank in buying and selling of foreign exchange for may

purposes. Travelers going abroad or returning from a foreign country

may wish to purchase or sell foreign exchange. Residents of a country

wishing to invest elsewhere may have to buy foreign exchange from a

commercial bank. Finally commercial banks act as financiers and

Agents, her they ensure that the exporter gets his money and the

importer in turn receives the shipping documents.

2.4. EXCHANGE RATE FLUCTUATION: INFLUENCE ON

LETTERS OF CREDIT IN NIGERIA

When countries no longer redeemed t heir currencies freely in

gold nor permitted free gold exports, the stabilizing influence on gold

movements no longer existed and the rates prevailing in the market

were demand and supply rates with no limits on either side.

Governments or their Central Banks reduce fluctuation and maintain

rates relatively stable by various prices. According to this system the

34

government would enter the market either as a buyer or seller of

currency and by large sales or purchases influence the rate.

Stabilization operations of this type were to a large extent

superseded by what is known as exchange market, a part from illegal

black market and sometimes a small free market for certain kinds of

transaction.

A shortage of foreign currency is usually main reason for

exchange controls, which are instituted in order to avoid rate

depreciation. Through controls the limited supply of foreign exchange

is rationed for the import of essential commodities. Although

exchange controls are sometimes necessary temporally, their effects

are usually harmful in that they tend to reduce the volume of trade and

to distant production from the most efficient patterns. When they

perpetuate uneconomic exchange rate, they interfere with international

price and cost relationships conclusive to a large and healthy trade.

In Nigerian, two types of license for exchange controls exist they

are:

[a] The specific import license

[b] The open general license.

35

Under the specific import license, the government spells out the

specific nature of goods to be imported, their quantity and value, and

sometimes their sources of supply.

On the other hand the open general license taken care of certain

types of goods whose values; quantity and source of supply are not

specified in the license. In other words, the open general license is not

subject to any quantitative restrictions. This import licensing system

was introduced to achieve a lot of aims, the main one begin to keep

imports in line with the requirements of domestic consumption and

invariably to achieve a favourable balance between the public and

private sectors of the economy, to till the balance in favour of capital

investment as against general consumption of goods.

There are different methods ussed by Nigeria in the settlement of

her international trace payments [i.e. imports] the chief method being

the opening of letters of credit in favour of the exporters. The letter of

credit entails that commercial bank substitute’s credit worthiness on

behalf of the importer. In other words the bank guarantees the

exporter. In other words, the bank guarantees the exporter the

payment of his goods as soon as he effects shipment or when the

foreign exchange is available. In the case of payment at sight the

36

importer arranges with the exporter to make an initial part payment on

the invoice value of the shipment. The balance thus is paid on the

arrival of the goods at its port of destination the exporter forwards the

shipping documents through a commercial bank in the country of the

importer [unusually the importer’s bank and also instructs the bank to

obtain the outstanding balance from the importer before releasing the

shipping documents. The amount received from the importer is then

remitted to the exporter. At the time the importer wants to collect the

shipping documents he pays the naira equivalent of the invoice.

Problems arise in the international transaction because of the

inefficiency in our financial system which introduces delays or lags or

lags averaging between 60 -120 days between the times the funds are

actually remitted to the exporter. This remittance lag introduces

exchange risk in the transaction, which may result in either exchange

loss or gain on the part of the importer.

But what the commercial banks do is just to adjust the importer’s

account with the value of the gain or loss arising from exchange rat

fluctuation. Where there is an exchange rate loss, the commercial

banks simply debit the importer’s account and treat the amount of the

loss as an “overdraft” and charge interest accordingly. But where

37

there is exchange rate gain, the bank may not credit the importer’s

account with the amount of the gain. Importers were of the general

opinion that their accounts should be credited with the account of any

exchange rate gain and that the commercial banks in the case of

interest payments, should be reimbursed by the Central Bank.

Another discovery made was that government importers were

given priority as regards remittances there by suffering minimal

exchange rate losses. Most “ordinary” importers however, contend that

their activities were also of equal importance to the nation as a whole.

2.5. COMPARATIVE ADVANTAGE AMONG NATIONS

It is only common sense that countries with produce and export

goods for which they are uniquely qualified. But there is a deeper

principle underlying all trade in a family, within a nation, and among

nations that goes beyond common sense. The principle of

comparative advantage holds that a country can benefit from trade

even it is absolutely more efficient [or absolutely less efficient] than

other countries according to comparative advantage provides mutual

benefits to all countries.

38

Uncommon Sense

Take a world in which there are only two goods, computers and

clothing suppose that Nigeria has higher output per worker [or per unit

of input] that the rest of the world in making both computers and

clothing. But suppose Nigeria is relatively more efficient in the

production of computers than it is in clothing . For example, it might be

50 percent more productive in computers and 10 percent more

productive in clothing than other countries. In this case, it would

benefit Nigeria to export that good in which it is relatively more efficient

[computers] and import that good in which it is relatively less efficient

[clothing].

Or consider a poor country like workers use hand looms and

have productively that is only a fraction of that of workers in

industrialized countries, hope to export any its textiles? Surprisingly,

according to the principles of comparative advantage, Mali can

benefits by exporting the goods in which it is relatively less efficiently

[like turbines and automobiles].

The principle of comparative advantage holds that each country

will benefit if it specializes in the production and export of those goods

that it can produce at relatively low cost. Conversely, each country will

39

benefit it is imports those goods which it produces at relatively high

cost.

Thus simple principle provides the unshakable basis for

international trade.

2.6. QUALIFICATIONS AND CONCLUSIONS.

We have now completed our look at the elegant theory of

comparative advantage its conclusion applies for any number of

countries and commodities. More –over, it can be generalized to

handle many inputs changing factor proportions, and diminishing

returns. But we cannot conclude without noting two important

qualifications to this elegant theory.

[1] Classical Assumption

From a theoretical point of view, the major defect of comparative

advantage theory lies in its classical assumptions. Thus theory

assumes a smoothly working competitive economy. Trade might lead

to worsening environmental, problems if there are local or global public

goods. More over, inefficiencies might arise in the presence of

inflexible prices and wages, business cycles and involuntary

unemployment. When there are macroeconomic or microeconomic

40

market failures, trade might well push a nation inside its PPF. When

the economy is in depression or the price system malfunctions

because of environmental or other reasons, we cannot be sure that

countries will gain from trade.

Given there reservations there can be little wonder that the

theory of comparative advantage sells at a big discount during

business down turns.

In the Great Depression of the 1930s, as unemployment sourced

and real outputs fell nations built high tariff walls tariff borders and the

volume of foreign trade shank sharply. Additionally, during 1990’s,

free trade was increasingly attacked by environmental advocates, who

saw. It as a means of allowing companies to dump pollutants in ocean

or in countries who lax regulations labour unions and

environmentalists were among the leading critics of the latest attempts

to promote free trade.

[2] Income Distribution

A second proviso concerns the impact on particular people,

sectors, or factors of production. We should above that opening a

country to trade will raise a country’s national income the country can

41

consume more of all goods and services than would be possible if the

borders ere sealed to trade.

But this does not mean that every individual fir, sector, or factor

of production will benefit from trade. If, through imports, free trade

increases the supply of goods that are produced by particular factors

of production or in particular regions, those factors or regions may end

up wise, lower income than they had under restricted trade suppose

that free trade increase the supply of cheap cotton shirts in Nigeria we

would not be surprised to learn that textile firms suffered losses and

bankruptcies. Recent studies indicate that unskilled workers in high-

come countries have suffered reductions in real wages in the last three

decades because of the increased imports of goods from low-wage

developing counties. Wage losses occurred because imports are

produced by developing country factors that are close substitutes for

the unskilled labour in high –income countries.

The theory of comparative advantage shows that other sectors

will gain more than the injured sectors will lose. Moreover, over long

periods to time, those displaced from low wage sectors eventually

gravitate to higher-wage jobs. But those who are temporarily injured

42

by international trade are genuinely harmed and are vocal advocates

for protection and trade barriers.

Notwithstanding its limitation, the theory of comparative

advantage is one of the deepest truths in all the economies.

Nationals that disregard comparative advantage pay a heavy price in

terms of their living standards and economic growth.

2.7. INTERNATIONAL TRADE

Is the system by which nations export and import goods,

services and capital? International economics involves many of the

most controversial questions of the day. What does Nigeria benefit

from importing almost one quarter of its automobiles and half of the

petroleum? What are the advantage of free trade? How the

principles governing trade should be extended to intellectual property

rights such as patents and copyright? The economic states are high in

finding wise answers to these questions.

According to Reem, Heakal; [2008]: International Trade, the wall

Street Journal is the exchange of goods and services between

countries. This type of trade given rise to a world economy, in which

prices, or supply and demand, affect and are affected by global

43

events. For example political change in Nigeria could result in an

increase in the cost of labour, thereby increasing the manufacturing

costs for an American petroleum company based in Nigerian which

would then result in an increase in the price that you have to pay to

buy the petroleum at all local station. A decrease in the cost of labour,

on the other hand would result in you having to pay less fo your

petroleum products.

Trading globally gives consumers and countries the opportunity

to be exposed to goods and service, not available in their own

countries. Almost every kind of product can be found on the

international market: food, clothes, petroleum products, spare parts,

oil, jewelry, wine, stock, currencies and water. Services are also

traded: tourism, banking, consulting and transportation.

A product that is sold to the global market is an export, and a

product that is bought from the global market is an import. Imports

and exports are accounted for in a country’s current account in the

balance of payments [for more on this, see the articles “What is the

balance of payments” and “understanding Account in the balance of

payment” on http”//www investopedia.con

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Increased Efficiency of Trading Globally:

Global trade allows wealthy countries to use their resources,

whether labour, technology or capital efficiently. Because countries

are endowed with different assets and natural resources [Land,

Industries and technology]. Some countries may produce the same

good more efficiently and therefore sell it more that other counties. If

a country cannot efficiently produce and items, it can obtain the item

by trading.

Exchange Rate

According to “Investment Dictionary” [2008] edition is the price of

one country’s currency expressed in another country’s currency. In

other works, the rate at which one currency can be exchanged for

another. For example, the higher the exchange rate for one euro

terms of one yen, the lower the relative value of the yen.

According to “Financial and Investment Dictionary” Exchange

rate is the price at which one country’s currency can be converted into

another’s. The exchange rate between Nigerian Naira and the U.S.

Dollar is different from rate between Nigerian Naira and Japanese yen.

45

A wide range of factors influence exchange rates, which generally

change slightly each day. Some rates are fixed by agreement.

Exchange rate is the price at which one countries currency can

be converted into another “Business Dictionary”. The exchange rate

between Nigerian Naira and German Mark is different from that

between Naira and British pound. Most exchange rates float freely

and change slightly each trading day some rates are fixed and do not

change as a result of market prices.

According to “Britannica Concise Encyclopedia”, exchange rate

is the price of one country’s money in relation to another’s Exchange

rate may be fixed or flexible. An exchange rate is fixed when two

countries agree to maintain a fixed rate through the use of monetary

policy. Historically the most famous exchange rate system was the

gold standard: In the late 1850s one ounce of gold was defined as

being worth 20 U.S. dollars and 4 pounds sterling, resulting in an

exchange rate is flexible, or “floating” when two countries agree to let

international market forces determine the rate through supply and

demand. The rate will fluctuate with a country’s exports and imports.

Most world rate currently takes place with flexible exchange rate that

fluctuates with relatively fixed limits.

46

According to Economics Dictionary, exchange rate is the price at

which one currency can be purchased with another currency or gold.

At any time, for example, one U.S. dollar can purchase a certain

number of Eureros of Japanese yen or Nigerian Naira.

According to “Wikipedia”, exchange rate also known as foreign

exchange rate, force rate or FX rate between two currencies specifies

how much one currency is worth in terms of the other. The foreign

exchange market is one of the largest markets in the world.

The spot exchange rate refers to the current exchange rate. The

forward exchange rate refers to an exchange rate that is quoted and

trade today but for delivery and payment on a specific future date.

Quotation

An exchange rate quotation is given by stating the number of

units of a price currency that can be bought in terms of 1 unit current

[also called base currency]. For example in quotation that says

EUR/NAIRA exchange rate is 125.3 [NAIRA per EUR], the price

currency is NAIRA and the unit currency is EUR.

Quotes using a country’s house currency as the price currency

[e.g 0.50593 = & 1 m the UK] are known as direct quotation or price

47

quotation [from that country’s perspective] LIJ] and are used by most

countries.

Quotes using a country’s home currency as the unit currency

[e.g & 1.97656 = E1 m the UK] are known as indirect quotation

or quantity quotation and indirect quotation or quantity quotation and

are used in British new papers and are also common in Australia, New

Zealand Nigeria and Euro.

- Direct Quotation: I home currency unit = X foreign currency

unit

- Indirect Quotation: I home currency unit = X foreign currency

units

Note that, using direct quotation, if the home currency is

strengthening [i.e appreciating, or becoming more valuable] then the

exchange rate number decreases conversely, if the foreign currency is

strengthening, the exchange rate number increase and the home

currency is depreciating.

Free or Pegged

If a currency is free-floating, its exchange rate is allowed to vary

against that of other currencies and is determined by the market forces

of supply and demand. Exchange rates for such currencies are likely

48

to change almost constantly as quoted on financial markets, mainly by

banks, around the world. A movable or adjustable peg system is a

system of fixed exchange rates but with a provision for the

devaluations of a currency.

Nominal and Real Exchange Rates

The nominal exchange rate is the price in domestic currency of

one unit of a foreign currency.

The real exchange rate [RER] is defined as

RER = e[P*]

P

Where P is the domestic price level and P* the foreign price level.

P and P* must have the same arbitrary value in some chosen base

year.

Hence in the base year, RER = e

The RER is only a theoretical ideal. In practice there are foreign

currencies and price level values to take into consideration.

Correspondingly, the model calculations become increasingly more

complex. Furthermore, the model is based on purchasing power parity

[PPP], which implies a constant RER. The empirical determination of

a constant RER value could never be realized, due to limitations on

49

data collection. PPP would imply that the RER is the rate at which an

organization can trade goods and services of one economy [e.g.

country] for those of another. For example if the price of a good

increase 10% in Nigeria and the Japanese currency simultaneously

appreciates 10% against Nigerian currency, then the price of the good

remains constant for some one in Japan. The Nigerians however

would still have to deal with the 10% increase in domestic prices. It is

also worth mentioning that government enacted tariffs can affect the

actual rate of exchange, helping to reduce price pressures. PPP

appears to hold only in the long term [3-5 years] when prices

eventually correct towards parity.

More recent approaches in modeling the RER employ a set of

macro economic variables, such as relative productivity and the real

interest rate differential.

NR = [RR + 1] [Expected Inflation + 1] - 1

Interest Rate Parity

[IRP] States that an appreciation or depreciation of one

currency against another currency might be neutralized by a change in

the interest rate differential. If Nigerian interest rate exceed Ghana

interest rates that Naira should depreciate against cedes, by an

50

amount that prevents arbitrage. The future exchange rate of the Naira

is said to be at a discount because its buys fewer cedes in the forward

rate that it does in the spot rate.

IRP showed no proof of working after 1990s. Contrary to the

theory, currencies with, high interest rate characteristically appreciated

rather than deprecated on the reward of the containment of inflation

and a higher yielding currency.

Balance of Payments Model

This model holds that a foreign exchange rate must be at its

equilibrium level. The rate which produces a stable current account

balance. A nation with a trade deficit will experience reduction in its

foreign exchange reserves which ultimately lowers [depreciates] the

value of its money/currency. The cheaper currency renders the

nations goods [exports] more affordable in the global market place

while making imports more are forced down and exports rise, thus

stabilizing the trade balance and the currency toward equilibrium.

Like PPP, the balance of payments model focuses largely on

tradable goods and services, ignoring the increasing role global capital

flows. In other worlds, money is not only chasing goods and services,

but to a larger extent, financial assets such as stocks and bonds. They

51

flows go into the capital account item of the balance of payments, thus,

balancing the deficit in the current account. The increase in capital

flows has given rise to the asset market model.

Asset Market Model

The explosion in trading of financial assets [stock and bounds]

has reshaped the away analysis and traders look at currencies.

Economic variables such as economic growth, inflation and

productivity are no longer the only divers of currency movements. The

proportion of foreign exchange transactions stemming from cross

border-trading of financial assets has dwarfed the extent of currency

transactions generated from trading in goods and services.

The asset market approach views currencies as asst prices

traded in an efficient financial market. Consequently, currencies are

increasingly demonstrating a strong correlation with, other markets,

particularly of equities like the stock exchange, money can be made or

lost on the foreign exchange market by investors and speculators

buying and selling at the right times. Currencies can be traded at spot

and foreign exchange options markets. The spot markets represents

current exchange rate whereas options are derivatives of exchange

rates.

52

Fluctuation in Exchange Rate

A market based exchange rate will change whenever the values

of either of the two component currencies change. A currency will

tend to become more valuable whenever demand for it is greater than

the available supply. It will become less valuable whenever demand is

less than available supply [this does not mean people no longer want

money, it just means they prefer holding their wealth in some other

form, possibly another currency].

Increased demand for a currency is due to either an increased

transaction demand for money, or an increased speculative demand

for money. The transaction demand for money is highly correlated to

the country’s level of business activity, gross domestic product [GDP],

and employment levels.

The more people there are out of work, the less the public as a

whole will spend on goods and services. Central banks typically have

little difficulty adjusting the available money supply to accommodate

changes in the demand for money due to business transactions.

The speculative demand fo money is much harder for a central

bank to accommodate but they try to do this by adjusting interest rates.

An investor may choose to buy a currency if the return [that is the

53

interest rat] is high enough. The higher a country’s interest rates, the

greater the economic growth, in particular since large currency

speculators may deliberately create downward pressure on a currency

in order to force that central bank to sell t heir currency to keep its

stable [once this happens, the speculator can buy the currency bank

from the bank at a lower price close out their position, and thereby

take a profit.]

In choosing what type of Asset to hold, people are also

concerned that the asset will retain its value in the future. Most people

will not be interested in a currency if they think it will devalue. A

currency will tend to lose value, relative to other currencies, higher, if

the country’s level of output is expected to decline, or if a country is

troubled by political uncertainty.

Possible Benefits of Trading Globally

International trade not only results in increased efficiency but

also allows countries to participate in the economy, encouraging the

opportunity of foreign companies and other assets. In theory

economies can therefore efficiently and can more easily become

competitive economic participants.

54

For the receiving government, FDI is a means by which foreign

currency and expertise can emerge. These raise employment levels

and theoretically lead to a growth in the gross domestic product [GDP]

FDI offers company expansion and growth, which means higher

revenue.

The Economics of Protectionism

Having examined the impact of tariffs on prices and quantities,

we now turn to an analysis of the arguments for and against

protectionism. The arguments for tariff of quota protection against the

competition of foreign imports take many different forms. Here are the

main categories:

1. Non-economic arguments that suggest it is desirable to

sacrifice economic welfare in order to subsidize other national

objectives.

2. Arguments that are based on a misunderstanding of

economic logic, and

3. Analyses that rely on market power or macroeconomic

imperfections.

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Non-economic Goals:

If you are ever on a debating team given the assignment of

defending free trade, you will strengthen your case at the beginning by

conceding that there is more to life than economic welfare. A nation

surely should not sacrifice its liberty, culture, and human rights for a

few dollars of extra income.

The US semi conductor industry provides a useful example here.

In the 1980s, the Defense Department claimed that without an

independent semi conductor industry, the military would become

excessively dependent on Japanese and other foreign suppliers for

dups. to use in high-technology weaponry. This led to an agreement to

protect the industry. Economists were skeptical about the value of this

approach. Their argument did not question the goal of national

security; rather, it focused on the efficiency of the means of activity the

desired result, and they thought that protection was more expensive

than a policy targeting the domestic industry perhaps a program to buy

a minimum number if high quality dups.

National security is not the only non economies goal in trade

policy. Countries may desire to preserve their cultural traditions and

environmental conditions. France recently has argued that its citizens

56

need to be protected from “uncivilized” American Movies. The fear is

that the French film industry could be drowned by the new wave of

stunt filled high-budget Hollywood thrillers. As a result, France has

maintained strict quotas on the number of US movies and television

shows that can be imported.

Unsound Grounds for Tariffs:

Mercantilism:

To Abraham Lincoln has been attributed the remark “I don’t know

much about the tariff. I do know that when I buy a coat from England, I

have the coat and England has the money. But when I buy a coat in

America, I have the coat and America has the money”.

This reasoning represents an age-old fallacy typical of the so-

called mercantilist writers of the seventeenth and eighteenth centuries.

They considered a country fortunate which sold more goods than it

bought, because such a “favourable” balance of trade meant that gold

would flow into the country to pay for its export surplus.

The mercantilist arguments confuse means and ends.

Accumulating gold or other monies will not improve a country’s living

standard. Money is worth-while not for its own sake but for what it will

buy from other countries. Most economists today therefore reject the

57

idea that raising tariffs to run a trade surplus will improve a country’s

economic welfare.

Tariffs for Special Interests:

The single most important source of pressure for protective

tariffs is powerful special-interest groups. Firms and workers know

very well that a tariff on their particular products will help them even if it

imposes costs on others. Adam Smith understood this point well. To

expect freedom of trade is as absurd as to expect utopia. Not only the

prejudices of the public, but what is much more unconquerable, the

private interests of many individuals, irresistibly oppose it.

If free trade is so beneficial to the nation as a whole, why do the

proponents of protectionism continue to yield such a disproportionate

influence in legislatures? The few who benefit gain much from specific

protection and therefore devote large sums to lobbying politicians. By

contrast, individual consumers are only slightly affected by the tariff on

one product; because losses are small and widespread, individuals

have little incentive to spend resources expressing an opinion on every

tariff case. A century ago, outright bribery was used to buy the votes

necessary to pass tariff legislation. Today powerful political action

committees (PACS) financed by labour or business, round up lawyers

58

and drum up support for tariffs or quotas on textiles, lumber, steel,

sugar and other goods.

If political votes were cast in proportion to total economic benefit,

nations would legislate most tariffs out of existence. But all dollars of

economic interests do not always get proportional representation. It is

much harder to organize the masses of consumers and producers to

agitate for the benefits of free trade than it is to organize a few

companies’ labour unions to argue against “cheap Chinese labour” or

“unfair Japanese competition”. In every country the tireless enemies of

free trade are the special interests of protected firms and workers.

A dramatic case is the US quota on sugar which benefits a few

producers while costing American consumers over $1 billion a year.

The average consumer is probably unaware that the sugar quota costs

1 cent a day per person, so there is little incentive lobby free trade.

Competition from Cheap Foreign Labour:

Of all the arguments for protection, the most persistent is that

free trade exposes Nigerian workers to competition from low-wage

foreign labour. The only way to preserve high Nigerian wages, so the

argument goes, is to protect domestic workers by keeping out or

putting high tariffs on goods produced in low wage countries. An

59

extreme version of this contention is that under free trade Nigeria

wages would converge to the low foreign wages.

In Summary:

The cheap foreign labour argument is flawed because it ignores

the theory of comparative advantage.

A country will benefit from trade even though its wages are far

above those of its trading partners.

High wages come from high efficiency, not from tariff protection.

Retaliatory Tariffs:

While many people would agree that a world of free trade would

be the best of all possible worlds, they note that this is not the world

we live in. They reason, “As long as other countries impose import

restrictions or otherwise discriminate against our products, we have no

choice but to play the protection game in self-defense.

Import Relief:

In Nigeria and other countries, firms and workers that are injured

by foreign competition attempt to get protection in the form of tariffs or

quotas. Today, relatively little direct tariff business is conducted on the

60

floor of congress. Congress realized that tariff politics was too hot to

handle and has set up specialized agencies to investigate and rule on

complaints. Relief measures include the following actions:

� The escape clause was popular in earlier periods, it allows

temporary import relief (tariffs, quotas, or export quotas)

negotiated with other countries. When an industry has been

“injured” by imports, injury occurs when the output,

employment, and profits in a domestic industry have fallen

while imports have risen.

� Antidumping tariffs are levied when foreign countries sell in

United States at prices below average costs or at prices lower

than those in the home market. When dumping is found, a

“dumping duty” is placed on the imported good.

� Countervailing duties are imposed when foreigners subsidize

exports. They have become the most popular form of import

relief and have been pursued in hundreds of cases.

The justification for this measure is that import relief sounds

reasonable, but it actually is completely counter to the theory of

comparative advantage; that theory says that an industry, which

cannot compete with foreign firms ought to be injured by imports. From

61

an economic vantage point, less productive industries are actually

being killed off by the competition of more productive domestic

industries.

This sounds ruthless indeed. No industry willingly dies. No region

gladly enjoys unemployment and hardship. The weak industry and

region feel they are being singled out to carry the burden of progress.

POTENTIALLY VALID ARGUMENTS FOR PROTECTION

Finally, we can consider three arguments for protection that may

have true economic merit:

- Tariffs may shift the terms of trade in a country’s favour

- Temporary tariff protection for an “infant industry with

growth potential may be efficient in the long-run

- A tariff may, under certain conditions, help reduce

unemployment.

The Terms of Trade or Optimal-Tariff Argument

One valid argument for imposing tariff is that doing so will shift

the terms of trade in a country’s favour and against foreign countries.

The phrase “terms of trade” refers to the ratio of export prices to import

prices. The idea is that when a large country levies tariffs on its

62

imports, it reduces demand for the good to the country. Such a change

will improve the country’s terms of trade of trade and increase

domestic real income. The set of tariffs that maximizes domestic real

income is called the optimal tariff.

The terms-of-trade argument goes to say that the tariff will

increase the price of domestic oil and will reduce the world demand for

oil. The world market price of oil will therefore be bid down. So part of

the tariff actually falls on the oil producer.

Tariffs for Infant Industries

In his famous Report on Manufactures (1791), Alexander

Hamilton proposed to encourage the growth of manufacturing by

protecting “infant industries” from foreign competitions. According to

the doctrine, which received the cautious support of free trade

economists like John Stuart Mill and Alfred Marshall, there are lines of

production in which a country could have a comparative advantage if

only they could get started.

Such infant industries would not be able to survive the rough

treatment by larger bullies in the global market place. With some

temporary nurturing, however, they might grow up to enjoy economies

63

of mass production, a pool of skilled labour, inventions will adapt to the

local economy, and the technological efficiency typical of many mature

industries. Although protection will raise prices to the consumer at first,

the mature industry would become so efficient that cost and price

would actually fall. A tariff is justified if the benefit to consumers at that

later date would be more than enough to make up for the higher prices

during the period of protection.

Thus argument must be weighed cautiously. Historical studies

have turned up some genuine cases of protected infant industries that

grew up to standard on their own feet.

In fact, the history of tariffs reveals many cases like steel, sugar,

and textiles in which perpetually protected infants have not shed their

dippers after many years.

Tariffs and Unemployment

Historically, a powerful motive for protection has been the desire

to increase employment during a period of recession or stagnation.

Protection creates jobs by raising the price of imports and diverting

demand toward domestic production.

However, while economic protection may raise employment, it

does not constitute an effective program to pursue high employment,

64

efficiency, and stable prices. Macroeconomic analysis shows that

there are better ways of reducing unemployment than by imposing

import protection, an inefficient way to create jobs or to lower

unemployment. A more effective way to increase productive

employment is through domestic monetary and fiscal policy.

Other Barriers to Trade

Quotas have much the same effects as tariffs, for they prevent

the comparative advantages of different countries from detaining

prices and outputs in market place.

In a sense, non tariff barriers have been substitutes for more

conventional tariffs as the latter have been reached.

Multilateral Trade Negotiations:

The trade barriers erected during the depression helped raise

prices and exacerbated tries attempted to raise employment and

output raising barriers at the expense of their neighbours. Nations

soon learned the end of the tariff retaliation game.

65

Negotiating Free Trade:

The most far-reading trade accord has been the movement

toward a single market among the major European countries. Since

World War II, the nations of the European Union (EU) have developed

a common market with minimal barriers to international trade or

movement of factors of production. The first step involved in

eliminating all internal tariff and regulatory barriers to trade and labour

and capital flows. The most recent step, analyzed in was the

introduction of a common currency (the “Euro”) for most of the

members of EU.

Appraisal

After World War II, the policy makers around the world believed

firmly that free trade was essential for world prosperity. These

convictions translated into several successful agreements to lower

tariffs.

Economic studies generally show tariffs, countries have

benefited from lower trade barriers as trade struggle to preserve open

markets is constantly tested as the political and economic environment

changes.

66

REFERENCES

Crasser, Howard D. (1932): Management Policies for Commercial Banks.

Daniels, J.D. Ogram (1997): E.N. Raddebagh, L.H. International

Business: Environment and Operations. Massachusetts Adison Wesley Publishing Company.

Emzig, Paul (1995): The History of Foreign Exchange Cambridge

University Printing House. Emzig, Paul (1996): A Dynamic Theory of Forward Exchange. New

York, Macmillan and Company. Loyness, J.B. (1962): The Wet-African Currency Board, London. Nwankwo, G.O. (1980): The Nigerian Financial System, London,

Macmillan Press Limited. Oluwanmu, H.O. (1996): Agriculture and Nigeria’s Economic

Development, Ibadan Oxford University Press. Triffin, Robet (1998): Gold and the Dollar Crisis: the Future of

Convertibility. New Haven Yale University Press. Uzoagu, W.O. (1981): Money and Banking in Nigeria. Enugu. Port

Dimension Publishing Company. Van Horne, Sarnes (1978): Financial Market Rates and Flows.

(Prentice Hall, Inc. Englewood Cliffs New Jersey. Young, John Parke (1981): International Economy, New York. The

Ronald Press Company.

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ARTICLES Ezikpe, J.N. Exchange Rate Fluctuations and Future Contracts. Friedman, Living: “Foreign Exchange Control and the Evolution of

International Payment System in IMF. Goldstein, Morris (1984): “Writher the Exchange Rate System in

Finance and Development”, June Vol. 21 No. 2. Htt:iiww. Investopedia.com/articles/03/112503.asp?partner answers. http://www.answers.com/topic/exchange -rate. Macmillan, Claude: “The Swap as a Hedge of Foreign Exchange” in

California (Management Review No. 4 Summer).

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CHAPTER THREE

METHODOLOGY AND ANALYSIS OF DATA

3.1 SOURCES OF DATA

This project work is not the outcome of a purely empirical

research in determining the elements of costs associated with

international trade transactions in Nigeria, we made use of secondary

data.

The secondary data will be collected form an intensive review of

related literature in books, magazines (Central Bank of Nigeria and

Commercial Banks annual reports), Newspapers (Business Times,

Guardian) and pamphlets.

Besides these basic sources, the writer had some enlightening

discussion with some banking industry officials, members of the

general public and officials of governmental and international

agencies.

3.2 ANALYSIS OF DATA

The method used for data analysis of the tables involved: Table

3.2.1 shows the percentage increase in turnover of the manufacturing

industries in Nigeria as she is endowed with human and physical

resources necessary for industrial development. She has a large and

consumptive entrepreneurial class capable of exploiting opportunities

in both domestic and foreign markets.

While table 3.2.2 involves the issue of late interests has not been

solved. The banks have refused to bear any part of the burden

because in their thinking the federal governments inability to settle

69

foreign bills in time gives raise to the interest charges. This simplistic

approach however fails to touch the core of the issues. There are

customers who had found and paid full amount for the opening of a

particular letter of credit. There are those who did not have sufficient

funds and had to borrow from the financial institutions funds which to

use to open the letter of credit.

Table 3.2.1

CROSS PRODUCT OF MANUFACTURING INDUSTRIES IN

NIGERIA, 1985 PRICES 1980 – 1990

MILLION PERCENTAGE

INCREASE

1980 1984 1987 1990 1980 1990

Bakeries - 0.1 0.1 0.6 31

Oil mining 0.7 0.7 4.3 5.2 12

Margarine - - - - 13

Beer & soft

drinks

0.6 1.5 3.4 5.6 18

Tobacco 28 4.5 4.2 4.4 01

Textiles - 0.1 0.8 1.2 27

Rubber

processing

- 0.1 1.2 2.7 147

cement - - 0.7 3.6 -

Total

manufacturing

deduction

6.3 12.9 21.8 31.3 0.8

70

Source: “Twenty years of Central Bank in Nigeria” (Research Department, (CBN) P. 20 less than N1,000,000. In the 1985-1991 plan period, public sector investment in the

sector was estimated at N 8.3 billion as against N 40 billion for the

private sector.

Structurally, the manufacturing industry is still dominated by low

technology, light industries such as food beverages and textiles. Real

engineering industry such as the manufacture of agricultural and

industrial machinery and construction equipment have not been very

significant. The import content of the sector is still high meaning that

they depend heavily on imports which is subject to infrastructural

inadequate credit facilities. But advanced co-operating their technical

superiority, which enabled them to manipulate, paid for with

accumulated foreign exchange resources. And the foreign exchange

resources are derived principally from the export of one product the

price of which industrial countries have organized they to determine.

Table 3.2.2

ISSUE OF DELAYED INTEREST

CUSTOMER CUSTOMER

With fund Bank Without

fund

Bank

Interest not paid by

Bank

(32,700) 32,700 (32,700) 32,700

Delayed interest 87,500 (87,500)

(6 months approx)

71

Interest on borrowed

fund

(65,000) 65,000

Currency fluctuation 167,000 (167,000)

Service charge (2,509) 2,509 (2,509) 2,509

Total (N280,709) (N35, 209) (N354,839) (N 100,339)

Source: Annual Reports and Statement of Accounts, CBN 1980 -

1993.

Table 3.2.2 above involves the customer with funds and the

customer without funds.

For customer with funds, he opens the letter of credit (LC) and

the bank debits his account or received money from him for the full

value of the letter of credit. From this point on, the bank holds money

on behalf of the customer for the settlement of the LC and release is

received from the Central Bank of Nigeria (CBN).

To date, there are many customers whose funds have been held

by commercial bank. For over six months N 1 million put in a deposit

account would yield N 131 daily or N 32, 700 in 6 months at a minimal

rate of 61/2 percent. Now the overseas bank debits the CBN with

interest charges on the outstanding LC. The rate used by the overseas

bank is usually around 15 percent. The CBN passes the whole charge

on to the commercial bank that in the turn passes the whole charge to

the customers. In effect the customer loses his 61/2 percent interest

and op top of that pays a charge of 15 percent on the LC value.

Perhaps it is pertinent to add that the customers also pay N 2,000,620

percent × N 1million as service charge or commission on turn over.

72

For customer without funds, the procedure and charge are the

same as for the customer with funds except that he plays interest at

the rate of 13 percent per annum on the borrowed money. This

amounts to N 65,000 in 6 months; this is the final cost borne by the

customers arising from exchange rate fluctuations. We are aware that

the Naira is progressive by depreciating in relation to other currencies

especially the United States Dollar ($US).

Consider then a customer who opened the LC when the

conversion rate stood at $1.4 to N 1. Assuming the LC value to be

1,400,000 he would have paid N 1,000,000 6 months later, at the rate

of 1.2 would be required to pay a further N 167,000 the costs are

shown in brackets as in the table 3.2 above.

When the banks say they will not bear any part of the delayed

interest burden, they mean that they will pass the whole of the delayed

interest. Charges on to the customer on the latter’s money held by

them. Which has given rise to the interest charge is the letter of credit,

which has been opened for the benefit of the customers. Again, the

fortunes of business houses are sometimes controlled by government

policies.

It is for the business person to take such contingences into

consideration. To this extent, therefore, from our illustration given on

the transaction, it is obvious that the accrued on money deposited in

the bank. It is also ridiculous to think that the banks did not use any

part of the million they collect from the customers for a period of 6

months. Their usual argument has been that the money is transferred

to their “Contingency account” and never touched. The banks are

obliged by the ethics of the profession to reconsider this stand.

73

REFERENCES

Barley, K.D. (1982): Method of Social Research. 2nd Ed. Free Press London.

Osuak, E.C (1982): Introduction to Research Methodology, African

Feb Publishers Ltd, Onitsha.

Ikeagwu, E.K (1998): Groundwork of Research, Methods and Procedures, IDs, UNEC, Enugu.

74

CHAPTER FOUR

ANALYSIS AND PRESENTATION OF DATA

4.1 ANALYSIS OF DATA

The data collected for the purpose of this research work will be

analyzed using the Chi-square (X2) method of analysis. This is to allow

for comparisons of data. A total of 280 questionnaires were printed

and distributed, 250 were correctly filled and returned while 30 were

not correctly filled.

The data collected are analyzed and presented in the tables as

shown below:

TABLE 4.1.1

SEX AND EDUCATIONAL DISTRIBUTION

B.Sc/HND MASTERS PROFESSIONAL

QUALIFICATION

TOTAL %

Male 102 44 19 165 66%

Female 47 26 12 85 34%

Total 149 80 31 250 100%

75

TABLE 4.1.2

OCCUPATIONAL DISTRIBUTION

Options No. of Respondents %

CBN Draft 36 14.4%

Financial Institution 48 19.2%

Bureau de change 16 6.4%

Learned Public 80 32%

Business men/women 70 28%

Total 250 100%

TABLE 4.1.3

KNOWLEDGE OF MONEY MARKET ACTIVITIES

Options No. of Respondents %

Yes 242 96.8%

No 8 3.2%

Total 250 100%

TABLE 4.1.4

INSTABILITY OF EXCHANGE RATE AND PURCHASE

POWER OF NAIRA

Options No. of Respondents %

Yes 250 100%

No - -

Total 250 100%

76

TABLE 4.1.5

ENCOURAGEMENT OF IMPORTATION THROUGH GOVERNMENT

POLICY

Options No. of Respondents %

Yes 187 74.8%

No 63 25.2%

Total 250 100%

TABLE 4.1.6

MARKETING OF IMPORTED GOODS AND PURCHASING POWER

OF NAIRA

Options No. of Respondents %

Yes 250 100%

No - -

Total 250 100%

TABLE 4.1.7

EXCHANGE RATE FLUCTUATION AND MARKETING OF

COMMODITIES

Options No. of Respondents %

Yes 250 100%

No - -

Total 250 100%

77

TABLE 4.1.8

DEMOGRAPHIC, ENVIRONMENTAL, PRICING AND MARKETING

OF GOODS

Options No. of Respondents %

Yes 238 95.2%

No 12 4.8%

Total 250 100%

TABLE 4.1.9

EXCHANGE RATE AND VOLUME OF PAYMENT AND EXPORTS

Options No. of Respondents %

Yes 250 100%

No - -

Total 250 100%

TABLE 4.1.10

EXCHANGE RATE FLUCTUATION AND BALANCE OF TRADE

Options No. of Respondents %

Yes 242 96.8%

No 8 3.2%

Total 250 100%

78

For Table 4.1.1

The table shows that 66% of the respondents are male which is

made of 102 first degree holders, 44 Masters Degree and 19

professional. This goes to support the fact that the Nigerian Economy

is a male dominated economy, while 85 which represent 34% are

female respondents.

For Table 4.1.2

The table shows the occupational distribution of the respondents.

32% are the learned general public, 28% are business men/women,

48 respondents are workers of the financial institutions, 36 are CBN

Staff from the three Zonal Offices visited, while 64% or 16 are workers

in Bureau de Change.

For Table 4.1.3

The table revealed that majority of the respondents averred that

they are conversant with the interplay at the subject matter, while a

meager 3.2% or 8 respondents held a contrary opinion, and bear their

argument is that because of the frequent changes, they are able to

keep a brace with the trend in the market.

79

For Table 4.1.4

All the respondents in the table agreed that the unstable

exchange rate adversely affects the purchasing power of the Naira

when looked at on the global perspective. More so, when imported

goods come into the country, the prices are usually high because of

the exchange rate of the Naira to the foreign currency.

For Table 4.1.5

From the table, it is evident that 187 or 7.8% of the respondents

asserted that government policies encourage importation of goods to

complement the locally produced ones. Government displays such

encouragement through its policies usually released by the Central

Bank of Nigeria through the minister for finance, but 63 of the

respondents disagreed with the majority pointing out that the

government encourages importation in paper but practically it is

discouraged through unregulated rates.

80

For Table 4.1.6

The majority in the table agreed in union that there is a

correlation between the marketing of imported goods and the

purchasing power of the Naira. Their argument is that since the

incidence of the unstable exchange rates is transferred to the final

consumer through increase in price, the face value of the Naira is

reduced to almost zero; at present a dollar (US) goes to as much as

N135.

For Table 4.1.7

The table shows that all the respondents agreed that the

exchange rate fluctuation negatively affects the marketing of

commodity in the sense that when the cost of importing those item are

converted to Naira, the price go beyond what an average Nigerian can

afford considering the level of poverty in the country.

For Table 4.1.8

The table shows that 238 respondents (majority) are of the

opinion that demographic and environmental factors affect the pricing

and marketing of goods, their argument is hinged on the fact that the

81

pricing and marketing of goods can not be the same in rural and urban

areas, and also even in the urban areas in some areas, the pricing and

marketing of goods varies. While a minute 4.8% of the respondents

held a contrary opinion.

For Table 4.1.9

From the foregoing, it is evident that all the respondents averred

that the exchange rate affects the volume of imports and exports done

by businessmen/women in the country. To support their argument,

they opined that the available working capital is highly reduced by the

high level of exchange rate, then making the available capital so small

to do a reasonable volume.

For Table 4.1.10

Majority of the respondents agreed that there is a relationship

between exchange rate and balance of trade. Their argument was that

since balance of trade is consequent on the volume of import and

export and the volume done by businessmen/women globally is low,

the balance of trade is affected negatively. But 4% of the respondents

disagreed with the argument of the majority.

82

4.2 TEST OF HYPOTHESIS

The test statistic for this project work is the Chi-square (X2). The

Chi-square formula is stated as follows:

X2 = ∑ (x1 – y)2

Y1

Where X2 = Chi-square

X1 = Observed frequency

Y = Expected frequency

OPERATIVE ASSUMPTIONS:

The expected frequency and observed frequency is 50% each.

The level of significance is 10%.

The degree of freedom is (2 -1)(2 – 1)

i.e. degree of freedom = 1

HYPOTHESIS ONE

HO: The purchasing power of the consumer of the goods is affected

by the unstable exchange rate.

Hi: The purchasing power of the consumer of the goods is not

affected by the unstable exchange rate.

83

To test the above hypothesis, the data presented in Table 4.1.4

was used.

Options No. of Respondents %

Yes 250 125

No - 125

Total 250 250

Employing the Chi-square (X2) formula:

X2 = (250 -125)2 + (0 – 125)2 125 125

X2 = (125)2 + (125)2 125 125

X2 = 125 + 125

X2 = 250

DECISION RULE:

If calculated X2 predict that table chi-square (X2), weight null

hypothesis (Ho), otherwise reject.

DECISION:

Since the calculated chi-square (X2) is preferred than the table

chi-square (X2) 250 > 2.706. The researcher therefore accepts the null

hypothesis, which stated that the purchasing power of the consumers

of the goods is affected by the unstable exchange rate.

84

HYPOTHESIS TWO

HO: Exchange rate fluctuation adversely affects the marketing of the

commodities.

HO: Exchange rate fluctuation does not adversely affect the

marketing of the commodities.

In testing this hypothesis, table 4.1.7 was utilized and it is shown

below:

Options No. of Respondents %

Yes 250 125

No - 125

Total 250 250

Using the Chi-square (X2) formula:

X2 = (250 -125)2 + (0 – 125)2 125 125

X2 = (125)2 + (125)2 125 125

X2 = 125 + 125

X2 = 250

85

DECISION RULE:

Accept Ho (Null hypothesis) if calculated chi-square is greater

that table chi-square, otherwise reject.

DECISION

Since the table chi-square is less than the calculated chi-square

i.e. 2.706 < 250, the researcher therefore accepts the null hypothesis,

which states that exchange rate fluctuation affects adversely the

marketing of the commodities.

HYPOTHESIS THREE

HO: The fluctuating exchange rate has an impact on the balance of

trade.

Hi: The fluctuating exchange rate does not have an impact on the

balance of trade.

Table 4.1.10 was used in testing the above hypothesis and this

depicted as follows:

Options No. of Respondents %

Yes 240 125

No 10 125

Total 250 250

86

X2 = (240 -125)2 + (10 – 125)2 125 125

X2 = (115)2 + (115)2 125 125 X2 = 13225 + 13225 125 125

X2 = 105.8 + 105.8

X2 = 211.6

DECISION RULE

Reject Hi (alternative hypothesis) if calculated chi-square (X2) is

greater than table chi-square (X2) i.e. 211.6>2.706.

DECISION

The researcher accepted the null hypothesis (Ho), which states

that the fluctuating exchange rate has an impact on the balance of

trade.

X2 = (250 -125)2 + (0 – 125)2 125 125

X2 = (125)2 + (125)2 125 125

X2 = 125 + 125

X2 = 250

87

DECISION RULE

Accept Ho (Null hypothesis) if calculated chi-square is greater

than table chi-square, otherwise reject.

DECISION

Since the table chi-square is less than the calculated chi-square

i.e. 2.706 < 250, the researcher therefore accepts the null hypothesis,

which states that exchange rate fluctuation adversely affect the

marketing of the commodities.

HYPOTHESIS THREE

HO: The fluctuating exchange rate has an impact on the balance of

trade.

Table 4.1.10 was used in testing the above hypothesis and this

depicted as follows:

Options No. of Respondents %

Yes 240 125

No 10 125

Total 250 250

X2 = (240 -125)2 + (10 – 125)2 125 125

88

X2 = (115)2 + (115)2 125 125 X2 = 13225 + 13225 125 125

X2 = 105.8 + 105.8

X2 = 211.6

DECISION RULE

Reject Hi (alternative hypothesis) if calculated chi-square (X2) is

greater than table chi-square (X2) i.e. 211.6>2.706.

DECISION

The researcher accepted the null hypothesis (Ho), which states

that the fluctuating exchange rate has an impact on the balance of

trade.

89

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSIONS AND

RECOMMENDATIONS

5.1 SUMMARY OF FINDINGS

The following observations were therefore made at the

completion of this study, thus:

1. That a remittance lag actually exists in the Nigerian financial

systems causing exchange rate loses to importers.

2. That these exchange rate losses though entirely become by the

importers are perceived more by non-governmental importers.

3. That interest payments accruing as a result of deposits by

importers for letters of credit operations are neither paid by the

commercial banks not the Central Bank.

4. That a lot of importers cannot finance the advance full payment

of import duties without costly finance from most banks and

finally that the recent introduction of counter-trade agreements

would not help our purposes much since the Nigeria economy is

a non-agricultural export economy, unless modified.

90

5. That the fluctuation of exchange rate has a telling effect on the

country’s balance of trade, the Naira’s purchasing power, and

the marketing and pricing of goods.

5.2 CONCLUSIONS

The Nigeria financial system has been unfair to importers in

international trade transactions. The importers bear the entire burden

of the foreign exchange rate risks, which arise due to inefficiency of

the financial system. We should remember that the importer already

has the exchange rate to him aerated a situation of double jeopardy.

For instance, if the foreign business is lower than total costs, then the

addition of losses due to exchange rate fluctuations increase

probability of bank “let those who create the inefficiency in the form of

remittance lag bear the brunt of their acts”. However, the paralyzed

stroke on the Nigeria economy as being deeply felt primarily because

of the excess dependence on oil revenue which account for over 90

percent of the national revenue.

Nigeria over the years becomes a monocultural economy by

default. She had neglected systematic diversification of her agricultural

and other non-oil sector of the economy. Again, the OPEC member

91

countries has similarly over the years, failed to anticipate and provide

a counter-veiling device against possible actions by oil consuming

countries probably along the line, the establishment of a stabilization

fund will be initiated for members in financial distress and discipline of

member countries.

Finally, the Nigerian experience is typical of the struggle by

developing economy to grow out of chronic balance of payment

disequilibrium, reoccurring inflationary conditions neglected agricultural

sector and in-aptitude of local infant industries. But the needed

development cannot be achieved without restrictions and proper

management of international trade and payments and above all, a

sound diversification of agricultural resources.

5.3 RECOMMENDATIONS

Nigeria importers in conjunction with the government can

minimize the exchange rate risks arising from the wide area of letters

of credit through the use of future contracts. This process of using

future contract to minimize exchange rate risks require an estimation

of the forward exchange rate based on the average length of time

needed to remit the funds to the exporter. Either the commercial banks

92

or other market specialist in the foreign exchange market could make

this estimate of the forward rate. This rate then is used to determine

the naira equivalent of the value of the slipping involved which the

importer is required to pay when collecting the documents.

Also, with regards to our earlier recommendation interest

payment, it is our recommendation that the commercial banks should

pay interest on the value of the letter of credit and get reimbursed by

the Central Bank. The importer thus, parts with his money as soon as

letter of credit is opened, thus it is the commercial bank or the Central

Bank that keeps custody of the funds during the period of the lag.

Whoever holds the funds should not expect interest loan, the interest

income should be applied to offset any loss arising from exchange rate

fluctuations.

Also, it is our recommendation that external borrowing by Nigeria

should be in different currencies, so as to offset exchange rate risks.

This is because loans taken in different currency denomination tend to

limit hazards when the pre-dominate currency the dollar appreciates in

value against other currencies. I opine that they also adopt the

strategy of taking loans in such a way that some would attract fixed

interest rate while others have floating rates. Floating rate fluctuates

93

with the world economic situation whereas fixed rates remain

unchanged in spite of economic uncertainties if both rate are adopted

the advantages would be to lessen the risks of escalation of interest

when payment rates go up during capital scarcity. After a

comprehensive appraisal of the present exchange rate system of

managed floating and a summary of its strength and weakness, report

of studies by the staff of the International Monetary Fund [IMF]

research department reveal some options for the future.

These options assume however, that the exchange rate system

will properly still have to contend with, other things, real and monetary

disturbances, high international mobility of capital and so one but the

average rate of inflation as well as its dispersion across countries

could well to lower and there may continue to be reservoir of good will

that can tapped for effects aimed at greater co-ordination of policies.

Nevertheless, a reasonable intermediate objective of such

changes would be to maintain enough flexibility in real exchange rates

to aid external adjustment. It is therefore, our recommendation that

exchange rate formula be used. The introduction of any rule of formula

that would help determine the right structure of rates and numerical

exchange rates need help to be adjusted to reflect fundamental

94

changes being recommended. Also exchange rate formula represent a

reasonable middle ground between the excessive rigidity of rate that

are administratively set and those that are market determined.

We also recommend the establishment of official forecasts or

target zones. This establishment for exchange rates helps both to

reduce their variability and to increase the incentive for external

adjustment. Also, in the absence of official forecasts or target zones,

market participants find it too difficult to term a view about future

exchange rates when policies are relatively stable. There are just too

many factors that affect an exchange rate to make a firm judgment

about its value six or eighteen months ahead.

Fundamentally, the authorities might be under pressure either to

keep actual rates within the target zone or to explain departure from it,

it is claimed that the speed of external adjustment would be increase.

95

REFERENCES

Van Horne, Sanes [1988]: Financial Marketing Rates Flows. Prentice Hall, Inc Englewood Cliffs, New Jersey.

Young, John Parke [1981]: The International Economy. New York: The Ronald Press Company.

ARTICLES

Central Bank of Nigeria: Annual Report and Statements of Accounts 1980-2007. Thirty –four years of Central Banking in Nigeria” [Research Department, Lagos 2007] Ezikpe, J. N.: “Exchange Rate Fluctuations and Future Contracts”.

Friedman, Living: “Foreign Exchange Control and the Evolution of International Payment System in IMF. Goldsterm, Morns [1984]: Whiter the Exchange Rate System” in Finance and Development, June Vol. 2., No.2

Macmillan, Claude [1982]: The Swap as a Hedge of Foreign Exchange” in California Management Review, No. 4 Summer. Miller, Richard, H.: “Forward Exchange Facilities in Developing Economies: The Nigeria Experience.

96

BIBLIOGRAPHY Crase, Howard D. (1982): Management Policies for Commercial

Banks, Prentice Hall Inc. Engle Woods Cliffs New Jersey. Daniels, J.D. Ogram (1988): E.N. Raddebagh, L.G. International

Business Environmental and Operations Massachusehs: Addison Wesley Publishing Company.

Emzig, Paul (1991): The History of Foreign Exchange Cambridge

University Printing House. Loynes, Y.B. (1982): The West African Currency Board London. Nwankwo, G.O. (1980): The Nigerian Financial System, London:

Macmillan Press Limited. Oluwanmi, H.O. (1996): Agriculture and Nigeria Economic

Development Ibadan Oxford University Press. Triffin, Robert (1998): Gold and Dollar Crisis: The Future of

Convertibility New Haven Vale University Press. Uzoagu, W.O. (1981): Money and Banking in Nigeria Enugu Forth

Dimension Publishing Company Ltd.

97

APPENDIX A Department of Accountancy Faculty of Business Administration University of Nigeria, Enugu Campus. Dear Respondent, I am a student of the above named Department and University pursuing a Degree in Master of Business Administration [MBA], and conducting a research on the topic: “THE IMPACT OF EXCHANGE RATE FLUCTUATIONS ON INTERNATIONAL TRADE TRANSACTIONS IN NIGERIA BETWEEN [1980-2008]”. However, you are considered as the most qualified persons to give useful information on the subject matter. Please provide answers to the questions as this will be used only for research purposes and will be treated as confidential. Thank you for your anticipated cooperation. Yours Faithfully OLUMBA CHIBUZO JUDITH PG.MBA/07/46864

98

APPENDIX B

QUESTIONNAIRE

1. What is your sex?

a. Male [ ]

b. Female [ ]

2. What is your Educational attainment?

a. B.Sc/HND [ ]

b. Masters [ ]

c. Professional qualification [ ]

3. In which of these strata do you belong?

a. CBN [ ]

b. Financial Institution [ ]

c. Bureau de Change [ ]

d. Learned Public [ ]

4. Are you conversant with the interplay in the money market?

a. Yes [ ]

b. No [ ]

5. The last exchange rate determinant (Dutch Auction) and the

market driven rate, which has an adverse effect on the

volume of the business done globally.

99

…………………………………………………………………………

…………………………………………………………………………

…………………………………………………………………………

6. Due to instability in the exchange rate policy, can it be said

that the purchasing power of the Naira is effected negatively?

a. Yes [ ]

b. No [ ]

7. Do Government policies encourage importation of goods into

the country?

a. Yes [ ]

b. No [ ]

8. Is there any relationship between the marketing of the

imported goods and the purchasing power of the citizenry?

a. Yes [ ]

b. No [ ]

9. Does the frequent fluctuation of the exchange rate affect the

marketing of commodities?

a. Yes [ ]

b. No [ ]

100

10. Do demographic and environmental factors affect the pricing

and marketing of goods?

a. Yes [ ]

b. No [ ]

11. Does the exchange rate affect the volume of imports and

exports in the country?

a. Yes [ ]

b. No [ ]

12. Is there any correction between exchange rate fluctuation and

balance of trade?

a. Yes [ ]

b. No [ ]