Exchange Rate Policy In Nigeria Case Study

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CHAPTER ONE GENERAL INTRODUCTION 1.1 BACKGROUND OF STUDY Nigeria, the most populous black nation in western Africa is popularly known for her dominant source of revenue, crude oil with oil revenue as the main stay of the Nigerian economy, volatility in the price of oil are to a large extent of prime interest to economist. According to Adeniyi et al (2004), exchange rate appreciate in response to rising oil prices and depreciates in response to falling oil prices in oil producing exporting countries while the reverse is the case in oil importing countries. therefore, the impact (positive or negative) which oil price could have on exchange rate volatility of a country depends on what part…show more content…
Economic essentials affect the level of volatility and the extent to which exchange rate stability is maintained. Favorable economic circumstances and outcome which in turn would appreciate the currency and maintain stability is caused by strong fundamentals. (Mordi 2006) 2.2.5 EXCHANGE RATE POLICIES IN NIGERIA The motive behind initiating an exchange rate policy, an integral element of monetary policy is to preserve the value of the domestic currency, maintain favorable external reserve and ensure the realization of price stability in the domestic economy. (Sanni, 2006). Exchange rate policy in Nigeria has gone through many changes spanning between two major regimes. These are the fixed and flexible exchange rate systems. The fixed exchange rate system was adopted in 1960-1986, while the flexible exchange rate system remains in use from 1986 till date having undergone series of modifications. THE FIXED AND FLEXIBLE EXCHANGE RATE…show more content…
Whereas, the micro economic effects of low exchange rates fluctuations under fixed exchange rate system are linked to reduced transaction costs for international trade and capital flows thereby increasing economic growth. If exchange rate volatility is eliminated, international arbitrage enhances efficiency, productivity and welfare. 2.2.6 OIL PRICE AND EXCHANGE RATE According to Adedipe (2004) the different exchange rate regimes in Nigeria can be classified into different periods relating to vagaries in the international oil market. The Post-Independence Era (1960 – 1971) The Nigerian currency was pegged at par to the British pound sterling (GBP) using administrative measures, to sustain the parity. The devaluation of GBP in 1967 made Nigeria adopt the US dollar, which was deemed better to support the import substitution industries which depend heavily on net imported inputs. Throughout this period the Nigerian pound sterling was overvalued, inhibiting optimal growth in agriculture and in goods produced for

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