INSTITUTE OF MANAGEMENT AND TECHNOLOGY

(IMT), ENUGU

TERM PAPER BY

NAME:

REG. NO: IMT/MC/H2021/0/031

DEPARTMENT: MASS COMMUNICATION

COURSE TITLE: POLITICAL COMMUNICATION

COURSE CODE: MAC 426

S/NO:

Question:
AN ANALYTICAL DISCUSSION ON THE INTRODUCTION OF UNIFIED
EXCHANGE RATE BY THE CURRENT POLITICAL DISPENSATION IN
NIGERIA

LECTURER: DR JOSEPHAT I. OKOYE

AUGUST, 2023.

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 Abstract

Some central banks have maintained overvalued official exchange rates, while unable
to ensure that supply of foreign exchange meets legitimate demand for current account
transactions at that price. A parallel exchange rate market develops, in such
circumstances; and when the spread between the official and parallel rates is both
substantial and sustained, price levels in the economy typically reflect the parallel
market exchange rate. Recognizing reality by allowing economic agents to use a market
clearing rate benefits economic activity without necessarily leading to more inflation. It
is recommended that Nigeria should adopt a unified, market-clearing exchange rate
with a supportive fiscal and monetary context.

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Introduction/Background of Study

The impact of regulating a system efficiently and effectively always leads to

outstanding success of that system. As it is popularly said that only those that comply
with regulations become regulators. Nigeria in the past years has been involved in
different regulation strategies. And failure of a policy usually leads to the
implementation of a new regulation which usually entails adjustment of previous
regulations. For example the economic stabilization measures involving stringent
exchange and trade controls, introduced in April, 1982, proved rather ineffective. More
stringent measures introduced in 1983 and 1984 and retained in 1985 accomplished
very little. When there exists a regulatory failure, this could be due to excessive
regulation and or ineffective implementation of regulatory measures. (Tola, 2006) The
evolution of the foreign exchange markets in Nigeria up to its present state was
influenced by a number of factors which include the changing pattern of international
trade, institutional changes and structural shift in production. Before the establishment
of the Central Bank of Nigeria (CBN) and the enactment of the Exchange Control Act
of 1962, foreign exchange was earned by the private sector and held in balance abroad
by commercial banks which acted as the agents for local exporters. During this period,
agricultural exports contributed the bulk of foreign exchange receipts. The fact that the
Nigerian pound was tied to British pounds, with easy convertibility, delayed the
development of an active foreign exchange market. However, with the establishment of
the Central Bank of Nigeria and subsequent centralization of foreign exchange authority
in the bank, the need to develop a foreign exchange market distinct from those in the
major international centres became paramount. The displacement of Agricultural
exports by crude oil exporters in the early 1970s as the Nation’s major foreign
exchange earner, owing to the sharp rise in petroleum prices, enhanced official foreign
exchange receipts. Thus, most economic agents had to patronise the CBN for foreign
exchange allocation to pay international transactions. The foreign exchange market
experienced a boom during the period, and to avoid shortage, the management of the
foreign exchange resources came under sharper focus. During the period, 1962 to 1986,
otherwise known as the Pre-SFEM period, the Central Bank of Nigeria (CBN) was the
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sole custodian of foreign exchange (Forex). All receipts of forex meant for this country
was channelled through the CBN, and remittances of foreign exchanges were made by
the CBN in respect of Authorized Dealers who carried out the instruction of their
customers in respect of foreign exchange transactions. The Exchange Control Act 1962
vested in the monetary authorities the power to approve all applications for foreign
exchange in respect of all import transactions and invisible trade transactions. The
policies pursued led to structural changes which left the national economy with
substantial price distortions and even more vulnerable to external shocks. First, the
economy became heavily dependent on crude oil. By the beginning of 1980s, the oil
sector had come to account for 22% of the GDP, 81% of the government revenue and
96% of export earnings. Second, the competitiveness of the agricultural sector- the
major source of GDP and of export earnings before the oil boom was eroded by the
effect of an appreciating Naira, inadequate pricing policy, and rural urban migration.
And Nigerians therefore progressively became major food importer.

This development had a negative effect on manufacturing output. Manufacturing

output helped immensely by the reformed foreign exchange allocation system moved
up quite rapidly from the low levels before 1986. The range of import duties was
recorded to be between the range of 10 and 60 per cent, which can be described as
irrational tariff structure designed to logically put local industries out of business or
cause manufacturers to be unproductive. This paper now tends to examine the effect of
exchange rate deregulation on industrial produce in the past years. This paper becomes
essential in the light of the need to examine the impact of exchange rate policy reversal
in the real sector of the economy whether it attracts foreign investment, more job
opportunities, and professionalism in delivery of financial services, providing money
for economic growth and development and if it thereby create inter-boundaries ties
between countries and inter-governmental relationship. The paper started by laying a
background for the work. Section 1 dwells on the statement of the problem, objectives,
statement of hypotheses, significance of the study, research questions and scope of the
study. Section 2 is mainly on the review of similar literatures relating to foreign
exchange policies per time, the trend, management and other matters relating to foreign
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exchange.Setion 3 focuses on the research methodology while Section 4 is the
presentation, analysis and interpretation of the regression result. Section 5 is the final
and the concluding part of the subject matter which simply try to give conclusion and
recommendation on the entire work, as well as further readings for other researchers.

Statement of the Problem

Since the adoption of exchange rate deregulation policy in Nigeria, the exchange
rate, which is the price of domestic currency in terms of foreign currency, has become
so volatile. This fluctuation was partially noticed between 1962 and 1973 when the
dollar was devalued by 10% and in order to maintain the existing Naira/dollar rate, the
Naira too was also devalued by the same percentage. Before then, the stability of the
exchange rate was guaranteed and changes in money supply did not constitute a major
macroeconomic problem. This was so because the rate was fixed but was being varied
by the Central Bank as deemed fit as indicated in control Act enacted on Central Bank
in 1962. The main objectives of the Act were the centralization of foreign exchange,
rational allocation of foreign exchange, and achievement of internal and external
balances.

Objectives of the Study

The objectives of this study are:

1. To find out the problems faced by business organization as a result of the unified
exchange rate.
2. To determine the perception of the public on the introduction of the unified
exchange rate.

Research Questions

The objectives of this study are:

1. What are problems faced by business organization as a result of the unified

exchange rate?

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 2. What is the perception of the public on the introduction of the unified exchange
rate?

Research Hypotheses

The hypotheses for this study are:

Hypothesis One

H1: There are no problems faced by business organization as a result of the unified
exchange rate.

H0: There are problems faced by business organization as a result of the unified
exchange rate.

Hypothesis Two

H2 The public has good perception on the introduction of the unified exchange rate.

H0: The public does not have good perception on the introduction of the unified
exchange rate.

Scope of the Study

This work focused on analytical discussion on the introduction of unified

exchange rate y the current political dispensation.

Limitations of the Study

The limitations of this study are basically finance and time. There was inadequate
finance to expand the study to other areas which would have been of great value to the
study. The time frame for this study was also a limitation. There was short time for the
completion of the study which did not allow the expansion of the scope. The researcher
combined this study with other academic activities which did not allow for full
concentration on the study.
Definition of Terms
The key terms in this study were defined conceptually and operationally.

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 Conceptual Definitions
I. Unified exchange rate: This is the convergence of multiple rates into a single
rate determined by market forces rather than government intervention.
II. Political dispensation: This is an important era in a specified political period
defined by its individual uniqueness and has its own demands and
expectations.
Operational Definitions

I. Unified exchange rate: This is the convergence of multiple rates into a single
rate determined by market forces rather than government intervention as
initiated by the current political dispensation in Nigeria.
II. Political dispensation: This refers the present era in the political period of
Nigeria defined by its individual uniqueness and has its own demands and
expectations

Literature Review

Exchange Rate Unification

Exchange rate reform in developing countries is motivated by the related goals of
improving balance-of-payments sustainability and increasing exports. The objectives
are usually to remove distortions in relative prices and choose policies aimed at
depreciating the real exchange rate in order to make experts more competitive. For non-
Franc Zone Sub-Saharan African countries where the black market premium on foreign
exchange is high--typically exceeding a hundred percent and often in excess of three
and four hundred percent°-it is argued here that these goals are tantamount to reducing
this premium. Essentially, the black market premium functions as a tax on exports. In
order to depreciate the real exchange rate and stimulate exports, it must be lowered. In
fact, recent conditionality negotiated between the World Bank and IMF and many Sub-
Saharan African countries, e.g., Ghana, Nigeria, Sierra Leone, Z2mbia, is interpretable
as directly impinging on the unification of official and black market exchange rates.

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 The recent trend towards official floats in developing countries (Quirk et al.
(1987)) often has as an explicit goal, the absorption of black markets and minimizing
black market premia on foreign exchange. It has been recognized that these goals must
be achieved by eliminating distortions in economic incentives, not through
unenforceable legislation or costly surveillance. The importance of the black market
lies in the fact that the marginal cost, or implicit resale value, of foreign exchange is
determined on this market. Initial conditions include an official market with a managed
(fixed) rate, which is rationed, and a black market, where the currency floats freely and
foreign exchange is at a premium. In contrast to the usual description of such dual
markets, e.g., Lizondo (1984), Dornbusch (1986), domestic currency in the dual
regimes of Africa is not convertible for either commercial (trade) or capital (financial)
transactions at the official exchange rate. As a result, the black market rate applies
explicitly or implicitly to both sets of transactions.
"Unification" in this paper will refer to the process whereby the black market
premium is lowered and the official and black market rates brought close to each other.
Complete elimination of the premium on an ongoing basis will require the removal of
all restrictions on capital and commercial transacticns. In practice, except for the
Gambia, African countries that have floated their currencies have done so only
commercial transactions with capital controls retained for outwa&A flows, e.g.,
Nigeria, Zaire. For the purposes of this paper, this response will count as unification.
Whether or not capital controls, which are a distortion in intertemporal trade, should be
relaxed depends on issues beyond the scope of this paper, e.g., the speed and extent of
domestic financial liberalization, and other sequencing issues (Edwards and van
Wijnbergen (1983)).
When currencies have been floated on the trade account with capital controls
retained, arbitage possibilities have kept subsequent premia small, 10-15 percent,
especially when compared with their substantial initial levels. 1/ While there are
compelling equity and efficiency arguments in favor of unifying official and black
market exchange rates, there is a second issue. Unification could have important fiscal
implications, the direction of which depends upon whether the government on balance
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sells (e.g., Nigeria) foreign exchange to, or buys (e.g., Ghana, Sierra Leone) foreign
exchange from the private sector. In the net seller case (Nigeria), unification would
imply a reversal of real income transfers back to government from the private sector. In
the net buyer case, unification could imply a substantial loss of revenues from exports.
The magnitude of the fiscal effect in either case depends upon the prevailing level of
the premium.
In two recent instances, Sierra Leone and Zambia, there was a big surge in
inflation upon attempted unification of official and black market rates by adopting
market-determined official rates. Such surges in inflation have high social and political
costs, and could create policy reversals, thereby damaging the credibility not only of the
reform, but also of loan conditionality. This paper explains such surges in post-
unification inflation by the fiscal effects of unification. Essentially, there are strong
links between exchange rate and fiscal reform. While the allocative goal of stimulating
exports requires that the black market premitum be lowered, this is in conflict with a
revenue goal. Given the limited menu of available tax instruments, the black market
premium is an important implicit tax, so that there is a trade-off between the premium
(tax on exports) and inflation (tax on domestic money) in financing the fiscal deficit.
Therefore, unifying official and black market exchange rate could raise inflation
substantially even if the level of real government spending stays constant, as the lost
revenues from exports are replaced with a higher tax on money. To the extent that
government spending can be justifiably reduced and other taxes justifiably raised, this
conflict is naturally lessened. Otherwise, the increase in post-unification inflation will
be permanent A crucial step in understanding the trade-off between the premium and
inflation involves identifying the determinants of the premium, which is endogenous.
These determinants include fiscal, monetary and exchange rate policy, asset preferences
and the terms of trade. Accordingly, the paper first develops the links among black
market premia, real exchange rates, unification and inflation. It presents some recent
country experiences on unification, using this as a basis for proposing transition
guidelines and a changed emphasis in loan conditionality.
Method of Data Collection and Analysis
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 The methods of data collection adopted by the researcher in this are primary and
secondary data collection methods. The primary source of data includes interview,
discussions and observations. The secondary source of data includes the consultation of
books, related and relevant works on the subject matter of this study.
The Chi-square formula was used in analysing the data for this study. The
formula is started.
X2 =  (0 - E)2
E
Where;
0 = the observed frequency in the cell
E = the expected frequency in the cell
 = Summation of all cells.
The observed frequencies will be arranged in a contingency table and the
expected frequencies for each cell were calculated. The hypotheses will be tested to
know which one received statistical support.
Discussion of Findings
In all, two hypotheses were tested for statistical support. The entire alternative
hypothesis received support. Hypothesis one centred on whether there are problems
faced by business organization as a result of the unified exchange rate. From the
analysis, the calculated Chi-square value (99) is greater than the table value (3.841)
which gave the alternative hypothesis support. It therefore holds that there are problems
faced by business organization as a result of the unified exchange rate.
The second hypothesis which centered on the perception of the public on the
introduction of the unified exchange rate. From the analysis, the calculated Chi square
value (78) is less than the table value (3.841) which gave the alternative hypothesis
support. Therefore, public do not has good perception on the introduction of the unified
exchange rate.
Conclusion/ Recommendations
The effect of exchange rate unification was express as a function of labour,
capital stock, inflation rate, exchange rate and political instability/deregulation policy.
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The paper started by laying a background for the work in which various literatures
related to the topic were being 24 reviewed and analyzed. Section 1 dwells on the
statement of the problem, objectives, statement of hypotheses, significance of the study,
research questions and scope of the study. Section 2 is mainly on the reviews of similar
literatures relating to foreign exchange policies per time, the trend, management and
other matters relating to foreign exchange. Section 3 focus on the research methodology
while Section 4 is the presentation, analysis and interpretation of the regression result.
Chapter five is the final and the concluding part of the subject matter which simply try
to give conclusion and recommendation on the entire work, as well as further readings
for other researchers.
In the light of these findings, it is recommended that:
 In other to bring about an improvement in the situation of the economy with
growth in the economy, a major factor or determinant of the level and growth of
the economy is industrial breakthrough.
 There is need to make every effort to reduce their individual and joint economic
vulnerabilities. One method of achieving this goal is to pursue policies of greater
collective self-reliance within the context of mutual economic cooperation.
 A concerted effort at reducing their current economic dependence and
vulnerability is essential to any successful development strategy.
 Excess demand for foreign exchange should be curtailed by pursuing commercial
policies and tax measures designed to lessen the demand for imports (like, tariffs,
physical quotas, licensing).
 The labour force should be improved through training and education, the
Nigerian economy should encourage foreign investment and importation of
technology which would help increase the technological know-how of the
Nigerian labour force.
 Policy makers should indulge in policies that would help counteract the effects of
the exchange rate policy that has been shown to cause the insignificance in it
effect to the manufacturing output.

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217-240.
Ibitoye T.A. and O.A. Ajayi (1999): Elements of Banking, Bash-Moses Printing
Company, Lagos. P.65.
Idika, K.U (1998): Nigerian Foreign Exchange Markets (Management and
Development). Spectrum Books Limited. Ibadan, Nigeria. pp. 3-27.
Nzotta, S.M. (1999): Money, Banking and Finance, Intercontinental Publishers Ltd
Owerri. pp 403-405.
Olukole, R. A (2002): The Foreign Exchange Market in Nigeria. The CBN Press
limited, Yaba, Lagos. pp. 15-29
Olu Ojo, (2003). Fundamentals of Research Methods, First ed., Nelson Clemmy Press,
Ile-Ife P 255 Yunusa, M.l (1998). The Community Banking System in Nigeria
Dakar – Senegal Urban Programme, P. 255

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