CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The desire to build a strong economy is the desire of every patriotic citizen in Nigeria. This desire is illustrated
via high productivity in the part of citizens in Nigeria and, the ability of the government to diversify the
economy to earn more foreign exchange.
Over the years, the discovery of oil in Nigeria has been argued to be a curse rather than a blessing. This assertion
is gotten from the fact that oil still remains Nigeria’s biggest income earner, as it accounts for over 80% of
export earnings.
The drop in oil prices has left nations like Nigeria who run an oil based economy with undiversified economies
in economic crises. This challenge brought about by exchange rate fluctuations is eventually causing too much
pressure on the Naira. This has affected the demand and supply of the US Dollar and other major currencies, as
scarcity is inevitable. The demand for foreign exchange by businesses surpass the supply of the currency,
thereby causing scarcity, inflation and some business closing shops due to their in-ability to get foreign exchange
to import. The government of the day in Nigeria usually relies on foreign exchange reserve generated from crude
oil to manage excessive volatility in exchange rate and recently crude oil prices have dropped drastically. This
has tremendous implication for foreign exchange earnings. The capacity of the Central Bank of Nigeria (CBN)
to fund foreign exchange market has being called to question. Low level of foreign exchange reserve induces
free movement of exchange rate. Issues are also on the rise on the demand side. There has being a high demand
for foreign exchange in the last five (5) years as a result of factors like, heavy dependence on imported finish
products, the industrial sector’s dependence on imported raw materials with other inputs, reversal of capital
flow by investors and high speculative demand which has caused uncertainty in the foreign exchange market
(CBN report, August 2013). Therefore, the increased foreign exchange demand in the face of unstable supply is
leading to volatility in exchange rate.
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