ABSTRACT

This study is on impact of foreign exchange rate on domestic investment. The total population for the study is 200 staff of CBN in Lagos state. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made accountants, human resource managers, senior staff and junior staff was used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies

  CHAPTER ONE

INTRODUCTION

• Background of the study

Due to the economic costs that exchange rate volatility can bring to an economy, most countries have engaged in exchange rate reforms. In particular, many Sub-Sahara African countries have moved towards the independence of their Central Banks to adopt different forms of exchange rate systems. This situation has allowed some of these countries to achieve sustainable levels of growth and development whereas some have become worse-off with it. This paper contributes to this body of knowledge by carrying out an empirical analysis of impact of foreign exchange rate on domestic investment

The history of exchange rate systems in Nigeria dated back to early 1960s. Before the establishment of the Central Bank of Nigeria in 1958 and the enactment of the Exchange Control Act of 1962, foreign exchange was earned by private sector and held in balances abroad by commercial banks that acted as agents for local exporters. The oil boom experienced in the 1970s made it necessary to manage foreign exchange rate in order to avoid shortage. However, shortages in the late 1970s and the early 1980‟s compelled the government to introduce some ad hoc measures to control excessive demand for foreign exchange. However, it was not until 1982 that a comprehensive exchange controls were applied. Then a fixed exchange rate system was in practice. The increasing demand for foreign exchange and the inability of the exchange control system to evolve an appropriate mechanism for foreign exchange allocation in consonance with the goal of internal balance made it to be discarded in September 26, 1986 while a new mechanism was evolved under the Structural Adjustment Programmes (SAP). The main objectives of exchange rate policy under the Structural Adjustment Programmes were to preserve the value of the domestic currency, maintain a favourable external balance and the overall goal of macroeconomic stability and to determine a realistic exchange rate for the Naira.

However, empirical cross-country studies have yielded ambiguous results with respect to the impact of different exchange rate regimes on macroeconomic performance particularly domestic investment. In practice, a stable exchange rate has generally been a byproduct of other policy choices, rather than of a particular form of exchange rate regime. If fixed exchange rate regimes benefit from short-term flexibility within margins, as well as scope for longer-term adjustment, the difference between fixed and floating exchange regimes may become largely a matter of announcement. However, the announcement effect of a fixed rate regime has not been based solely on the adoption of the regime itself but has also depended on whether monetary and exchange rate decisions have been assigned separately to more than one official institution; it has therefore varied from country to country, depending on the institutional arrangements. Macroeconomic environment has no doubt changed dramatically since Nigeria government embarked on exchange rate reforms in the middle of 1980s. One of the most important ingredients of the reforms programmes which have generated a lot of inconclusive controversies is the movement from fixed exchange rate to flexible exchange rate system. It has had obvious implications for specific macroeconomic variables, including trade, balance of payment position, domestic investment, inflationary trend, export and import, purchasing power and economic growth to mention a few. At firm level for instance, exchange rate movements and its volatility had led to poor performances of domestic investment in Nigeria.

For Ngerebo-a and Ibe (2013), Exchange rate is the ratio between a unit of one currency and the amount of another currency for which that unit can be exchanged at a particular time. Exchange rate of currency is the link between domestic and foreign prices of goods and services. Also, exchange rate can either appreciate or depreciate. Appreciation in the exchange rate occurs if less unit of domestic currency exchanges for a unit of foreign currency while depreciation in exchange rate occurs if more unit of domestic currency exchanges for a unit of foreign currency. Economic history has shown that there are two common concepts of exchange rate namely nominal exchange rate and real exchange rate. The nominal exchange rate is the number of unit of domestic currency that must be given up to get a unit of foreign currency. Exchange rate is one of the economic indicators which directly affect investment as such its role in the overall economic objectives of a country cannot be underestimated. This gives confidence to why the public sectors, foreign investor and private individual pay a lot of attention to the exchange rate variation. The exchange rate is among the most watched, analyzed and government manipulated macroeconomic indicators. Since September 1986, when the market determined exchange rate system was introduced via the second tier foreign exchange market, the naira exchange rate has exhibited the features of continuous depreciation and instability. People have not been investing due to exchange rate volatility. This instability and continued depreciation of the naira in the foreign exchange market has resulted in declines in the investment, standard of living of the populace, increased cost of production which also leads to cost push inflation. It has also tended to undermine the international competitiveness of non-oil exports and make planning and projections difficult at both micro and macro levels of the economy.

• STATEMENT OF THE PROBLEM

Nigeria adopted the freely floating exchange rate regime in 1986. The floating exchange rate regime implies that the forces of demand and supply will determine the exchange rate. This regime assumes the presence of an invisible hand in the foreign exchange market and that the exchange rate adjusts automatically to clear any deficit or surplus in the market. In addition to the freely floating regime, Nigeria also adopted a variant of the freely floating regime otherwise referred to as managed floating regime. Under this arrangement, government intervenes in the foreign exchange market in other to influence the exchange rate, but does not commit itself to maintaining a certain fixed exchange rate or some narrow limit around it. The frequency with which the measures were introduced and changed is informed by the determined effort of the monetary authorities to un-relentlessly combat the un-abating depreciation and instability of the naira exchange rate. It was expected that the policy shift should put Nigerian economy on the path of macroeconomic stability, recovery and sustainable development. But rather, the country has continued to be at disadvantage in terms of macroeconomic performances. The different regimes have been accompanied by instability and uncertainties. The uncertainties in exchange rates which followed the macroeconomic reforms may be decomposed into two components. The first reflects systematic movement of the exchange rate and the second, exchange volatility. Exchange rate volatility is usually taken as some measure of the dispersion of the rate over some period of time. Volatility of the rate impacts on investment through a variety of channels, including savings, lending rate and inflation. All in all, Nigeria continues to be confronted with a number of economic maladies with the exchange rate reforms. Among these problems are low level of savings and investment, high rate of inflation, high level of unemployment and poverty

• OBJECTIVE OF THE STUDY

The objectives of the study are;

1. To ascertain the relationship between foreign exchange rate and domestic investment
2. To ascertain the impact of foreign exchange rate on Nigeria economy
3. To examine the influence of foreign exchange rate on domestic investment
   • RESEARCH HYPOTHESES

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

H₀: there is no relationship between foreign exchange rate and domestic investment

 H₁: there is relationship between foreign exchange rate and domestic investment

H₀²: there is no impact of foreign exchange rate on Nigeria economy

H₂: there is impact of foreign exchange rate on Nigeria economy

• SIGNIFICANCE OF THE STUDY

The study will give a clear insight on impact of foreign exchange rate on domestic investment. The study will be significant to students, Nigeria government and the general public. The study will also serve as reference to other researchers that will embark on this study

1.6 SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers impact of foreign exchange rate on domestic investment. The researcher encounters some constrain which limited the scope of the study;

1. a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
2. b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
3. c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.

1.7 DEFINITION OF TERMS

EXCHANGE RATE: In finance, an exchange rate is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in relation to another currency

DOMESTIC INVESTMENT: investment in the companies and products of someone’s own country rather than in those of foreign countries: On the whole, China depends more on domestic investment and consumption than on exports to generate its growth.