CHAPTER ONE

INTRODUCTION

1.1  Background of the Study

During the pre – Babangida administration years, the Nigerian currency was above the dollar and at par with the pound, but now, the naira seems to be tumbling down the abyss. Exchanging for #44 to the United States dollar and #120 to the pound sterling in the parallel market as at October 1994 and despite the official rate for the pound sterling at 336 to one dollar and #68 to one pound in the official market. The question is how did we get to this present stage? What happened between 1995 and now? When General Ibrahim Babangida mounted the seat, naira was overvalued, especially as receipts from crude – oil – Nigerian main foreign exchange earner had been decline over the years. So some thing was to be done about the naira. Government manufacturers and other commentators came into a consensus that the naira exchange rate should be more realistic. On the other hand, advocates of devaluation had a relief on 26th September, 1986 when government introduced the second tier foreign exchange market (SFEM) in line with the objective of SAP. As explained by victor odozi, the CBN director of foreign currency operations “the move was to enable education I the pressure on balance of payment”. Naira has lost its value? Cried a house wife who went to the market with some boundless of naira and came home with few items in her basket and had no balance from the money she went to market with. Today, nobody wants to use naira as medium of exchange, no body wants to counts his wealth in naira. Some ministers in the federal capital territory receive their salaries I dollars. In same vein, many Nigerian, if given the opportunity wouldn’t want to be paid with naira yet there is this obligation to every Nigerian to serve and love his father’s land. Even some of the so – called fathers have no respect for the land. Now the fact is that their children will come up tomorrow and would want to be paid with dollar. Naira, which is their father’s land currency keep going down.
Hard currency is the order of the day. Every Nigerian want to fly to America or Europe in pursuit of hard currency. To them naira has lost its value and it seems to be a simple truth because what naira was able to buy in 10 years ago has dropped to a great range if compare to what it can buy today. Naira, of a truth has lest its value and it is consistently going down hence, my interest in this project.
1.2 STATEMENT OF PROBLEM
This study embraces or covers the area of persisted depreciation of naira in Nigerian. For Nigerian, most of them have been living in surprise of thunderbolt and the painful effect of a sledge hammer blew, wages have been decrying and inflation increasing in leaps and bounds. Eating good food has become a tough task while financing other recurrent project like children’s school fees, hospital bills, clothing etc. things that people should comfortably do without getting worries has become difficult task. These problem enumerated above have devastating impact on the economy in general as it pertains to the naira exchange rate this study will go a long way in finding their causes and provide possible lasting solution.
1.3 PURPOSE OF THE STUDY
Some of the major functions of money are, it serves as a medium of exchange, services as store of value and serves as a unit of account. Today nobody wants to use the naira as a medium of exchange, nobody wants to count his wealth I naira, and nobody wants to store it (naira) because of fear of lost of value as a result of its persistent depreciation. It is also proven fact that naira is shrinking of its value as the evidence is in the fast ad steady increase in the price of commodities and services. This study is designed to fine the extent of the role play by (FEM) on the general and steady depreciation of the nation’s currency with its associated increase in the price of goods and service in order to find some lasting possible solution to them. The research study will also disclose the causes of this persistent depreciation of the naira and advice on the various avenues through which they can be alleviated.
1.4 SIGNIFICANCE OF TH STUDY
A country’s worth is dependent on it’s currency because the international worth of a country is measured by the performance of its currency in the foreign exchange market. This shows that the currency of a nation is its symbol of personality. The value of a country’s currency can be traced from the GNP of its economy. In other words, a country’s currency is its symbol of strength. The underlying strength in the currency is the gross national product which include agriculture mining, manufacturing etc. the sum total of what this country product and hold come out to show in a strong currency. Thus a sound management of the Nigerian foreign exchange market (FEM) will generate a reliable and stable naira rate of exchange that will encourage manufacturers and agriculturist to invest and will in turn leads to economic development and growth and equally brings about a strong currency. It is a known fact, that a country runs the risk of balance of payments unless the policy framework and management of its’ scarce resources as regard foreign currency other wise known as foreign exchange.
1.5 DEFINITION OF TERMS
(Fem) foreign exchange market – this is a market where bank are allowed to source their foreign exchange from any source and sell to and user at market determined rates.
(G.D.P). gross domestic product – this is the total value of the goods and service produced in a country in a year plus the net income from abroad and it is measured in monetary term.
Letter of credit – this is a guarantee that foreign importers would get their money from the importer though the importers bank correspondent abroad.
Forex: simply means “foreign exchange”