FOREIGN EXCHANGE MANAGEMENT AND ECONOMIC GROWTH IN NIGERIA

FOREIGN EXCHANGE MANAGEMENT AND ECONOMIC GROWTH IN NIGERIA

Background to the Study

The role of foreign exchange management on the growth of an economy cannot be overemphasized as it is a major determinant of economic growth. Foreign exchange basically explains the trading of one currency for another which is brought about by the exchange of goods and services among countries of the world. It is widely known that due to globalization, there is an increasing level of interdependence between countries of the world where country “A” cannot produce all that her citizens need. In the same vein country “B” cannot produce all that her citizens need due to the economic concept of scarcity. Scarcity in this context means countries do not have all the resources needed to produce all goods needed because human wants are insatiable. Hence countries, ceteris paribus produce goods in which they have comparative advantage over other countries and in order to increase the welfare of their citizens, export such goods in exchange for the goods they have a lesser comparative advantage to produce. Given that there are different currencies for different countries, there is a trade of many currencies in order to pay for goods exchanged. Foreign exchange is a means of effecting payments for international transactions. It can be acquired by a country through; the export of goods and services, direct investment inflow, draw down on external loans, aids and grants and it can be expended to settle international obligations. Obaseki. (1991). Obaseki also stated in his journal, that when there is a disequilibrium in the foreign exchange market caused by inadequate supply of foreign exchange reserves, pressure may be exerted on foreign exchange reserves. If the reserves are not adequate, this may deteriorate into balance of payments problems. There is, therefore, need to manage a nation's foreign exchange resources.so as to reduce the adverse effects of foreign exchange volatility. The management of foreign exchange resources is further informed by the need to set an appropriate clearing price in 3 the foreign exchange market that would guarantee adequacy of supply in relation to the demand for foreign exchange. Therefore, the art of foreign exchange management is a conscious attempt to harness foreign exchange resources, deploy them to service the economy and to meet other international commitments while saving some to raise the level of the country's international reserves so as to prevent the economy from experiencing shocks due to foreign exchange volatility. Obaseki (1991). According to Rasheed (1995), foreign exchange management in its broadest sense, refers to the efficient holding and optimal deployment of all the country's foreign exchange reserves in order to meet its foreign exchange expenditures and other monetary policy targets. Thus foreign exchange management must aim at accounting for all receivable foreign exchange revenues, investing the foreign exchange reserve in a most efficient manner, determining a sustainable exchange rate for the Naira vis-a-vis other foreign currencies and above all provide immediate liquidity in meeting Governments' commitments. The Central Bank of Nigeria is the major regulator of the foreign exchange market in Nigeria. Foreign exchange management therefore stems from the need to ensure that countries involved in international trade ensure that the trading of their currencies for other world currencies brought about by international trade is efficiently done such that it is favourable to them. This is because proper foreign exchange management will improve a nation’s currency position and result in many other factors which will ultimately improve economic growth. The aim of this paper is to empirically show the role of foreign exchange management on the growth of the Nigerian economy for the stipulated period, 1981 to 2019. To achieve this, the variables examined are exchange rate, exports, imports, foreign direct investment and Nigeria’s foreign reserve.

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