Exchange Rate Fluctuation And Performance Of Nigerian Manufacturing Firms

•                                                      INTRODUCTION

1.1       Background Information to the Study

Exchange rate plays a significant role in international economic transactions because no nation can remain in autarky due to varying factor endowment. These facts emphasize the importance of exchange rate to the economic well-being of every country that opens its doors to international trade. That is, import and export of goods and services. The importance of exchange rate derives from the fact that it connects the price systems of two different economies making it possible for international trade to make direct comparison of traded goods. (Nura 2020) the distortions faced with overvalued exchange rate regime are hardly a subject of debate in developing countries that are mostly dependent on imports for production and consumption. Exchange rate is defined as the rate at which a country’s currency is exchanged for another. Exchange rate has been recognized in many literatures as one of the major element of international trade. In the 1970s before the collapse of the Breton Wood, fixed exchange rate was in practice, where the exchange rate of most nations is fixed by the monetary authority of a nation. Trade and production flows in those periods seemed very profitable as manufacturing companies did not encounter the challenge of fluctuation in exchange rate.

Ali (2020) states that the fluctuation in the exchange rate however can be appreciated or depreciated, whichever way, both forms of fluctuation has a fundamental effect on the economy. When a country’s currency appreciates, it results into an improvement in the country’s balance of payment, but when it depreciates, it deters the country’s balance of payment. When Breton Woods system of fixed exchange rate was no more, this made many nations to adopt the floating exchange rate system, hence, exposure to uncertainty caused by fluctuation in exchange rate. Exchange rate fluctuation which has been defined by Christelle and Joel (2017) as the risk associated with unpredicted movements in exchange rate which pose a serious effect on a nation’s economy. Kazeem, (2017), argues that Nigerian manufacturing companies has been greatly affected by the floating exchange rate as the fluctuation in exchange rate has been instigating various macroeconomic severities. Enekwe, Ordu and Nwoba (2013) states that movements in the exchange rate have ripple effects on other economic activities such as interest rate, inflation rate, unemployment, money supply, etc.

Following the fluctuations of the naira in 1986, a policy was adopted  by the federal government, tagged Structural Adjustment Programme (SAP), then the subject of exchange rate fluctuation has become a major  issue among manufacturing companies and Nigeria as a nation. This is because the aim of every economy is to have a stable rate of exchange with its foreign partners. This goal was not achieved in Nigeria despite the fact that the country embarked on devaluation to promote export and regulate the exchange rate. The failure to achieve this goal exposed the Nigerian manufacturing sector to the challenge of constantly fluctuating exchange rate. Exchange rate policies in developing nations are often sensitive and controversial, mainly because of the kind of structural transformation required, such as decreasing imports or increasing non-oil exports, invariably imply a depreciation of the nominal exchange rate. Such domestic adjustments, due to their short-run impact on prices and demand, are perceived as damaging to the economy. Ironically, the contortions inherent in an overvalued exchange rate regime are rare subject of discussion in developing economies that are majorly dependent on imports for production and consumption (Enekwe et al., 2013). It is an avenue for increasing productivity in relation to import substitution and export expansion, creating foreign exchange earning capacity, raising employment, improving the growth of investment at a faster rate than any other sector of the economy, as well as wider and more efficient linkage among different sectors (Fakiyesi, 2015).

The increasing potentials of manufacturing sector of a nation is strategic to the macro-economic aspect of such nation, the sector plays a significant role and has many dynamic benefits that are important for economic transformation. It is an avenue for increasing productivity in relation to import substitution and export expansion, creating foreign exchange earning capacity, raising employment, promoting the growth of investment at a faster rate than any other sector of the economy, as well as wider and more efficient linkage among different sectors (Akinmulegun & Falana, 2018). In many nations, the performance of the manufacturing sector serve as a yardstick for assessing the effectiveness of macro-economic policies. Government policies; particularly exchange rate policies can only be deemed successful if they have positive effect on the import and export, production and distribution of goods and services. Manufacturing sector of a nation creates more linkages in the economy and encourages internal and external balance. Differences in exchange rate is a crucial natural factor that affects economic performance, due to its impact on macroeconomic variables like outputs, imports, export, prices, interest rate and inflation rate. A good and proper exchange rate policy is a crucial condition for promoting economic performance (Akinmulegun et al., 2018). In practice, no exchange rate is pure float or majorly dictated by market forces. Rather, the predominant system is the managed float type, whereby there is frequent intervention by monetary authorities in the foreign exchange market to achieve strategic objectives.

A managed floating exchange rate regime has been the most prevailing in Nigeria since the introduction of Structural Adjustment Programme in 1986. The major goals of exchange rate policy in Nigeria are to preserve the value of domestic currency against international value and to maintain a favourable external reserve position. According to Akinmulegun et al., (2018), the Central Bank of Nigeria has applied different techniques in the management of the exchange rate of the naira. They believed that past exchange rate policies have been structured with a bias towards demand management in Nigeria, as the supply side has always been limited by the monoculture base of the economy, where foreign exchange inflow is overpowered by- oil export proceeds. The management of any country‘s foreign exchange market is carried out within the control of a foreign exchange policy, which according to (Akinmulegun et al., 2018), is the sum total of the institutional framework and measures put in place to push the exchange rate towards desired levels in order to encourage the manufacturing sectors, reduce inflation, ensure internal balance, promote the level of exports and attract foreign investment and other capital inflows. The incompetency of the system to achieve the main objectives of exchange rate policy led to the retraction of the policy in September 1986 to floating exchange regime with the creation of SAP. However, Nigerian manufacturing sector had since faced with the problem of persistent fluctuating exchange rate due to the failure to realize the goals of SAP subjected to the Nigerian manufacturing sector to the challenge of a persistently fluctuating exchange rate.