A Critical Appraisal of Exchange Rate Policies and the Value of Domestic Currency in Nigeria, 1970 – 2002

Abstract

This paper critically appraised exchange rate policies and its influence on the value of the domestic currency (i.e. Naira) in Nigeria for the period 1970 through 2002 within the framework of tabular approach. Exchange rate theories and the exchange rate policies prior to SAP, during SAP and after SAP were reviewed. The relationship between exchange rate theories and exchange rate policies as it affects the value of the domestic currency was equally reviewed. It was discovered in this study that the exchange rate policies adopted within this period has either caused the value of the domestic currency to appreciate or depreciate due to a number of factors or practices in the foreign exchange market which is determined by the forces of demand and supply. For instance, in the pre-SAP era (1970- 1986), the value of the currency appreciated in 1970 through to 1975 due to the operation of an independent exchange rate system when the Pound Sterling ceased to serve as a direct external anchor for the Nigerian currency. While there was a depreciation in the value of the Naira in 1976 and 1977 as a result of the introduction of US dollar as one of the reference currencies. Between 1986 and 2002, the floating exchange rate policy was introduced and the value of the Naira steadily depreciated between 1986 and 2001 due to some factors among which are over valuation of the Naira; excess demand of foreign exchange over supply, excess liquidity in the economy, capital flight from the economy; round-tripping etc. But in 2002, the Naira appreciated due to the introduction of Dutch auction system which emphasizes on market-oriented approach to price determination of which the economic implication resulted to stability in the exchange rate, a boost on non oil export and growth in the economy due to improved credit worthiness. This paper concludes that SAP had failed the nation in many ways and that to achieve stable value of the naira, the current exchange rate policy, the Dutch Auction System should be maintained with the enforcement of two-quote system in the IFEM. Firstly, the CBN should monitor the use of foreign exchange resources to ensure that foreign exchange disbursement and utilization are in consonance with the predetermined economic preferences and also with the purview of the yearly foreign exchange budget.LWATI: A Journal of Contemporary Research Vol. 5 2008: pp. 279-297