Exchange Rate As An Instrument Of Macro-Economic Management (Nigeria In Perspective 1996 – 2005)

ABSTRACT

The economy of Nigeria has a strong external orientation. It is characterized by heavy dependence on the export of one or a few product. The products find markets in the developed countries where ironically there is a small control over the prices of the exports. As a result of this, the Nigerian economy is vulnerable to external shock. This calls for effective tools for managing the external sector. The main focus of this study has been to evaluate the effectiveness and appropriateness of the exchange rate policies formulated to ensure the sound management of Nigeria’s external sector. In this respect, we considered the impact of the policies on some variable like the change in balance of payments, the external reserve and the total volume of imports as well as inflationary rate. The data for the exercise was collected from various sources depicting the movements in exchange rates as well as the other variables from 1996-2005. However, for any policy instruments to have the derived effect or influence on the specified variables such as those selected for this study, there must be a reasonable degree of association between the exchange rate and the other variables. Coefficient of correlation and multiple regression analysis were used for the test with the aid of a computer package known as egive. The study revealed that in comparison with the other variables a weak relationship between the changes in exchange rate and the rate of inflation in Nigeria exists. Recommendations as to the effectiveness of exchange rate policy in the management of the Nigeria economy were made and this includes: there should be proper monitoring and regulation of the conduct of Nigeria’s foreign exchange market and it is desirable to check over dependence on import and the need for the pursuit of aggressive export promotion programmes.