vo1ume .;u, NO . .; JUIY - VV!Jl. £VVO -·•,·,•· '·' .,; ··-· . ,;,,. ., .I . : . i}_';:./:· ./3 U LLI otY . \ . \ i- ··-\: ;., .· '' ; I }}\ -:•.• --"""'-"""=- .;_·,:.i .• - •. ·::.: ._ ... � .'· . _ B OF Prof. Charles C. Soludo Governor (Chairman) - �.-. Dr. Shamsuddeen Usman Deputy Governor (Operations) Mr. Ernest C. Ebi Deputy Governor (Corporate Services) Mr. Tunde Lemo Deputy Governor (Financial Sector Surveillance) Dr. Obadiah Mailafia Deputy Governor (Economic Policy) •.'.': \!' ,, ' . � ·• ;_;:. ;.�.. };} ,: .. Volume 30, No. 3 JUiy - :,epl. LUUt> (""'_c_o_N_T _EN_T_s _PA_G_ ___E J PAGE 1 OVERVIEW OF EXCHANGE RATE MANAGEMENT IN NIGERIA FROM 1986 TO DATE MIKE I. OBADAN, Ph. D PAGE 10 THE ACHIEVEMENT OF CONVERGENCE IN THE NIGERIA FOREIGN EXCHANGE MARKET 0. 0. AKAN]!(MRS.) PAGE 17 CHALLENGES OF EXCHANGE RATE VOLATILITYIN ECONOMIC MANAGEMENT IIII NIGERIA CHARLESN. 0. MORD! PAGE 26 THE CHALLENGES OF SUSTAINABILITYOF THE CURRENT EXCHANGE RATE REGIME IN NIGERIA H. T.SANNI PAGE 38 ECONOMICS OF EXCHANGE RATE MANAGEMENT AYODELEODUSOLA, Ph. D PAGE45 EFFECTIVE RESERVES MANAGEMENT IN NIGERIA: ISSUES, CHALLENGES AND PROSPECTS ALH.AJI M. NDA PAGE 52 EXCHANGE RATE STABILITY AND POVERTY REDUCTION IN NIGERIA GREGNZEKWU PAGE 64 RECENT REFORMS IN THE NIGERIAN BANKING INDUSTRY: ISSUES AND CHALLENGES U.KAMA .................... ...,..,, ......,..... Economics OF EHCHAnliERATE MAnA&EMEnl By AYODELEODUSOLA, Ph. D National Economist United Nations Development Programme (undp) nun House, Plot 617/618 Central Business District, Abuja role in the management of any I • Stimulation of non-oil economy not only in terms of exports; and I facilitating the achievement of I, • Promotion of efficient macroeconomic objectives at the allocation of foreign exchange domestic end but also in terms of its i resources through: reduction of importance on international trade I1 dependence on imports and oil and investments. The primary exp Or ts, e Iimi nation of objective of foreign exchange unfavourable capital flight and policy (FOREX) has therefore stimulation of inflows of capital, become the main motivation for the and reduction and possibly AYODELE ODUSOLA, Ph. D choice of any exchange rate I. INTRODUCTION elimination of exchange rate regime. misalignment and exchange rate 1 Exchange rate policy plays an premium. In recent times, achieving exchange rate important role in national economic The starting point of examining the convergence has therefore development management. If well economics of exchange rate become one of the intermediate managed, it could facilitate the management is therefore to have a objectives of central banks in many achievement of macroeconomic better understanding of the specific countries. objectives of rapid economic objectives of exchange rate. This growth, low rate of inflation, high can be grouped into two broad employment generation, buoyant categories: traditional and non� The main objective of this paper balance of payment condition, and traditional objectives. Traditionally, therefore is to examine the progressive income distribution. Of foreign exchange management in economics of exchange rate all economic policies, it is the most Nigeria is aimed at the following management. To address the suitable policy for ensuring internal th ree mutually exclusiv e main focus of this paper therefore, and external balances. objectives:• it is structured into five main parts. Conservation of available Following the introduction is In specific terms, most countries foreign exchange resources so as section two which examines the focus attention on exchange rate to check expenditure and undue conceptual issues in exchange policy for many reasons. Whatever depletion of external reserves; rate management. In the third section, types of exchange rate exchange rate regime adopted has • Ensuring adequacy of regimes are examined while some implications on the prices of reserves consistent with current section four contains the goods and services in any and future internatio nal significance of exchange rate economy. This is particularly so for commitment; and imported commodities and those management. Exchange rate • Preserving the value of ' produced within the economy management questions are external reserves through I whose intermediate inputs and raw reviewed in section five. Section appropriate portfolio diversification materials depend heavily on six draws relevant lessons and and optimal deployment into strong importation. As a tool of correcting concludes the paper. currencies. internal and external imbalances as II. CONCEPTUAL ISSUES well as an instrument of improving The non-traditional objectives the efficiencyof resource allocation, include: This section addresses key concepts that facilitate the governments in many developing • Reduction of excessive countries use exchange rate as the appreciation of the economics of demand for foreignexchange; exchange rate management. It linchpin of any stabilization policy. • serves as the frameworks for From all intent and purposes, Removal of distortions in the economy; contextualizing the focus of the exchange rate plays an important paper. 38 Whatis a Foreign Exchange? domestic-currency term (E,) is charged on imports and exports. #Generically, foreign exchange can defined as units of domestic (iii) Multilateral RER {MRER): be defined as foreign currency or currency per unit of foreign This is a weighted average of the any other financial instruments currency. From foreign-currency external real exchange rate index acceptable as a means of payment term (E,), it is the units of foreign with respect to using multiple trading or exchange for international exchange per unit of domestic partners. On the other hand, NMER transactions. Foreign exchange is currency. The domestic-currency is nominal multilateral exchange made up of convertible currencies measure is the reciprocal of the rate in domestic currency term and that are accepted for the settlement foreigncurrency term. NEER, stands for nominal effective of international transactions - trade exchange rate in domestic currency and other external obligations. Real Exchange Rate (RER): term betweenthe home country and Specifically, the International While nominal exchange rate the major trading partners. Monetary Fund (as cited in Odusola measures the relative price of two 2002) defines it as the monetary moneys, the real exchange rate Fundamental Equilibrium authorities' claims on foreigners in measures the relative price of two Exchange Rate (FEER}: As defined the form of bank deposits, treasury goods. by Williamson (1997), it is the real bills, short-term and long term Real Exchange rate can be defined effective exchange rate compatible government securities and other from both external and internal with simultaneous achievement of claims usable in the events of perspectives: internaland external balances in the balance of payments deficits, •!• External RER is the medium term. By internal balance including non-marketable claims nominal exchange rate adjusted for we mean the highest level of arising from inter central banks and price level differences between economic activity that is consistent inter-government arrangements, countries. 11 is the ratio of the with a desirably controlled level of without regard to whether the claim aggregate foreignprice level or cost inflation, based on the existing factor is denominated in the currency of level to the home country's endowments including technology. the debtor or creditor. aggregate price level or cost The concept of external balance measured in a common currency. refers to determining the level of The Central Bank of Nigeria also •!• Internal RER: Measures current account deficit that is defines it as any currency other the relative prices of two broad consistent with development than the Nigerian currency and categories of goods tradable and objectives ensuring sustainable includes coins or notes which are, non-tradable goods: ratio of the medium term target for the current or have at any time been legal domestic price of tradable to non­ account. This also connotes tender in any territory outside tradable goods within a single improvement of balance of Nigeria: poster orders, money country. The main objective is to payments position and maintenance orders, bills of exchange, capture the internal relative price of a level of reserve consistent with promissory notes, drafts, letters of incentive in a particular economy macroeconomic stability. credit and travellers' cheques for producing or consuming payable or expressed in a non­ tradable as opposed to non­ What is an efficient foreign Nigerian currency. tradable goods. exchange market? (i) Bilateral RER {BRER): It This refers to a situation where the What are Foreign Exchange comprises the price of a prevailing exchange rates fully Rates? representative consumption or reflect available information. That is Exchange rates are the prices at production basket in the home the actual profit in any given period which currencies trade for each country with similar representative from any arbitrage or speculation other: spot and forward rates. It is price in a foreign country measured activity equals, on the average, the simply the value of a foreign in the same currency. The choice of equilibrium expected profits for the currency expressed in terms of this simple index RER is usually time period the actual exchange domestic or other currencies. This informed by the existence of a rate equals the equilibrium can further be classified into