: MS Word : 1-5 : 151 : Abstract
 Price: Just #2000
Get the complete project ยป

EDS00289 - EFFECT OF EXCHANGE RATE AND INTEREST RATE ON PRIVATE INVESTMENT (980-2017)


CHAPTER ONE

INTRODUCTION

  •      Background to the Study

Though different opinions have been shared on how the Nigerian economy has failed to trickle down its nominal economic growth to the greater portion of its citizen thus making statistical record of the economy to be presented unrealistic before the Nigerians and the world. One of the arguable facts about the development of the economy is the question of how the exchange rate and interest rate have brought about development in the private investment capability as a stimulator of growth especially in the developing countries.

Some economists view led by Mckinnon (1973) and Shaw (1973) in the early 1970s began to agree on the issue of financial liberalization as a medium of promoting saving, investment, and growth. This argument was based on the phenomenon that real interest rates are subsequently negative in developing countries because of administrative controls on the nominal interest rates and their powerful policies and regulation in the financial market. This argument illustrates that the real interest rates financially have a net positive impact on individual investment, contradicting the traditional view of a negative relationship between private investment and real interest rates (Osundina & Osundina, 2014).

In Nigeria, before the introduction of the 1986 National development plan of the Structural Adjustment Program (SAP), the Nigeria’s currency benefitted an appreciable value against the U.S dollar and this factor became the key to rapid economic growth, price stability and the sectorial function ability of the economy. Meanwhile, with the introduction of new economic development plans and different political leaderships and laws, the country began to suffer unfavorable exchange rate that lead to a higher degree of risk and uncertainty in the Nigerian business environment thereby becoming a major concern for existing investors and intending private domestic and foreign investors. According to Oniore, Gyang, & Nnadi (2016) the Nigeria’s investment opportunity is anunpredictable prospect with  uncertain interest rate  that domestic investors faces enormous risk that no individual, no matter how intelligentand experienced such person is in the business world could predict the possibility of the foreign exchange market performance of the economy.

According to the Central Bank of Nigeria report in June (2009) series, a financial reform was filled to focus on structural changes, monetary instrument or policy, interest rate administration and foreign exchange management, including the liberalization of  both financial institutions and market building in a bid to aid proper business atmosphere through favourable regulation of interest rate and exchange rate activities. Nonetheless, in the opinion of Ojima & Fabian (2015), “Interest rate policy in Nigeria is a major tool of monetary policy with regards to the role it play in the mobilization of financial resources which goal is to promote the econmic growth and development of the economy.

Earliest theoriest like Adam Smith and Karl Marx view investment as the engine of economic productivity and the fundamental cause of economic disconfort whenever it is low or not paid preferential attention. Salman & Nawaz (2014) added that the private investment is one of the most important macroeconomic variable which serves as a stem of growth for every economy both in the short and the longrun. In short run, private investment is important because it is the most sensitive and volatile component of aggregate demand; which is chiefly responsible for business fluctuations. And in the Long term, the significance of the private investment comes from its role in physical and human capital formation which is the ultimate source of growth and productivity.

According to Muhammad (2004) as cited by Ojima & Fabian (2015), Investment performs an important function in the economic growth in a country in that countries rely on investment to solve economic problems such as domestic development, poverty, unemployment and other macroeconomic problems.

In this view, this research therefore aims at highlighting the very important of exchange rate and interest rate in favor of private investment opportunities. 

1.2       Statement of the Research Problem

The Nigerian economy witnessed an economic development upheaval and some great financial depression in the early 1980s Imoisi, Uzomba, & Olatunji (2010). In 1980's, the Nigerian economy was in jeopardy from the ineffective structure of the economy, falling prices of crude oil in the international market and huge external debt stock (Imoisi, Uzomba, & Olatunji, 2010). This economic shock led to financial depression which largely manifested in the internal and international productivity deficiency through indiscriminate distortions of the financial prices including interest and exchange rates which have tended to the reduction in the real growth rate and performance of the Nigerian economy at large.

However to Shaw (1973), this financial depression will retard the development process of the economy especially when the financial system of such economy is not productive. Consequently, it is unfortunate that despite all the effort of the Nigerian government for the past years to improve the economic development by controlling interest rates, exchange rates and securing cheap funding for the success of the country’s economic activities, all has been unsuccessful because of the mismanagement of economic activity administrations.

According to the Central Bank of Nigeria (CBN) report (2009), in August 1987, all controls on interest rates were removed, while the CBN adopted the policy of fixing only its minimum rediscount rate to indicate a change in the desired direction of interest rate changes. This was modified in 1989, when the CBN issued further financial instrumental directives on the required spreads of deposit and lending rates. In 1991, the Ibrahim Banbagida government prescribed a maximum margin on financial disposition between each bank's average cost of funds and its maximum lending rates. Later, the CBN as the head financial institution of the country prescribed a specific savings deposit rate and a maximum lending rate. Furthermore, a partial deregulation was restored in 1992 of which the subsidiary financial institutions of Nigeria was only required to maintain a specified spread between their average cost of funds and their maximum lending rates.

More also the removal of the maximum lending rate ceiling in 1993 makes the interest rates to increase more substantially to an unprecedented levels in sympathy with rising inflation rate which rendered banks' high lending rates negative in economic terms. In 1994, direct interest rate controls were restored. As these and other controls introduced in 1994 and 1995 had negative economic effects, total deregulation of interest rates was again adopted ever since October, 1996. Imoisi, Uzomba, & Olatunji (2010) issued report that in a bid to enthrone sanity in the foreign exchange market, the CBN re-introduced the Dutch Auction System (DAS) in July 2002 introducing the goals of realigning the exchange rate of the naira, increasing external reserves, enhancing market transparency and curbing capital flight from the country. Under this system, the Bank is expected to intervene twice weekly and end-users through authorized dealers bought foreign exchange at their bid rates. This rate known to be the cleared market rate (marginal rate) was adopted as the ruling rate of exchange rate for the period, up to the next auction. DAS also introduced a good financial instrumental measure of stability in exchange rate as well a reduction in the arbitrage premium between the official and parallel market rates. Other monetary tools adopted to enhance the operational efficiency of the foreign exchange market included the unfettered access granted holders of ordinary domiciliary accounts to their funds, while utilization of funds in the non-oil export domiciliary accounts was allowed for eligible co-international transactions.

According to Agu (1988) as cited by Imoisi, et al (2010) on his view about the determinants and structure of real interest rates in Nigeria, concluded that there is a negative effect of low interest rate on savings and investment using the usual Mckinnon financial representative diagram. Hence , the relationship between real interest rates, savings and investment is inconclusive. Uchendu (1993) opines that one of the raising issues in the current economic policy in Nigeria is the interest rate policy which is expected to play an important function in the deregulation of the economy through induced savings which can be channeled to investment and thereby increasing employment, output and efficient financial resource utilization. Osundina & Osundina (2014) insisted in their empirical research that “the long run objective of deregulating the interest rate to promote investment most especially  in the agricultural and manufacturing sector of Nigeria was to achieve positive relationship between interest rate and investment in Nigeria in order to enhance economic growth and domestic investment development”.

According  to Jonathan et al  (2016), the instability and unprecedented depreciation of the naira in the foreign exchange market  has led to the decline in the investment, standard of living of the country, increment in the cost of production which necessitated cost-push inflation. This badwagon effect has also influenced ngatively the international competitiveness of the non-oil exports and even oil export revenue and in addition, it has made manpower planning and national objective projections difficult at both micro and macro economic level.

In this vein, the objective of this research is to critically assess the impact of interest and exchange rates on private investment effectiveness in Nigeria from 1980 to 2017. By examining the management of interest rate and exchange rate in Nigeria, the research is aimed at looking into how significant exchange rate and interest rate is to the country’s economic growth.

1.3       Research Questions

From the above discussions and arguments, we can observe the following research questions:

  • What is the impact of exchange rate and interest rate on Private Investment in Nigeria?
  • What is the trend of exchange rate and interest rate to private investment?

1.4       Research Objectives

The broad objective of this study is to examine the impact exchange rate and interest rate on Private Investment in Nigeria from1980-2017. Other objectives which will serve as the specific objectives that will guide this study are as follows:

  • To determine the impact of exchange rate and interest rate on Private Investment in Nigeria.
  • To examine the trend of exchange rate and interest rate to private investment?

1.5       Scope of the Study

The scope of this study is concentrated on the effect of exchange rate and interest rate on Private Investment on the Nigerian economy, and it covers the trends within the year 1980 to 2016 (i.e. 36 years). The choice of 1980 as a base year is due to the fact that the researcher wants to study Nigerian Economy within post Oil boom, the oil glut era, and the first devaluation while the choice of 2017 as a terminal year is to check the effect of the explanatory variable till date.

1.6       Justification of the Study

This research will help bring about the guidelines to resolve the unpalatable ravaging discrepancies and uncertainty of the optimization of the objective(s) in the interest of the domestic investors who has   invested or planning to invest in the country. It will also help to reduce brain drain, over dependency on imported commodities since a certainty of profit awaits the investor from the observation and result.