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CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND OF THE STUDY

Following the fluctuation of the naira in 1986, a policy induced by the structural adjustment programme (SAP), the subject of exchange rate fluctuation has become a topical issue in Nigeria. This is because it is the goal of every economy to have a stable rate of exchange with its trading partners. In Nigeria, this goal was not reached in spite of the fact that the country embarked on devaluation to promote export and stabilize the rate of exchange. The failure to realize this goal subjected the Nigerian manufacturing sector to the challenge of a constantly fluctuating exchange rate. This was not necessitated by the devaluation of the naira but the weak and narrow productive base of the sector and the rising import bills also strengthening it. In order to stem this development and ensure a stable exchange rate, the monetary authority put in place a number of exchange rate policies. However, very little achievement was made in stabilizing the rate of exchange. As a consequence, the problems of exchange rate fluctuation persisted in macro-economic management, exchange rate policy as an important tool derives from the fact that changes in the rate of exchange have significant implications, for a country‟s balance of payment position and even its income distribution and growth. It is not surprising since its behaviour is said to determine the behaviour of several other macro-economic variable (Oyejide, 1985). It is even more so for Nigeria which had embarked on a course of rapid economic growth with attendant high import dependency. The manufacturing sector plays a catalytic role in a modern economic and has many dynamic benefits that are crucial for economic transformation. In an advanced country, the manufacturing sector is a leading sector in many respects. It is a quest for increasing productivity in relation to import substitution and export expansion, creating foreign exchange earnings capacity, raising employment, promoting the growth of investments of a faster rate than any other sector of the economy, as well as wider and more eicient linkage among dierent sectors (Fakiyesi, 2005). But the Nigerian economy is under-industrializes and its capacity utilization is also low. This is in spite of the fact that manufacturing is the fastest growing sector since 1973/74 (Obaden, 1994). The sector has become increasingly dependent on the external sector for import of non-labour input (Okigbo, 1973). In the ability to import therefor; can impact negatively on manufacturing production Oyejide (1985) posited that the breakdown of the Brelton woods system induce variability in the rate of exchange worldwide; Nigeria inclusive. Umubanwer (1995) has noted that three adverse consequence of this on ability to import. Devaluation which further aggravates the situation has not significantly affected economic performance in the positive direction in Nigeria (Ojo, 1990). 

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