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University of Nigeria Research Publications
NWAKOBY, Obiora Christopher
Aut
hor
PG/MBA/90/10751
Title
Multinationals in Nigeria: Hedging Against Foreign Exchange and Interest Rate Risk
Facu
lty
Business Administration
Dep
artm
ent
Banking and Finance
Dat
e
October, 1991
Sign
atur
e
.WULTINATIONALS IN NIGERIA : Ilcvlging against foreign cxclmnge and
in tcrcst rate risk.
Subraitted in partial fulfilment of the I ~ I S 1 1 MI1 t DC~PCC in thv
Depur tn~cnt of' Banking and Finance
Ibpartmcnt of Banking and Financv University of Nigeria
Enugu Campus
Nvakoby Obiora Chris topher , a post-graduate student
i n the Departanent of Banking and Finance, University
of Nigeria, with the r e g i s t r a t i o n number PG/MBA/~O/I 0751
has s a t i s f a c t o r i l y completed t he requirements lor t h e
award of Master of Business Administration Degree i n
Banking & Finance.
The work embodied i n t h i s D i s se r t a t i on i s o r i g i n a l and
has no t been submitted before i n p a r t o r full f o r any
diploma o r degree i n t h i s o r any o t h e r un ive rs i ty .
D E D I C A T I O N
This dissertat ion is dedicated to my loving 4
parents
LATE MR. C .A. NWAKOBY
AND
MRS. C. NWAKOBY
ACKNOWLEDGEMENT ----I----------
I am indebted t o my supervisor DR. B.E. Chikeleze f o r h i s
inumerable con t r ibu t ions towards t he success of t h i s research
work. I cannot thank you enough.
My g r a t i t u d e a l s o goes t o a l l the f i nanc i a l executives of I
some of the major Mul t ina t ional Companies f o r the mater ia l s
and information they gave me f o r t h i s work. I r e g r e t not
mentioning t h e i r names ( a t t h e i r r eques t ) .
Many thanks t o my boss, Mr W.N. Ekemezie f o r h i s co-operation T4
3 and understanding and Mrs. ~da - Ibeka who typed t he manu-
s c r i p t f o r a good Job wel l done.
I apprecia te the many he lp fu l comments and suggest ions of
Ogwueleka PeN. Miss and some of my col leagues , M r . 0. Okafor
0suJ i ~ l p h o n s u s , Mojekwu I., ~ w a ~ a C., OsuJi C.S. Miss,
Onuegbu S. Miss, Esiaba M. Miss, Iroh D.N., Obidike A. Miss,
Anieke E., Amadi wokocha and Madueke G. Miss.
I a l s o owe my family, the Nwakobys', a considerable debt
f o r con t r ibu t ing a t d i f f e r e n t l e v e l s of my education. My
spac i a l thanks t o my loving mother, Mrs. Chr i s ty Nwakoby,
meka, Nkiruka, Ifeyinwa, a l l Nwakoby and Mrs. Chinwe
Chukwunenye f o r t h e i r support.
F ina l ly , I thank the Almighty Cod, without whose b less ing
and guidance, t h i s p r o j e c t wouldn't have been a success.
NWAKOBY O.C.
ABSTRACT
N u l t i n a t i o n e l C o m p s n i e s i n . N i g e r i a a r e t h o s e w h o s e
P a r ~ n t b o d i e s a r e a b r o a d . T h e y a r e S u b s i d i a r i e s o f t h e i r
.I C ~ n t r a l O f f i c u s w h i c h a c t a s t h e i r a d m i n i s t r a t i w c . U n i t . They
C o n t r o l m o s t o f t h e V i a b l e L e c t o r s o f t l ~ c E : ig r - r i ?n cconorily.
Tt lc is G r i q i r l d a t e : ; i - ~ c C t o t i i s L o r y .
T ~ I E N i g e r i a n ~ c o n o m y , i n r e c e n t t i m e s , W i t n e s s e d a l o t o f
p e s n t i v e f l u c t u a t i o n s i n i t s f o r e i g n u x c h a n g o r ~ t e t h o u g h t h ~
i n t t ; r e s t r a t u i s p e g g e d a t 2 1 % .
b
The r i s k a s s o c i a t e d w i t h such f l u c t u a t i o n s i n c l u d e
a c c o u ~ t i n g a n d a c o n o m i c r i s k s . when t h e c a s h f l o w e f f e c t o f
a n r j xchanyo l o s s i s a n i rnpodimc!nt t o t h e 0 p r ; r a t i o n s o f thci
f'irfll, s c o n o r r ~ i c r i s k i s o x p a r i e n c e d w t . ~ i l c a c c o u n t i n g r i s k
affect^ c a c h f l o w p r o f e c t j o n s , p r o f i t e ~ d l o s s a c c o u n t a n d
I o rdc . , r t o c:nsuri, t l r a t t h e y d o n o t o n l y b r e a k e v e n o r i a r e p r o f l t a l l e , r r ~ u l t i n a t i o ~ a l C o m p a n i e s e rnploy v a r i o u s
h e d g i n g p o l i c i e s wl~icll i n c l u d e Lxol i i~nyr? p l a n : ~ i n y , f o r w a r d
c ,xc t ranye O u n t r a c t s , s o u r c i n g o f w o r k i r q C a p i t a l f roru
l o w i n t c r c ? s t r a t o Cot . rn t r ic . s , s o u r c i n g o f w o r k i n g C a p i t a l
f r o m t h e C a p i t s 1 m a r k e t , a d j u s t m o n t o f , p r i c a s o f t h e i r
p r o d u c t s t o r e f l e c t t h e p r e s e n t r c ! a l i t i c , , i n t ~ i r n z l c o r ~ t r o l
a n d t e c h n i q u c 2 , p r r , p ~ y r n c ? n t s l e a d i n g & L a g g i n g a n d t h e n a c c e l e v -
a t i o n o f r e m i s s i o n o u t s i d e t h e C o u n t r y whnn t h e y s n n s o t , h a t t h e
m o n e t a r y a u t h o r i t i e s a p p e a r l i k e l y t o i n s t i t u t e e x c h a n g e
r o s t r i c t i o n s .
As f o l s i y n e x c h a n g o r a t e a n d i n t e r e s t r a t e i s d i r e c t l y
a f f a c t c d b y e a c h o t h e r , a l l h e d g i n g p o l i c i a s #jncompal;s a
c o ~ , s i r j c . r a t i o n o f b o t h .
T h e p ~ o j e c t i s d i v i d e d i n t o 5 c h a p t e r s .
C h a p t e r 1 i n t r o d u c u s t h e p r o j e c t . I t s t a t e s wily tile r k s e a r c h
w o r k wos considered i m p o r t a n t t o b e c a r r i e d O I J t , 3 1 1 t l n l o o
Ctlaptc r 2 , reviews a v a i l a b l e l i t c r z t u r c s o n t l i o t o p i c .
I C h a p t e r 3 o x p l a i n s t h e r u s e a r c h m e t h o d o l o g y a d o p t e d .
C l ~ a p t n r 4 t r e a t s r i s k a n a l y s i s . Undr . r t h i s C t i ; ~ ( , t ~ r , t h e
b e h e v i o u r o f f o r e i y n o x c l ~ a n c , e r n t o s a n d i n t n r o s t r ~ t e s was
analysc+d ( T r o n d a n a l y s i s ) .
1 Thb a n a l y s i s C o m p r i s e d of p e r c ~ n t a y e a n a l y s i s a n d 1.; I
m e t h o d o f p r o j e c t i n g a v e r a g e k j U ~ D o l l a r e x c h a n g e r a t e u s i n g
i P a s t r e c o r d s .
# J l ~ u m a i n t h e m of' t h e p r o j e c t w l ~ i c t l i a h e d y i n g a g a i n s t
r i s k was d u e l y s x p l a i n e d .
C h a p t e r 5 c o n c l u d ~ s t h e p r o j e c t a n d Ul f f ea s s u g g e s t i o n s
a n d r e c o m m u n d a t i o n s .
LIST O F TABIBS
TURNOVER OF 12 N I G E R I A
CORPORATE N I G E R I A 1989/90
AVERAGE BANK I N T E R E S T RATES (1990) I N PERCENT
SAVINGS, F I X E D D E P O S I T AND LENDING RATES (COMMERCIAL BANKS) 1987 - 90
F I X E D D E P O S I T RA'FES (MERCHANT BANKS) 1989 - 1990
FOREIGN EXCHANGE FLOWS THROUGH THE CENTRAL BANK O F N I G E R I A (#'WILLION)
FOREIGN EXCHANGE FWWS THROUGH THE CENTRAL BANK W D OTHER BANKS ($'MILLION)
FOREIGN EXCHANGE BUDGET, EXPENDITURE AND EARNINGS, 1980 - 1989 (# 'MILLION)
COMPARISON O F THE AUTONOWOUS RATES WITH FEW RATES (January - ~ u g u s t 1988)
MONTHLY AYERAGE 1986 - 1989 #/US DOLLAR EXCHANGE RATE
MONTHLY AVERAGE RATE 1990 #/US DOLLAR
#/US DOLLAR EXCHANGE RATE, D E C M B E R 1-30, 1990
#/US DOLLAR EXCHANGE RATE, JANUARY 1 991
PERCENTAGE INCREASE/DECREASE FOR AVERAGE LENDING RATES ( ~ o m m e r c i a l / ~ e r c h a n t ~ a n k a )
MQNTHLY AVERAGE 1986-1989 #/US DOLLAR EXCHANGE RATE
MONTHLY/ANNUAL PERCENTAGE INCREASE OR DECREASE O F #/US DOLLAR EXCHANGE RATE
L I S T OF FIGURES -----------------
10 COMMERCIAL BANKS' DISTRIBUTION OF
LOANS AND ADVANCES (w'M)
2 0 DEMAND - SUPPLY OF FOREIGN EXCHANGE B
( J A ~ A R Y - MARCH 1990)
3. 7 990 F'OREICN EXCHAWE BUDGET ALLOCATION
C E R T I F I C A T I O N
DEDICATION
ACKNOWLEWEMENT
L I S T O F TABLES
L I S T O F
CHAPTER 1
INTRODUCTION ... . . . STATEMENT O F THE PROBLEM ... ... O B J E C T I V E O F THE STUDY ... ... S I G N I F I C A N C E AND IMPORTANCE OF THE: STUDY * * * SCOPE O F THE STUDY ... ... CHAPTER 2
LITERATURE REVIEW
THE N I G E R I A N E C O N O ~ I An Appraisal from 1960 to date ... ...
CORPORATE PERFORMANCE ANALYSIS .*. ... I N T E R E S T RATE P O L I C Y AND BE?iAVIOUR BEFORE
AND AFTER DEREGULATION FOREIGN EXCHANGE P O L I C Y AND MONITORING . * . 0 - 0
FOREIGN EXCHANGE CONTROL TOOLS . . . . . . FOREIGN EXCHANGE POLICY AND CONTROL UNDER THE STRUCTURAL ADJUSTMENT PROGRAMME (SAP ) . . . FOREIGN EXCHANGE CONSERVATION I N N I G E R I A ...
RESEARCH METHODOLOCIY
RESEARCH APPROACH SOURCES O F DATE 3.2.1 P r i m a r y source8 3.2.2 secondary aources DATA ANALYSIS METHOD
CHAPTER 4 RISK ANALYSIS
R I S K STRUCTURE ... . . . 4.1.1 mreign mchange and In teres t
4.1.2 C a u s e s of Exposurea ... ... 65
4.2 TREND ANALYSIS ... ... 67 4.2.1 DfB-Znc percantage ~nalysis . . . . . . 4.2.2 ProJected Average ##/US
Dollar Exchange Rate For 1991 . . . 73 4.3 HEWING POLICIES AGAINST RISK . a . . a . 77
4.3.1 Calculating c o s t of Hedging . ... 83
CHAPTER 5
5.1 C O N C L U S I O N e e e ..a 86 5.2 SUGOESTIONS AND RECOMMENDATIONS e e * a*. 92
NOTES . . . . . . 97 BIBLIGRAPHY ... . . . 99
CHAPTER I
1 ' I N T R O D U C T I O N
~ l t h o u g h t h e r e i s no g e n e r a l l y a c c e p t a b l e d e f i n i t i o n
of m u l t i n a t i o n a l companies, it i s however d l s t i n g u i -
s h a b l e from o t h e r companies i n terms of d i r e c t i n v e s t -
ment abroad and d i r e c t i n t e r e s t i n t h e bus iness envi-
ronment i n which it has such inves tments , i L,y-
Eehrman (1969) m i d t h u t the hal lmark of a m u l t i n a t i o n a l ,?' , '! c o r p o r a t i o n a r e c o n t r o l and i n t e g r a t i o n o f a f f i l i a t e s . j
M u l t i n a t i o n a l s has i t s r o o t s f a r back i n h i s t o r y . b
M u l t i n a t i o n a l s d i d n o t grow i n a vacuum. They f l o u -
r i s h e d becvuse alter world wur 11, the m&Jur' d a v a l u y a d . I /
/
countries l e d by U,g, s a t a b l i s h e d a framework f o r t h e
world economy t h a t encouraged t h e free flow of goods
and p r i v a t e c a p i t a l between c o u n t r i e s on market 2 p r i n c ' l p l e s ,
The f a c t o r s t h v t were in s t rumen ta l i n spark ing t h e
r a p i d e v o l u t i o n o f m u l t i n a t i o n a l c o r p o r a t i o n s a r e i n
3 p a r t environmental and i n p a r t "managerialn . The rBT"ctor8 t h a t induced firms t o s e t up f a c i l i t i e s
f o r manufacturing and marketing abroad a r e t h e
a t t r a c t i o n o f a growl% market, t h e s t imu lus of
government restrictions on d i r e c t t r a d e , encouragement
by t h e go$crment of t h e h o s t n a t i o n and managerial
a s p e c t s o f t h e f i r m and t h e i n d u s t r y group which i t
i s a member. Whether l a r g e o r sma l l , m u l t i n a t i o n a l
c o r p o r a t i o n s a r e open t o a s s o r t e d c r i t i c i s m a from a
v a r i e t y of q u a r t e r a . Notably amongst them a r e t h e
e x p l o i t a t i o n of people and r e s o u r c e s and t h e e x e r c i s e
of enormous p o l i t i c a l i n f l u e n c e t h a t p l a c e s t h e
m u l t i n a t i o n a l s beyond t h e c o n t r o l of n a t i o n - s t a t e s .
There i s a g e n e r a l f e e l i n g now t h a t a s e t of i n t e r - J
,4 n a t i o n a l g u i d e l i n e s endorsed by t h e United Nat ions , I I
I n a t i o n a l governments and t h e m u l t i n a t i o n a l s themselves !?
b ;: i s a b s o l u t e l y e s s e n t i a l t o l a y a founda t ion f o r $
4 llgoodn world c o r p o r a t e c i t i z e n s h i p . I n t h e i n t e r n a t i o n a l a r ena , where cur rency e x c h a n ~ e
occu r s between c o u n t r i e s , as a r e s u l t of o p e r a t i o n s of
m u l t i n a t i o n a l s , a n a t i o n a l monetary u n i t h a s no l e ~ a l
t ende r . T ransac t ions by m u l t i n a t i o n a l s can only be
auhieved through t h e convers ion o f one cur rency i n t o
a n o t h e r , and t h i s p r o c e s s is c a l l e d f o r e i g n exchange,
The market i n which c l a ims t o f o r e i g n c u r r e n c i e s a r e
bought and s o l d i n terms of domestic money i s known
as t h e f o r e i g n exchange market.
The b a s i c f u n c t i o n o f t h e f o r e i g n exchange market i s
t o t r a n e r a r purchas ina power from one n a t i o n t o another .
This i s dona through v a r i o u s f o r e i g n exchange bankers
and t h e fo'reign exchange depar tments of commercial p
banks who buy and s e l l f o r e i g n exchange.
Foreign exchange ea rn ings from i n t e r n a t i o n a l t r a d e
t r a n s a c t i o n s and e x t e r n a l a i d a r e v i t a l f o r t h e
economic t r ans fo rma t ion of less-developed c o u n t r i e s
of which Niger ia i s one.
According t o 030 (1990). between 1960 and 1985,
Niger ia went through varying development experience
which r equ i red prudent management of a v a i l a b l e f o r e i g n i
exchange resources . Inadequate f o r e i g n exchange was I
i' a na3or c o n s t r a i n t i n t h e execut ion of t h e f i rs t
8
National development p lan , 1962 - 1968, a s i t u a t i o n
t h a t wa6 accentua ted by t h e prosecut ion of t h e c i v i l
war between J u l y 1967 and January 1970. The per iod
1970 - 1980 witnessed a dramatic improvement i n
~ i g e r i a ' s f o r e i g n exchange p b s i t i o n fol lowing t h e
. s u b s t a n t i a l i n c r e a s e s i n crude o i l p r i c e s i n 1973-74
and 1979.
Following the c o l l a p s e of t h e world o i l market i n
the e a r l y 1980as , N i ~ e r i a once more en tered a very , f \ , i!
t i g h t f o r e i g n exchanae p o s i t i o n e s p e c i a l l y i n t h e \ P,,
i!: c o n t e x t of prev ious commitaents. Despi te t h e f a c t
t h a t f o r e i g n exchange management s i n c e 1986 has I,\
'1% I
responded adequately t o the needs of t h e economy, it \ ,
has r a i s e d s e v e r a l i s s u e s which t h e des ign of f u t u r e I 1 \
n a t i o n a l development s t r a t e g i e s must t a k e i n t o account.
Forolgn exuhange may t h e r e f o r e be d e f i n e d aa t h e
monetary a s s e t used f o r t h e s e t t l e m e n t o f c u r r e n t
i n t e r n a t i o n a l t r a n s a c t i o n s and f o r f i n a n c i n g
i n b a l a n c e s i n a c o u n t r y ' s e x t e r n a l payments p o s i t i o n
vis-a-via o t h e r c o u n t r i e s . The main sou rces of
f o r e i g n exchange t o a count ry i n c l u d e f o r e i g n cur rency
r e c e i p t s from t h e e x p o r t s of goods and s e r v i c e s , in f low
of f o r e i g n c a p i t a l such as l o a n s and investments, a s
. w e l l a a g r a n t s o r g i f t s which r e p r e s e n t u n i l a t e r a l b
t r a n s f e r s . Foreign exchange, based on t h e above, can
be de f ined as a component o f a c o u n t r y ' s o f f i c i a l
e x t e r n a l r e s e r v e s which may be de f ined a s t h e t o t a l
s t o c k of e x t e r n a l assets which are a v a i l a b l e t o t h e
monetqry a u t h o r i t i e s of a count ry f o r t h e s e t t l e m e n t
of i n t e r n a t i o n a l economic t r a n s a c t i o n s .
M u l t i n a t i o n a l s can r a i s e money i n t e r n a l l y ( i e w i t h i n
t h e coun t ry ) f o r t h e i r o p e r a t i o n s . This i s done wi th
a good a n a l y s i s o f i n t e r e s t r a t e s .
I n t e r e s t r a t s the world over i s t h e p r i c e of c a p i t a l
and c o n s t i t u t e e a r e t u r n on c a p i t a l f o r t h e l e n d e r o r
i n c l u d i n g t h e r e d u c t i o n of i n f l a t i o n , promotion of
o a p i t a l f lows and discouragement o f c a p i t a l f l i g h t .
- 5 -
With the d e r e g u l a t i o n of i n t e r e s t r a t e s and t h e
a t t e n d a n t compet i t ion on r a t e a pa id f o r d e p o s i t s , banks
can now o f f e r any r a t e s t o t h e i r customers wi th in t h e
range p resc r ibed by t h e Cen t ra l Bank of Niger ia . This
freedom could l ead t o i n c r e a s e i n t h e c o s t g f funds i n
t h e economy.
Thie r e sea rch t h e r e f o r e i s conducted with t h e view t o
o u t l i n i n g some of t h e b a s i c r i s k s a s s o c i a t e d with
f o r e i g n exchange and i n t e r e s t r a t e s and a l s o determining b
how they a re conta ined by t h e m u l t i n a t i o n a l s with
bus iness i n t e r e s t s i n Nigeria.
STATEMENT OF THE PROBLEM
M u l t i n a t i o n a l s i n N ige r i a as' a l r e a d y de f ined can be
simply p u t as a l l bus ines s concerns o p e r a t i n g i n
Niger ia whose o p e r a t i o n s c u t s a c c r o s s o t h e r n a t i o n s .
Whether t h e i r headqua r t e r s a r e s i t u a t e d i n Ni$er la o r
n o t , does n o t debare them from f a c i n g t h e r e a l i t i e s of
t h e i r cognate environment which i s Niger ia .
For e f f i c i e n t o p e r a t i o n , they must procure f o r e i g n
exchange ( t h a t is exchanging n a i r a wi th i t s equ iva len t 4
of o t h e r f o r e i g n c u r r e n c i e s ) . This f o r e i g n cur rency ,
s o procured, i s normally used i n impor t a t ion o r expor-
t a t i o n a c t i v i t i e s . There a r e i n h e r e n t problems i n
procur ing f o r e i g n exchange i n Niger ia . Most s i g n i f i -
Gent amongst others arc
( a ) t h e l i m i t e d amount made a v a i l a b l e t o
banks through FEM ( f o r e i g n exchange
marke t ) ,
( b ) cumbersome procedures towards procure
ment and
( c ) f l u c t u a t i o n s ( t h a t i s i n c r e a s e o r
dec rease i n va lue ) which is normally
caused by market f o r c e s o f demand and
supply, i n f l u e n c e of i n t e r n a t i o n a l
c r e d i t o r g a n i s a t i o n s l i k e P a r i s c l u b ,
World Bank, IMF e t c and t h e deva lua t ion
of the l o c a l currency ( n a i r a ) through
t h e i n t r o d u c t i o n o f .FEM.
Another f a c t o r t h a t a f f e c t s t h e o p e r ~ t i o n of mult ina-
t i o n a l s i n Niger ia i s i n t e r e s t r a t e . Thia f a encoun-
t e r e d when they seek f o r c r e d i t s from banks. I n t e r e s t
r a t e which i s t h e r a t e of i n t e r e s t charged by bunks on
va r ioua money market i n s t rumen t s and f o r g iv ing o u t
l o a n s t o i t s customers , of which m u l t i n a t i o n a l s a r e
a major p a r t , i s normally in f luenced by r e g u l a r govern-
ment monetary and f i s c a l p o l i c i e s and market forces of
demand and supply.
To g rapp le wi th a l l t h e s e problems i s no mean f e a t .
The q u e s t i o n s t h a t r e a d i l y come t o mind a r e t h e
followin&:-
i ) how do m u l t i n o t i o n ~ l s o p e r a t i n g
i n Niger ia hedge o r gu ide a g a i n s t
t h e s e problems o u t l i n e d ?
i i ) how does t h e i r s o l u t i o n package o r
p o l i c i e s look l i k e ?
i i i ) what a r e the coun te r s from t h e
c o u n t r i e e apex f i n a n c i a l l n o t l t u t i o n
t o ensure that t h e economy o f t h e
country i s n o t adverse ly a f f e c t e d ? #
i v ) why must t h e government a l low t h e s e
r a t e s t o be determined by t h e f o r c e s
of demand and supply knowing q u i t e
w e l l t h a t the countries f inanc ia l
markets are not f u l l y matured and
developed?
The d e c i s i o n t o embark on a study o f t h i s nature,
therefore, was borne out o f the need t o f i n d out how
mult inationals i n Nigeria operate prof i tably under t h e
environment of these problems outlined above.
- 9 -
1.3 pBJF,CTIVE OF THE STUDY
The a c t i v i t i e s o f m u l t i n a t i o n a l s a f f e c t t h e s t a t e of
t h e Niger ian economy,
For t h e economy t o be on a sound f o o t i n g , t h e a c t i v i t i e s
of t h e s e m u l t i n a t i o n a l s should be c a r e f u l l y monitored
and t h e government propound and en fo rce p o l i c i e s t o com-
plement t h e aforementioned.
The o b j s c t i v t ~ of t h i s s tudy i s t o probe and f i n d o u t
t h e d i f f e r e n t convent iona l and Mnconventional p o l i c i e s
employed by m u l t i n a t i o n a l e o p e r a t i n g i n Niger ia i nb
checking f o r e i g n exchange and i n t e r e s t r a t e r i s k s . I t
i s meant t o a c t as a gu ide t o t h e enab l ing f i n a n c i a l /
economic a u t h o r i t i e s i n Nigekia i n de te rmin ing t h e
R ~ ~ U C ~ U I - ~ untl cor;tr*ntn of the Bronc? t . t~ry b i r r ( ! t ' i n c e l
p o l i c i e s .
The c o n t e n t s of t h i s p r o j e c t w i l l , no doubt , h e l p any
member o f t h e Nigeria s o c i e t y who i s i n t e r e s t e d i n t h e
economic w e l l being of t h e count ry .
- 10 - 1.4 SICNLFICANCE AND IMPORTANCE OF THE STUDY
The m u l t i n a t i o n a l s ope ra t ing i n Niger ia , t h e C e n t r a l
Bank of Niger ia and o t h e r i n d i v i d u a l s who a r e i n t e r e s t e d
i n t h e we l f a re of t h e Niger ian economy need t o have a
good knowledge of t h e behaviour o r f l u c t u a t i o n s of
t h e v a l u e of n a i r a i n r e l a t i o n t o f o r e i g n c u r r e n c i e s
and i n t e r e s t r a t e s . The r i s k of such f l u c t u a t i o n s being
The knowledge w i l l h e l p them determine t h e s t r u c t u r e
of t h e bus ines s environment a v a i l a b l e t o them and de
a b l e t o f o r e c a s t f u t u r e cond i t ions . Good bus iness i s
t h e a b i l i t y t o make p r o f i t and s u s t a i n t h e l i f e of t h e
company. One can only ach ieve t h i s through a proper
knowledge of interest r a t e and fopeign exchange
behaviours.
This s tudy , t h e r e f o r e , w i l l p rov ide t h e r equ i r ed
knowledge of p a s t t r e n d s , and f u t u r e f o r e c a s t of
f o r e i g n exchange and i n t e r e s t r a t e va lues v i s -a -v is
m u l t i n a t i o n a l s ope ra t ing i n Niger ia . I t i s meant t o
i d e n t i f y obvious gaps i n the knowledge of f o r e i g n
exchange and i n t e r e s t r a t e a n a l y s i s .
The c o n t e n t of t h e s tudy i s meant t o g i v e a n up-to-date
knowledge i n t r end a n a l y s i s and f o r e c a s t i n g f u t u r e
op t ions . me methodology employed i s s c i e n t i f i c and
g i v e s a q u a n t i t a t i v e a n a l y s i s of the s u b j e c t m a t t e r
t o t h e b e n e f i t of t h e reader .
This s tudy is t h e r e f o r e of immense importance o r
va lue t o multinationals ope ra t ing i n Niber ia , t he
C e n t r a l Bank of Niger ia , Researchers i n t h e f i e l d of
f i n a n c i a l a n a l y s i s , p r a c t i t i o n e r s and p r o f e s s i o n a l s
and persons o r e n t i t i e s who a r e i n t e r e s t e d i n t h e f i e l d
of f inance .
It w i l l a s s i s t t h e m u l t i n a t i o n a l s i n r e g u l a t i n g t h e i r
bus iness , t h a t is knowing when t o ope ra t e i n a c e r t a i n
way o r t a k e c e r t a i n dec i s ions , be i t s t r a t e g i c o r
otherwise. The func t ions namely, planning, organiging,
d i r e c t i n g and c o n t r o l l i n g by t h e o rgan i sa t iona w i l l be
made more e a s i e r and meaningful.
The Cen t ra l Bank of Niger ia , as a banker t o banks
(commercial banks, merchant banks and f inance houses) ,
wi th t h e h e l p of t h i s r e sea rch work w i l l know how, when
and which types of r e g u l a t o r y laws t o i s s u e t o banks
and f inance houses, a l though it is widely bel ieved t h a t
f inance houses a r e n o t f u l l y r egu la t ed comparatively
with t h e i r c o u n t e r p a r t s i n t h e banking business . With
this s tudy , t h e CBN w i l l a l s o determine how t o r e g u l a t e
t h e f i n a n c i a l involvements of a l l m u l t i n a t i o n a l s i n
Niger ia with a view t o '!Short C i r c u i t i n g " t h e i r ou t l ined
hrd6in6 p o l i c i e s . R ~ s e a r c h e r s w i l l f i n d t h i s a s a base
f o r continued assessment and f u r t h e r r e sea rch on t h e
The value of the inves t iga t ion t o profess ionals ,
prac t i t ioners and persons or corporate bodies cannot
be over-emphasised.
A knowledge o f the f a c t that indiv iduals , profess ionals
or prac t i t ioners are involved i n the operation of these
mult inationals , CBN and banka throws more l i g h t in to
the envisaged importance o f t h i s study.
- 13 - 1 .5 SCOPE OF THE STUDY
I n under-going t h i s s tudy , s p e c i a l e f f o r t wae made t o
cove r t h e a c t i v i t i e s o f m u l t i n a t i o n a l s o p e r a t i n g i n the
fo l lowing s e c t o r s of the Niger ian economy. The companys I I
were n o t quoted d i r e c t l y i n the s tudy because t h a t was ,
t h e bases f o r a l lowing one have a n i n s i g h t i n t o t h e i r ,/
b) Pharmaceut ica l s b
,
c ) Petroleum
These a r e a s were chosen because of t h e i n h e r e n t u se of
f o r e i g n c u r r e n c i e s i n t h e conduct o f t h e i r bus iness .
They e i t h e r manufacture, impopt o r e x p o r t p roduc ts from
NiBeria.
Emphasise waa made i n i n v e s t i ~ a t i n g i n t o t h e produc ts
t hey d e a l on, p r i c e of such p roduc t s , p l a n t s i t e and
c a p a c i t y u t i l i s a t i o n , and t h e promotional mix they employ.
A n a n a l y s i s of t h e r i s k which they a r e exposed t o i n
t e r n s of f o r e i g n exchange procurement and i n t e r e s t r a t e
was made. I n a n a l y s i n g f o r e i g n exchange r i s k s , t h e
scope was reduced t o n a i r a i n r e l a t i o n t o US d o l l a r s
which i s the maJor i n t e r n a t i o n a l l y accepted and u n i v e r s a l
cur rency i n c i r c u l a t i o n , a l s o i t w i l l be remembered t h a t
most m u l t i n a t i o n a l s o p e r a t i n g i n Niger ia a r e Americans.
f n t e r e a t ra t s a n a l y s i s c o n s i s t e d of a l l r e l e v a n t
money m a r k e t rates.
The branches of t hose companies covered a re s i t u a t e d
i n Lagos ( L Q ~ o s s t a t e ) , Aba ( ~ b i a s t a t e ) and P o r t
Harcourt (R ive r s s t a t e ) . I n v e s t i g a t i o n was concentra&d
i n Lr8oa b e l n g tilo u r e u where ttle Heud Of f 1 ( cr l -
Corporate headqua r t e r s of most o f them a r e s i t u a t e d .
During i n v e s t i g a t i o n s , persona l i n t e r v i e w s and
p h y s i c a l i n s p e c t i o n of documents were done through h e l p b
of f i n a n c e and marketing managers and accountan ts .
In format ions g o t d u r i n g i n v e a t i g a t i o n s i n c l u d e
o p e r a t i o n a l b r i e f s and d i f f e r e n t hedging p o l i c i e s they
employ i n running t h e i r o r g a n i s a t i o n s ,
Although t h e r e s e a r c h was conducted s u c c e s s f u l l y , it
was however, w i th some weaknesses and s h o r t comings,
One found it hard t o g a i n a c c e s s t o some of t h e o f f i c i a l s
of t h e companies and i n most c a s e s was met wi th out-
r i g h t re lusml from them t o dicrclooe coriyurly y v l l c i a t r
which they be l ieved w a s only f o r i n t e r n a l consumption.
Never the less , some success was recorded.
To be a b l e t o cover a l l t h e a r e a s mentioned above, a
l o t of money was s p e n t on t r a n s p o r t a t i o n ( e s p e c i a l l y
i n Lagos), f eed ing and accommodation.
F i n a l l y , a major c o n s t r a i n t t o t h e i n v e s t i g a t i o n was
' t h e s h o r t t ime @ven f o r t h e conduct and r e p o r t i n g of
such an e l a b o r a t e i n v e s t i g a t i o n .
CHAPTER 2
LITER-
2.1 THE NIGERIAN ECONOMY: 'N-60 TO DATE
The s t r u c t u r e of t h e Nigerian econony, i n t h e p a s t
t h r e e decades, has gradual ly changed from predominantly
o~ricultusal economy i n the 196Q's t o a n economy mainly
sus ta ined with t h e s a l e of o i l from the mid I970ts .
The growth i n o i l earn ings i n t h e mid 19701s was not I
I
f u l l y i n t c r n a l i s e d i n t o the economic system, a s a r e s u l t , ' b
t h e consumption p a t t e r n became import o r i en ted . Unfor- I
t u n a t e l y , when the o i l g l u t came, t h e economy was I i
adverse ly a f f e c t e d t o t h e e x t e n t t h a t i t l e d t o the I
emergency of t r a d e a r r e a r s . A growing deb t burden a l s o ,
surfaced i n t h e e a r l y 1980's as a r e s u l t of jumbo loans
cont rac ted from t h e i n t e r n a t i o n a l c a p i t a l market.
D r . (Mrs) Toyin P h i l i p s i n one of h e r a r t i c l e s s t a t e d
t h a t the e x t e r n a l deb t outs tanding s h o t up d r a s t i c a l l y
f rom $593.6 million i n 1976 t o $18.6 b i l l i o n i n 1986
and t o vbout $30 b i l l i o n i n 1990. The p u r s u i t of an
overvalued exchange r a t e po l i cy , the subsequent r e l e -
g a t i o n of t h e a g r i c u l t u r a l s e c t o r t o the background,
heavy publ ic s e c t o r spending and t h e huge debt over-hang,
a l l combined t o c r e a t e d i s t o r t i o n s i n t h e production,
consumption and payments p a t t e r n s , The p r e c i p i t o u s
d e c l i n e i n o i l earn ings i n the 1980's necess i t a t ed
a pol icy re -d i rec t ion aimed a t re -a l igning the domeatic
5 product ion p a t t e r n wi th the l o c a l r e source base.
To address t h e s e problems, t h e government i n agreement
w i t h the Cent ra l Bank of Niger ia in t roduced c e r t a i n
po l i cy reforms.
This was named t h e s t r u c t u r a l Adjustment Programme
(SAP) geared towards re-el l ignment of t h e n a i r a exchange
r a t e t o r e f l e c t market f o r c e s , t r a d e l i b e r a l i s a t i o n ,
p r i v a t i s a t i a n and commercial isat ion of government
owned e n t e r p r i s e s and t h e promotion of loca l ly-sourced
raw m a t e r i a l s and de- regula t ion of t h e economy. 6
me economic c r i s i s which t h e economy found h e r s e l f i n ,
before t h e SAP, inc luded t h e r educ t ion i n the a b i l i t y
of t h e country t o feed h e r s e l f due t a a d e c l i n e i n the
average growth r a t e of aggrega te output and p e r c a p i t a l
income, i n t h e f a c t of r ap id expansion i n populat ion.
The s i t u a t i o n was accentuated by t h e high l e v e l s of
unemployment and domestic i n f l a t i o n and a n a c c e l e r a t i w
environmental degrada t ion . This was compounded by t h e
h igh r i s e i n f o r e i g n d e b t burden.
AlhaJi A. A b e d (1991) b e l i e v e s t h a t wrong macro-
economic po l i cy p u r s u i t s p r i o r t o t h e reforms i n i t i a t e d
i n 1986, f o s t e r e d the d e t e r i o r a t i o n w i t h i n the Nigerian
economy. Among t h e po l i cy l a p s e s which he h igh l igh ted
were l a rge ' f i s c a l d e f i c i t s , r a p i d monetary expansion,
p r i c i n g and t r a d e r e s t r i c t i o n s , f o r e i g n exchange con t ro l8
and currency over-valuat ion. Other causes of t h e
- 18 - economic downturn included low p r o d u c t i v i t y i n
a g r i c u l t u r e and i n d u s t r y , environmental degrada t ion
a r i s i n g from unfavourable c l i m a t i c cond i t ions , weak
i n t e r n a l markets, low and u n s t a b l e work market p r i c e s
f o r expor t s and l a c k of v i a b l e i n n o v a t i ~ n s and c a p i t a l
f o r inves tmint .
The p o l i c y reforms which were suggested by Ahmed
inc luded r a t i o n a l i s a t i o n of p u b l i c spending through
cut-back i n the s i z e of t h e p u b l i c s e r v i c e , commercia- b
l i s a t i o n and/or p r i v a t i s a t i o n of many p u b l i c e n t e r p r i s e 8
i n a d d i t i o n t o r educ t ion i n spending on s u b s i d i e s and
a b o l i t i o n and/or reform of i n e f f i c i e n t p a r a s t a t a l s ,
adopt ion of more r e a l i s t i c t r a d e and p r i c i n g p o l i c i e s ,
i n t r o d u c t i o n of l i b e r a l t r a d e and f o r e i g n exchange
p r a c t i c e s and a gene ra l s h i f t t o market f o r c e s i n t h e
a l l o c a t i o n o f r e sources , r educ t ion i n cumbersome
s e c t o r a l c r e d i t c o n t r o l s and a l l o c a t i v e p o l i c i e s , eape-
c i a l l y i n i n t e r e s t r a t e de regu la t ion . Ahmed concluded
by s t a t i n g t h a t the main e f f e c t of t h e po l i cy r e f o m s
s o f a r i s t h e obvious c o r r e c t i o n of d i s t o r t i o n s i n
r e l a t i v e p r i c e s i n t h e product , money and f o r e i g n
exchange markets.
Authur Nwankwo (1981 ) be l i eves t h a t rnul t i n a t i o n a l s
ope ra t ing i n t h e country con t r ibu ted immensely t o the
economic c r i s i s . H e s t a t e d t h a t t h e proclaimed c o n t r i -
bu t ions of mul t ina t iona l - co rpora t ions t o t h e development
- 19 - of t h e economics of t h e developing c o u n t r i e s i n
g e n e r a l and Niger ia i n p a r t i c u l a r a r e l a r g e l y i l l u s o r y .
They b r i n g i n some investment funds i n this r ega rd ,
b u t they g e n e r a t e a huge amount of p r o f i t s a s a r e s u l t
o f t h e p r i v i l e d g e s which a r e g ran ted t o them and t h e b monopol i s t i c p o s i t i o n which they en joy .
H e concluded by proc la iming , ".... the government
which l e g i t i m a t e l y a s p i r e s t o l e a d black Afr ica , must
c u t o f f t h e p e r v a s s i v e t e n t a c l e s of t h e m u l t i n a t i o n a l s . ' 7
N i g e r i a t s very s u r v i v a l depends on t h i a . b
A . R . p r i n d l (1976) i n h i s own a s s e r t i o n t h i n k s
d i f f e r e n t l y from Nwankwots view. H i s view is t h a t
"The M u l t i n a t i o n a l Companies, which a r e now at t h e
h e a r t of a hea ted deba te as t o t h e i r motives and e f f e c t
on l o c a l economics have n o t drown i n t o l a r g e homogenous
u n i t s as t h e c a s u a l obse rve r mil:ht b e l i e v e . Rather ,
t h e i r growth h a s l e d t o fragmentation of t h e s e i n t e r -
n a t i o n a l l y d i s p e r s e d companies, which t ends t o i n c r e a s e
d i r e c t l y a s a f u n c t i o n of t h e i r s i z e . This fiagmenta-
t i o n comes from a number of s t r u c t u r a l and environmental
f a c t o r s , and a c c e n t u a t e s the problem of managing t h o
f i n a n c i a l f u n o t i o n of t h e f i r m . Impediments such a s
d i s t a n c e , u n r e l i a b l e aommunications and d i f f e r e n t t ime
8 zones are well-known1'.
The i s s u e of the bad e f f e c t s o f m u l t i n a t i o n a l s t o t h e
economy of t h e h o s t country can be reviewed based on
P r i n d l t a argument. !they contend with a l o t of p r o b l e m
that a l l i s n o t w e l l with them a s a g a i n s t what
Nwankwo th inks . The a n t i c i p a t e d c o n t r o l and a l l e g i a n c e
t o t h e pa ren t body abroad i s minimised with time, i f
P r i n d l t s i d e a i s r e a l i s t i c .
2.2 CORPORATE PERFORMANCE ANALYSIS
Most of the co rpora te bodies i n Niaer ia a r e multina-
t i o n a l s . Because of t h e remarkable i n c r e a s e i n t h e i r
number and -the a f f e c t 8 on the Nigerian economy vis-a-vis
r e a l i s t i c fo re ign exchange and i n t e r e s t r a t e s , a
review of t h e i r performance becomes d e s i r a b l e .
The Nigerian governaent has a l s o continued t o encourage
f o r e i g n investment even though i n the l a s t few yea r s
it has, under the i n d e g i n i s a t i o n decree , i n s i s t e d on
equ i ty p a r t i c i p a t i o n i n some' businesses by Nigerian
c i t i z e n s . Nwankwo (1981) ind ica ted t h a t t h e s e mul t ina t iona l s
corpora t ions a r e inves t ing i n developing c o u n t r i e s ,
n o t f o r any a l t r u i s t i c motives, as they accep t , but f o r
the s e l f i s h i n t e r e s t of making p r o f i t s under the f r e e
e n t e r p r i s e system of capi ta l i sm. H i s a s s e r t i o n i s
J u s t i f i e d by t h e f a c t t h a t Nigeria i s a developing
country and runs a f r e e e n t e r p r i s e c a p i t a l i s t system.
The degreeeof presence of mul t ina t iona l corpora t ions i n
Nigeria was est imated by Nwankwo who s a i d t n a t p r i v a t e
cap1 t u l 1rlveutnt:tlt htts been eetirnate~f t o t ~ e ~rc*atc?r
t h a n p u b l i c inves tment du r ing the first n a t i o n a l deve-
lopment p l a n p e r i o d , 1962-68. The a c t u a l investment
was abou t #1,60Omillion a s a g a i n e t t h e planned p u b l i c
inves tment o f #1,500 m i l l i o n . I n t h e second Nat iona l
development p l a n , 1970-74, t h e planned Net p u b l i c
inves tment programme was W1,380 m i l l i o n . Only i n t h e
t h i r d Nat ional development p l a n was p u b l i c investment
e s t ima ted t o be much greater t han t h e t a r g e t p r i v a t e
i n v e a t a e n t and this was t h e r e s u l t o f i nc reased govern-
ment revenue from petroleum ( o i l ) . While t h e planned
nominal p u b l i c c a p i t a l programme was Pf20rnillion, t h e
i n d i c a t i v e nominal inves tment programme f o r t h e p r i v a t e
s e c t o r vaa approximately W1 million? Nwenkwo however
expla ined t h a t no t a l l p r i v a t e inves tments i n Niger ia
i s under taken by fo re igne r s . . ~ l t h o u g h t h i s i s t r u e ,
t h e p o i n t s t i l l remains t h a t t h e p r i v a t e inves tments i n
N ige r i a i s dominated by m u l t i n a t i o n a l co rpo ra t ions .
The tu rnove r of t h e twelve (12) b i g m u l t i n a t i o n a l
c o r p o r a t i o n s i n Ni8er ia as a t 1991 i s expla ined by t h e
fo l lowing t a b l e .
S/NO N A M E TURNOVER (M' b i l l i o n )
U . A . C .
BEREC UNION BANK
P . z, N I G E R I A N BOTTLING CO
F I R S T BANK
U . B . A . 3. C . 0. A .
NATIONAL O I L
LEVER BROTHERS
TOTAL 1 2 . G U I N N E S S 1 . 0 0 1 \I,
, r;. I ,
TABLE 1 /"
I
SOURCE: T h e Financiol Post
The outlook of Corporate Nig@ria i s f u l l of g a i n s and
pains .
J u s t when you th ink they have been submerged by the
W i s s i l e s n of Nige r i a ' s addust ing economy, t h e i r hands
pop o u t of the rubb les t o f l a s h impressive t r a d i n g
r e s u l t s .
The f i g u r e s a r e l a r g e f o r p r o f i t s and even run i n t o
b i l l i o n s of n a i r a f o r turnover a s explained by t a b l e 1
above.
~ n a l y s i n g * t h e i r performance f o r the per iod of 1 9 9 1 , t h e chairman of Levent is Motors, Chief S . ~ d e John s a i d
t h a t m o s t of t h e problems which m i l i t a t e d a g a i n s t the
procurement of components f o r t h e manufacture of buses
have been l a r g e l y over-come,. Consequently, buses have
now begun t o r o l l o u t from t h e moniya f a c t o r y and
s u b s t a n t i a l s a l e s have a l r e a d y been achieved i n t h e
c u r r e n t y e a r v . i*
Their prob,lama as he p u t r e r e t h e c u r r e n t lack of
adequate l i q u i d i t y i n the domestic economy a s wel l a s
t h e r e l a t i v e sho r t age of f o r e i g n exchange f o r f i nanc ing
imports .
The Chairman of Guinness PLC, M r . P.M. Mbanefo i n Bn
addres s t o the s h a r e h o l d e r s s t a t e d "1 am pleased t o
r e p o r t t h a t your company achieved product ion r a t e s , i n
excese of 80 p e r c e n t o f i n s t a l l e d c a p a c i t y and we a r e
a b l e t o s e l l a l l t h a t we could produce. During t h e
p e r i o d , new brew houses were'commissioned i n a l l our
brewer ies a t a c o s t approaching #I90 m i l l i o n n a i r a t o
enab le t h e company t o use l o c a l g in" .
M.T. Chellaram i n h i s own speech enumerated a l l the
p r o b l e m which h i s company exper ienced. This included
s e v e r e domestic i n f l a t i o n a r y p r e s s u r e f u e l l e d mainly
by con t inu ing d e p r e c i a t i o n of t h e n a i r a , i n c r e a s e i n
- h a d a g e t a r i f f s , unequil ibrum i n f o r e i g n exchange
earnings/expendi t u r e , i n d u s t r i a l c a p a c i t y , under -u t i l i -
sa t i o n and* h igh r a t o of unemployment . Chief M. Okoya Thomas i n r e s p e c t of C.F.A.O. s a i d
" i n t h e e a r l y p a r t of the y e a r , t h e governments economic
p o l i c y r e s u l t e d i n c o n d i t i o n s which were very f avourab le
t o oompanies suoh se ours; Coneumer demund was s t r o n g
and r e a l i n t e r e s t rates were nega t ive when viewed i n
conJunct ion wi th the r a t e of i n f l a t i o n , However, by
mid-year, government had in t roduced a s e r i e s of measures
which had the e f f e c t of reducing l i q u i d i t y i n the
banking system: this r e s u l t e d i n a sharp r i s e i n
i n t e r e a t rutes and o weakening o f consumer demand which
i n t u r n adve r se ly a f f e c t e d ou r r e s u l t s . "
AlhuJ2 G. J, Abdulkadir , chairman o f a ~ongl .omerate ,b
was o f t h e view t h a t "dur ing the e a r l i e r p a r t o f t h e
y e a r , the economy was subJec ted t o s eve re i n f l a t i o n a r y
p r e s s u r e s and measures were in t roduced by government t o
mop up excess l i q u i d i t y i n t h e banking system, These
measures helped t o bring down tho r a t e of i n f l a t i o n and
e t u b l l i s e the f o r e i g n exchange value of the n a i r a . The
e f f e c t of the governments t i g h t monetary p o l i c y however,
w t l s that i n t e r e s t r a t e s e s c a l a t e d .
AlhaJ i Abdulkadir , as opposed t o o t h e r a n a l y s t s , w a s
of the view tha t the rate of i n f l a t i o n has come down
and the f o r e i g n exchange va lue h a s s t a b i l i s e d . Ti?is i s
f a r from t h e p r e s e n t s i t u a t i o n where t h e i n t e r e s t r a t e
and f o r e i g n exchange r a t e have cont inued t o f l u c t u a t e .
The o i l i n d u s t r y was n o t l e f t ou t i n t h e p r o f i t s p r e e
d e s p i t e t h e unfavourable economic cond i t i ons . I n h i s
'own words, t h e Chairman of Nat iona l O i l , Major General
- 25 - Hasaan Usman Ka t s ina ( r t d ) s a i d " i n s p i t e o f t h e
adverse ~3 i tuaL ion i n the money m a r k e t i n 1989, the
baldnce sheet of your company remained s t rong . Most
of t h e c a y i t d l p r o j e c t s under-taken i n 1909 were
geared towards main ta in ing the s t r o n g compet i t ive pos i -
t i o n of your company w i t h amyhasise on key areas of t h e
manufactur ing d i d lnilrketing a c tlfi t i e s . "
I n h i s own a n d l y ~ i s , Otunba Ojora of Agiy a t t r i b u t e d
the i~nprovement recorded i n t h e i r p r o f i t t o pa-urleri-1;
ndnugement of t h e i r r e s o u r c e s and We stability i n t h e
demand fd r t h e i r l u b r i c a n t s i n the market.
An a n a l y s i s of a l l the problems which most cf t h e
m u l t i n a t i o n a l s r e p o r t e d inc luded i n f l a t i o n which h a s
marg ina l i s ed consumers incouie, h igh c o s t prof ire,
t i g h t monetary and f i s c a l p o l i c y , harsh economic
cl lmhta, Cerltrul B m k o f Niger ia mop-up of excess
l i q u i d i t y , p r o f i t d e c l i n e due t o p r o v i s i o n Sorb bud
work, d e c l i n e I n market demand, l o c a l sou rc ing of raw
n m t e r i a l s , h igh i n t e r e s t r a t e s , r i s i n g c o s t o f p roduc t ion ,
d e y r e c l u t l ~ va lue of t h e n a i r a , h i g h c o s t o f importa ,
h i g h t a r i f f s , i nc reased competion and scarce f o r e i 8 n
exchange.
It w a s obslerved t h a t the problem of h igh and f l u c t u a t i n g
i n t e r e s t r a t e s and s c a r c e and f l u c t u a t i n g f o r e i g n
e x c h a n ~ e r a t e s was t h e two problems t h a t i s common t o
- 26 - a l l of t h e mul t ina t iona l s opera t in8 i n N i ~ e r i a .
Despite all these problems, the mult inat lonsl ls s t i l l
made huge p r o f i t s and maintained a sound balance shee t .
~ l t h o u g h they a r e supposed t o c o n t r i b u t e t o the deve-
lopment o f Nigeria , an a n a l y s i s o f t h e : performance
i n terms of t h e i r con t r ibu t ions i n technology revealed
a b a s i c cause of f u r t h e r unemployment and a f u r t h e r
concen t ra t ion of a l ready extremely unequal income
d i s t r i b u t i o n , while not ing t h e excessive p r i c e s they
charge i n t r a n s f e r r i n d t h i s technoloey . b
Upon examination, t h e f i n a n c i a l con t r ibu t ion t u r n s o u t
t o be a f i n a n c i a l d r a i n , decreasing both c u r r e n t con-
sumption and a v a i l a b l e l o c a l s a v i w s end thus f u t u r e
consumption f o r the vast maJori ty of N i ~ e r i a n s .
The balance of payments c o n t r i b u t i o n a l s o l ed t o
~ i m i l a r conclusions. While p o t e n t i a l inf lows were
minimised, balance of payments outflows were accpntuated
through import over p r i c i n g and i n f l a t e d roya l ty
payments.
These i s s u e s were n o t addressed by these companies who
were more i n t e r e s t e d i n t h e i r f i n a n c i a l p o s i t i o n as
a g a i n s t the i n t e r e s t of t h e i r h o s t coun t r i e s .
For them t o achieve t h e i r o b j e c t i v e s , they cons tan t ly
monitor thp economic environment of the country and
based on t h e i r f ind ings , they employ p o l i c i e s t h a t he lp
'them through. This was confirmed by Chief Joseph
Adebola OgundeJi of Barec PLC, who said "it has remained
- 27 - d i f f i c u l t t o f ind f o r e i e n exchange f o r our opera t ionsM.
Add1 tionally, the economy remains l e ~ a than bouyant.
I n s p i t e of one l i m i t e d opera t ion , your Board has pu t
i n p lace necessary measuree t o eneure t h a t your company
remaine p r o f i t a b l e . We a r e approaching, a l b e i t con-
t i n o u s l y , t r a d i n g i n o t h e r l i n e s of ~ e n e r a l ~ o o d s
buein@ss apart from our t r a d i t i o n a l l i n e 8 of battery
systems, t o r c h e s and hand-lampsn.
Ahmsd Joda of SCOA explained t h a t they have continued
t o maintain a s teady t r a i n i n g programme both i n s i d e
and outaide the country, to ensure t h a t t h e i r s t a f f @
a r e f a m i l i a r with changing cond i t ions brought ,,,Ut
by changing technology and t h e very d i f f i c u l t economic.
cond i t ions i n which they have t o opera te .
I t i s bel ieved t h a t a l o t of o t h e r p o l i c i e s has been
employed t o hedge a g a i n s t fo re ign exchange and i n t e r e s t
r a t e r i s k s . A eood example i s poly products whose
Chairman Chief J. l kin-George s a i d t h a t they have
r e s o r t e d t o high borrowing a s a r e s u l t of i n c r e a s e i n
lending r a t e s , d e c l i n e i n exchange of t h e na i ra and
high i n f l a t i o n r a t e s .
The t a b l e below shows the average turnover of t h e
d i f f e r e n t s e c t o r s of the Nigerian economy with other
d e t a i l s . These s e c t o r s a r e highly dominated by t h e #
mul t ina t iona l s .
From the t a b l e , one can see t h a t d e s p i t e a l l odds,
many companies a r e pos t ing h igher r e tu rns .
CORPORj
SECTOR
AUTOMOBILE
BANKING BREWERIES
B U I L D I N G S
CHEMICALS
COMMERCIAL
COMPUTER/OFFICE EQUIPMENT
CONCLOMERATES
CONSTRUCTION
SOAP & T O I L E T E R I E S
FO~D/BEVERAGES & TOBACCO FOOTWEAR
INDUSTRIAL/DOMESTIC PRODUCTS
INSURANCE
MACNINERY/MARK PACKAGING
PETROLEUM
P U B L I S H I N C
TEXTILES
TABLE 2
- 28 - 'E NICER11
AVERAGE TURNOVER (#?m)
1989/90 AVERAGE P R O F I T W m )
P R O F I T 1 AVERADE AS 96 OF DIVIDEND TURNOVER, (k)
SOURCE: The financial p o s t (calcu1atAc;ns baaed on
annual r e p o r t s ) .
2.3 INTEREST RATE POLICY AND BEHAVIOUR BEFORE AND AFTER DEREG~~TXITON I n t e r e s t r a t e s were c o n t r o l l e d and r egu la t ed u p t i l l
I986 when t h e S t r u c t u r a l AdJus tment Programme was
in t roduced . The r a t e s were g r a d u a l l y de regu la t ed from
1986 and l a t e r decon t ro l l ed from August 1987, Since
then , a l l d i r e c t c o n t r o l s were removed and t h e r a t e s
l e f t a lmos t e n t i r e l y t o market f o r c e s ,
I n t e r e s t r a t e s were f i rs t used a s ins t rument of monetary
p o l i c y i n Niger ia between 1959 and 1962 a s a means of
r e p a r t r i a t i n g shor t - term funds from abroad t o Niger ia . B
I n 1963 t h e minimum r e d i s c o u n t r a t e was reduced by
0.5% t o 4.0%. i n December 1964 it was r a i s e d by 1.0%
t o 5.0% and i n May 1968 i t was reduced by 0.5% t o 4.05%.
It remained a t t h i s l e v e l u n t i l Apr i l 1975 when it waa
reduced f u r t h e r by 1.0% t o 3.05%.
I n t h e 1976-77 budget, t h e f e d e r a l government accepted
t h e recommendation of t h e a n t i - i n f l a t i o n t a s k f o r c e
which decided t h a t t h e i n t e r e s t r a t e s f o r commercial
bank8 and Merchant banks loans t o t h e p roduc t ive s e c t o r
s h a l l range between 6,096 and 8.096 and t h a t l oans t o the
non-productive s e c t o r s w i l l a t t r a c t i n t e r e s t of up t o 10 a l i m i t o f 10.0% however computed.
I n t h e 1978-90 budget t h e r a t e s were g radua l ly r a i s e d
by 1.0 p e r c e n t i n o r d e r t o promote sav ings , check
i n f l a t i o n , improve resource a l l o c a t i o n , encourage domestic
non-bunk f i n a n c i a l i n a t i t u t l o n s t o buy government bonds
- 30 - t o f inance development prodec ts and a t t r a c t f o r e i g n
investment. The minimum lending r a t e was r a i s e d from
6.0 - 7.0 p e r c e n t and maximm from 10.0 t o 11.0 percent .
The r a t e s f o r t h e p re fe r red s e c t o r s a r e inc reased from
t h e prev ious maximum of 8.0 p e r c e n t t o 9.0 p e r cen t .
The i n t e r e s t r a t e f o r the favoured s e c t o r - t h e
A(gricultura1 C r e d i t Scheme a t t r a c t s a r a t e of i n t e r e s t
ranging from 4.0 p e r c e n t t o 6.0 p e r c e n t .
I n 1980, t h e r e was a s l i g h t upward r e v i s i o n of most
i n t e r e s t r a t e s . The l ending r a t e s of commercial banks b
i nc reased on the average by 0.5 p e r c e n t whi le r a t e s
ohtiro~se on lvv r l e to U I ~ favoured sector-ti ui Ute-! acurwmy
remained unchanged. This r a t e was r e t a i n e d i n 1981
f i s c a l year .
The i n t e r e s t r a t e s were r ev i sed i n January, Apri l and
December 1982. The f irst two were i n t h e upward d i r ec -
t i o n , whi le the t h i r d downward. By Apri l a l l r a t e s
were r ev i sed upwards by 2.0 p e r c e n t above t h e i r
r e s p e c t i v e l e v e l s a s a t January 1982. However i n
November t h e r e was a downward r e v i s i o n of 1.0 p e r c e n t
a c r o s s t h e board.
I n 1983 t h e r a t e s were r e t a i n e d while i t was ad jus t ed
upward i n 1984 by 1.5 - 2.0 p e r c e n t with the except ion
of lending r a t e s f o r a g r i c u l t u r e . #
I n 1985, tho s t r u c t u r e of i n t e r e s t r a t e was untouched.
It 18, t h e r e f o r e , c l e a r t h a t before 1985, t h e r a t e s
were f u l l y c o n t r o l l e d through t h e governments monetary
and f i s c a l p o l i c i e s .
With t h i s c o n t r o l , t h e r a t e s were moved around wi th
the sole aim of r e a l l s i n g a r ~ a l i e t l c i n t e r e s t r a t e .
The achievements were n o t encouraging o r s a t i s f a c t o r y
s o t h e system of c o n t r o l was r e l axed . This l e d t o t h e
b i r t h of t h e S t r u c t u r a l Adjustment Programme.
The S t r u c t u r a l AdJustment Programme (SAP) was in t roduced
i n 1986. A s t h e r a t e s were l e f t e n t i r e l y t o market
f o r c e s , which was pu re ly t h e main package i n SAP, t he
minimum r e d i s c o u n t r a t e was r e v i s e d downwards from b
15.0 p e r c e n t t o 12.75 p e r c e n t on 29 th December 1987.
It remained unchanged a t 12.75 p e r c e n t throughout 1988
and was l a t e r r a i s e d t o 13.25 p e r c e n t which took e f f e c t
from 3 ls t January 1989. I n reaponse t o h igh i n f l a t i o n
rats i n 1989, the minimum r e d i s c o u n t r a t e (MRR) was
r e v i s e d upwards t o 18.50. From January 1991 the MRR
was r e v i s e d downwards t o 15.5 p e r c e n t and the banks
were expected t o relate i n t e r e s t rates charged by them
t o t h e i r l o s t o f funds . Banks l end ing r a t e s a r e
c u r r e n t l y pegged t o a maximum of 21.0 p e r c e n t p e r annum.
The u s e r s o f fund are no t happy with t h i s development.
The i r c o n t e n t i o n being t h a t t h e 21.0 p e r c e n t c e i l i n g
i s s t i l l t o o h igh . m n k s on t h e o t h e r hand t h i n k t h a t
t h e r a t e should be r e v i s e d upwards. The government i s
l e f t wi th h e problem of s t r e i n g i' balance between t h e
two views a l though the 21.0 p e r c e n t i s h igh ly favoured
by most i n d i v i d u a l s ,
The s t a n c e of t h e CBN a s r ega rds i ts i n t e r e s t r a t e
p o l i c y i s t o ensure p o s i t i v e - r e t u r n s on Savings, promote
i n d u s t r i a l expansion and encourage hea l thy compet i t ion
among t h e banks,
Because of this compet i t ion, i n t e r e s t on co rpora t e
d e p o s i t s took a d i f f e r e n t t w i s t . There u r e now i n t e r e s t
r a t e v a r i a t i o n s between banks and t h e i r co rpora t e
d e p o s i t o r s .
According t o t h e Managing D i r e c t o r of Lion Bank,
M r , Paul Y. LuguJa, n t h e c r a s h i n i n t e r e s t r a t e s ha%
induced banks t o in t roduce p r e f e r e n t i a l i n t e r e s t r a t e s
because they want t o r e t a i n t h e i r c o r p o r a t e customersft,
With a prime lending r a t e (PLR) of 29.0 p e r c e n t and
h i g h e s t sav ings d e p o s i t i n t e r e s t r a t e of 22.0 p e r c e n t ,
LuguJa sees t h e c u r r e n t i n t e r bank ra tes of between
16.0 p e r c e n t and 18.0 p e r c e n t a s Ma temporary balance
because t h e r e a r e no economic a c t i v i t i e s t h a t w i l l
i n J e c t more money i n t o t h e economy, except t h e l i f t i n 8
of ban on politic sf^.
According t o t h e Cen t ra l Bank of Niger ia monetary
po l i cy f o r 1990, t h e inter-bank i n t e r e s t r a t e should
be a% l e a s t 1 , O p e r c e n t p o i n t below the prime r a t e f o r
each lending bank.
The import'ance of de regu la t ion of i n t e r e s t r a t e s t o u who o u t l i n e d
banks was made c l e a r e r by F.0, Orcsot sthe bas ic func t ions of i n t e r e s t r a t e s i n an economy
- 33 - and summarised them under t h r e e broad aspec t s . F i r s t ,
i n t e r e s t r a t e s , a s r e t u r n on f i n a n c i a l a s s e t s serve as
i n c e n t i v e t o save r s , making them d e f e r p r e s e n t consumption
t o a f u t u r e da te . The r e l e v a n t i n t e r e s t r a t e s i n t h i s
case a r e t h e depos i t r a t e s co r rec ted f o r p r i c e i n f l a t i o n
( o r more p r e c i s e l y expected i n f l a t i o n r a t e ) . In t h i s
connection, i n t e r e s t r a t e s a f f e c t the a v a i l a b i l i t y of
saving, and t o the e x t e n t t h a t depos i t r a t e s vary
depending on the matur i ty of the f i n a n c i a l a s s e t s , they
a l s o inf luence t h e a l l o c a t i o n of c u r r e n t saving among
the a s s e t s . Second, i n t e r e s t r a t e s , being a componGnt
of c o s t of c a p i t a l , a f f e c t the demand for ,and a l l o c a t i o n
of loanable funds.
The a p p l i c a b l e r a t e of i n t e r e s t i n t h i s case i s t h e
bank lending r a t e , t h e changes i n which a f f e c t the c o s t
of c a p i t a l which in f luences i n v e s t o r ' s wi l l ingness t o
i n v e s t i n machine and equipment ( r e a l investment). I n
t h i s way, t h e l e v e l of i n t e r e s t ( lending) r a t e could
in f luence growth i n f i n a n c i a l instrument , output and
employment. Third, t h e domestic i n t e r e s t r a t e s i n
conjuc t ion with the r a t e of r e t u r n on f o r e i g n f i n a n c i a l
&sue t u , exyec tell exchange r a t e and expec t d lrii'lcltiun
r a t e , determine the a l l o c a t i o n of accummulated savings
among domestic f i n a n c i a l a s s e t s , fo re ign a s s e t s , and
goods t h a t J a r e hedged a g a i n s t i n f l a t i o n , t h e specu la t ive
movements of funds in to /ou t of domestic/foreign a s s e t s
depends on t h e r e l a t i v e l e v e l of i n t e r e s t r a t e s and
whichever i s appropriate among exchange r a t e , i n f l a t i o n 11 r a t e and fore ign i n t e r e s t r a t e s .
Since deregulat ion under SAP; the r a t e s of i n t e r e s t on
loanable funds and deposi ts have been f luc tua t ing
( s ee t ab l e 3 ) .
TABLE 3
Average bank. i n t e r e s t r a t e s (1990) i n per cent .
PRIME CURRENT
SAVINGS '7 DAYS
30 DAYS
3 MONTHS
6 MONTHS
12 MONTHS
MAY 9 20.86
5.01 14.42 14.44 14.89 16.79 16.32 47.32
MAY 17 20.24
5.00 14.30 14.47 15.96 1'7.50 16.36 15.60
SOURCE: Various banks (ca lcu la t ions based on simple average).
- 35 - One of t he causes of t h e s e f l u c t u a t i o n s i s explained by t h e f a c t t h a t t h e i r might be a n autonomous i n c r e a s e
i n t h e demand f o r money, which causee t h e l end ing r a t e s
t o r i s e on a s u s t a i n e d b a s i s ,
According t o Oresotu, " t h e upsurge i n t h e i n t e r e s t r a t e s
wi tnessed s i n c e d e r e g u l a t i o n of t h e r a t e s may be p a r t l y
due t o t h e combined e f f e c t s of the de regu la to ry p o l i c i e s
ln t roduced i n d i f f e r e n t s e c t o r s of t h e economy on t h e
money and c v p i t v l murkata together w i t h the r o v t r i c t l v e
monetary p o l i c y s t a n c e dur ing the periodll.
The on going p r i v a t i s a t i o n programme has l e d t o the b
f l o a t a t i o n of new s h a r e s i n a d d i t i o n t o debentures and
t h e r i g h t s i s s u e s of s t o c k s which has had t h e e f f e c t of
i n c r e a s i n g the demand f o r money.
As a r e s u l t o f this i n c r e a s e , t h e ernergiw excess
demand f o r money balances h a s t r a n s l a t e d i n t o h ighe r
bank l end ing r a t e s a s t h e banks need t o r a t i o n only t h e
p e r m i s s i b l e c r e d i t dur ing t h e per iod .
This c h a r a c t e r i s t i c of t h e money market means t h a t t h e
i n t e r e s t r a t e s o f f e r e d d e p o s i t o r s and charged t o borrowers
by t%c commercial and merchant banks a r e l a r g e l y d e t e r -
mined by institutional i n s t e a d of market f o r c e s , This
p u t s a ques t ion
being e f f e c t e d .
Cadbury Niger ia *
market t o r a i s e
having r a i s e d u
on t h e e x t e n t and n a t u r e of d e r e g u l a t i o n
Limited r e c e n t l y went t o the c a p i t a l
money f o r i t s working c a p ' t a l a f t e r
#5O m i l l i o n loan t o bu i ld i t s c e r e a l
conversion p l a n t (CCP) and a l s o Onwuka Hi-Tek which
i n 1987 sourced a mul t ip le loan f a c i l i t y of #22 milliom,
this yea r does n o t th ink t h a t opt ion i s s t i l l v iab le ,
It i s looking f o r o t h e r avenues t o r a i s e a working
c a p i t a l of M25 mil l ion .
A l l these goea t o prove t h a t with improved performance
of the n a i r a and i t s r e l a t i v e s c a r c i t y i n the market,
funds may s t i l l have t o 80 up i f t h e apex authority i n -
a i s t s that r a t e s be determined by m a r k e t f o r c e s r t l ther
than regu la to ry measures, b
FIGURE 1: COMMERCIAL BANKS' DISTRIBUTION OF ZOANS AND A D V ~ S (#'MI
. ~ g r i c u l t u r e ~ . ~ e n u f a c t u r i ~
SOURCE: CBN
TABLE 4 :
FIXED DEPOSITS AND LENDING RATES AL BANXS) 1~m .I
MONTH/ YEAR
1 987
January
February March
April
May June
July Augut3t
September
October November December
AVERAGE ( 1 987 )
I 988 - January
February March
April
May June July
A W J s t September
b
October November
December
AVERAGE (1 988)
SAVINGS AVERAGE AVERAGE DEPOSIT FIXED LENDING RATE DEP . RATE RATE
MONTH/ YEAR
S A V I N G S AVERAGE DEPOSIT FIXED RATE DEP. RATE
1989 - January 12.0 13.5 February 12.0 13.5 March 12.0 13.8
~ p r i l 12.0 13.8
May 12.0 13.7 June 12.0 13.6
July 12.0 14.6
~ u g u s t 12.7 15.6 September 12.0 16.7
October 13.6 17.2
November 15.8 18.3
December 16.4 - 19.5 - AVERAGE ( 1 989) 12.9 15.3 - - 1990 - January 17.5 20.5
February 17.5 * 20.0
March 17.5 20.7
April
May June July Auguet September 18.7 21 .0
October 18.8 21.4
November 18.8 21 ,3 December 18,8 - 20.8 - AVERAGE ( 1 990) 18.4 22.9
_I_ .11.I(.-
AVERAGE LENDING R.ATE
SOURCE: CENTRAL BANI[ OF N I G E R I A XJLLION (VARIOUS ISSUES)
- 39 - TABLE 5
FIXED DEPOSITS RATES (MERCHANT BANKS) 1989,1990
1989 - January
February March
A p r i 1
May June July Au~rua t September
October November decernber
AVERAGE (1989)
1 990 - January February March
I & 1-1 1
May June
July Augur; t Sep ternher
October Noveni ber Gecember
4VFRbAGE ( 1990)
AVERAGE DEPOSIT *
RATE
A VEHACE LENDING RATE
- 17.5 18,ti
.17 * '9
17.8 18*7 24.7
25.7 2 5 . 3 27.0 28.0
29.9 - 22 08 -
29.2
30.5 29.2
28.5
28.8
23.5 27 07 28.1
717.8
28.2 28.2
27.4 - 78.6 -
'SOURCE: CENTRAL BANK OF IJICERIA: BULLION (VARIOUS ISSUES)
- 4 0 -
2.4 FOREIGN EXCHANGE POLICY AND MONITORING
The y r i r x i p l e s of f o r e i g n exchange t r a n s a c t i o n s come d i n t o y l a y when two coun t r i e s . engage i n f i n a n c i a l t r a n s -
a c t i o n s i n r e s p e c t of t h e s a l e and purchase of goods and
sel*vi ctss o r c a p i t a l t r a n s a c t i o n s .
Theee t r a n s & c t i o n s are guided by t h e r a t e s a v a i l a b l e .
Foreign exchange r a t e between t h e currency u n r t s o f two
c o u n t r i e s means the n m b e r of t h e u n i t s o f une n a t i o n a l
currency t ha t a r e needed t o buy one u n i t 01 the o t h e r
n a t i o n a l currency. By l i n k i n g t o g e t h e r t h e c u r r e n c i e s
o r mor~ey u n i t s o f d i f f e r e n t c o u n t r i e s , f o r e i g n exchgnge
rates makef comparison of i n t e r n a t i o n a l c o s t s and p r i c e s
of good8 vr~d s e r v i c e s p o s e i b le . Consequently , they y l a y
P dominant r o l e i n de te rmin ing t h e volume and d i r e c t i o n
of i n t e r n a t i o n a l t r a d e . ~;?"@JL I n w e ' t~ keep f o r e i g n exchange r a t e a t a meaningful
va lue , i t has t o be shaped by a f o r e i g n exchange po l i cy .
The need f o r t h i s p o l i c y a r i s e s a s a r e s u l t of' economic
tkleory of comparative c o s t as w e l l a s i n t e r n a t i o n a l
r e s o u r c e endowment d i f f e r e n t i a l s and inba lance . No
count ry can l a y a b s o l u t e c la im on s e l f s u f f i c i e n c y i n
i t s r e s o u r c e requirements o r l a y a b s o l u t e c la im on a
p e r f e c t l y balanced supply of resources '? With t h i s ,
the need f o r p o l i c y formula t ion and management of t h e
r e s o u r c e s becomes inevitable.
According .to R . A . Olukole (1991 ), f o r e i g n cur rency ,
o therwise known a s f o r e i g n exchange, i s one of t h e
sca rce resources p a r t i c u l a r l y i n a developing economy.
Unless t h e po l i cy frame work and management of this
s c a r c e resources i e p r o p e r l y . a r t i c u l a t e d i n terms of
i t s revenue genera t ion and expenditure , o r inf low and
outflow, a country runs the r i s k of balance of t r a d e o r
balance of payment problems.
During the pre-SFEM per iod , a l l r e c e i p t s and remit tances
of f o r e i g n exchange were made by the Cent ra l Bank of of
Nigskia on behalfLauthoriaed d e a l e r s who c a r r i e d ou t
the i n s t r u c t i o n s of t h e i r customers i n r e s p e c t of
f o r e i g n exchange t r ansac t ions . b
The exchange c o n t r o l a c t 1962 ves ted i n the monetary
a u t h o r i t i e x the power t o approve a11 a p p l i c a t i o n s f o r
f o r e i g n exchange i n r e s p e c t of a l l import t r ansac t ione
and i n v i s i b l e t r a d e t r ansac t ions .
The exchange r a t e was c o n t r o l l e d and regula ted s o l e l y
by Cent ra l Bank of Nigekia dur ing the pre-SFEM period.
I t was then determined i n r e l a t i o n t o the performance
of the U.S. d o l l a r and pound s t e r l i n g i n t h e world
f o r e i g n exchange market.
Olukole maintained t h a t the count ry ' s exchange r a t e
maintained p a r i t y with the pound s t e r l i n g u n t i l the
devalua t ion of t h e pound i n 1 . He s a i d t h a t the T7 country before 1971 adopted t h e Gold Content approach
under which the va lue of the Nigeria currency was
derived vis-a-vis the Gold Contents of the pound
s t e r l i n g and the U.S Dollar. From h i s analysis, the
- 42 - value of n a i r a was pegged aga in s t a basket of cu r renc ies
from January 1972 and an import weighted basket approach
i n 1978. I n 1984 and 1985 the exchange r a t e waa de te r -
mined through the va lue of the pound s t e r l i n g and U.S,
Dollar which wan then used a s a s o l e currency of i n t e r -
vent ion. Olukole concluding, remarked t h a t the exchange
r a t e po l i cy was p r ec i s e ly t h a t of a crawling peg between
+ One o f the p o l i c i e s which# aimed a t f ind ing a r e a l i s t i c
exchange rate of n a i r a was the in t roduc t ion o f the
second-t ier fo re fan exchange market (SFEM) as a cop
component of t h e S t ruc tu r a l AdJustment Programme i n
1986 - 1988.
The Second-tier f o r e ign exchange market (SFEM)
s t a r t e d with the first bidding sess ion (auc t ion) on
29th September 1986 i n the c e n t r a l Bank of Nigeria. On
t h a t da te , t he exchange r a t e i n the f i r s t - t i e r ' fo re ign
exchange market which was being admin i s t ra t ive ly de te r -
mined was #7,5697 t o 1 U S d o l l a r while t he r a t e i n SFEM
was ~4 .6174 , thus showing a deprec ia t ion of 66 per cen t
when the l a t t e r was compared with the former. The
first-tier fo r e ign exchange market was terminated and
a un i f i ed fo r e ign exchange market ( ~ m ) was evolved on
2nd July 1987 under a f l o a t i n g exchange r i d e system
13 with an edchange r a t e of N3.7375 t o 1 US d o l l a r . The SFEM was made up of the auct ion and the interbank
market, On 14th January 1987, the interbank market r a t e
was deregula ted . I n a cont inous sea rch f o r a r e a l i s t i c
exchange r a t e , va r ious p r i c i n g methods have been used
s i n c e the i ncep t ion of SFEM. During the 1 s t and 2nd
bidding s e s s i o n s on 26th September and 20th October both
i n 1986, t h e c e n t r a l Bank of Nigeria used the simple
average of t h e success fu l bid r a t e s i n s e l l i n g fo rex t o
the authoriaed d e a l e r s . Marginal r a t e w a s however used
as a cut-off p o i n t t o determine success fu l bidders. The
use of the marginal r a t e continued u n t i l 19th March
1987 when the exchange r a t e had deprec ia ted from ~ 3 , 9 1 9 5
t o ~ 4 . 0 2 0 3 per 1 US d o l l a r . AS a r e s u l t , the Dutch B
a u c t i o n system was introduced on 2nd Apri l 1987. The
Dutch auc t ion system (DAS) remained i n f o r c e till the
end of 1988 when t h e r e wqs an observed wide d i f f e r e n t i a l
of about 55 per c e n t between the FEM r a t e s and t h e
autonomous market r a t e , a s i t u a t i o n which caused enough
concern t o n e c e s s i t a t e a review.
On January 9, 1989, a modified f o r e i g n exchange market
(FEM) was introduced and t h e r e was a f u s i o n of the
a u c t i o n r a t e and the autonomous r a t e . A s from t h a t d a t e
a un i f i ed exchange r a t e became app l i cab le i n t h e banking
system and the f o r t h n i g h t l y bidding sess ion under t h e
Dutch auc t ion system waa replaced by a d a i l y bidding
seaeion. The exchange r a t e i n the f i r s t d a i l y auc t ion ,
was 6 . 8 7 0 t o 1 US d o l l a r from t h e c l o s i n g r a t e of
As a r e s u l t o f a n o t t oo i a p r e s s i v e performance of the
d a i l y a u c t i o n system, the Dutch auc t ion system was re -
in t roduced w i t h t h e use of me marginal r a t e under which
t h e a u t h o r i S N d e a l e r a were obl iged t o b id f o r t h e i r
customers and n& l o n g e r f o r themselves. AS a r e s u l t of
t h e m policies, a review of the n a t u r e of f o r e i g n exchange
flowe between t h i s per iod becomes p e r t i n e n t .
Data on the foreign exchange f lowa through t h e Central
Bank o f Niger ia i n February 1990 showed a n e t in f low of
$220.5million, i n c o n t r a s t t o the n e t outflow of $98.4 14 m i l l i o n i n the preceding month . b
I n September 1990, fo re ign exchange flows showed a n e t
in f low of $74.3million, compared wi th t h e n e t in f low of
$21 3 . h n i l l i o n i n t h e praceeding month?
October 1990 showed a n e t outf low of $4242.lmillion i n
contrast to the net inflow o'f $312.3 m i l l i o n i n t h e 16 greceeding month.
The fo l lowing yea r i n January 1491, it ind ica ted a n e t
inf low of $250.4million, i n c o n t r a s t t o t h e n e t outflow
of $1 39. J m i l l i o n i n t h e preoeeding month??
TABLE 6
SOURCE : Economf c and F i n a n c i ~ l Review 1.1
IF Volume 28, No.2 June 1990
- TABLE 7
CN EXCHANGE FLOWS THROUGH THE A L BANK AND OTHER BANKS ( S ' ~ L L I O _ N ~
C A W 8lBXSD I QUARTER
Amdm
I provisibnal
SECOND 1 QUARTER APR- JUNE
1990 3
2033.0 1557.6 +475.4
A
PERCENTAGE CHANGE BETWEEN 7&3=
mow 1 933. 3 . On 1431.1
#O#..oft 502.2
(1) cm (I 68.1 ) (11) Othar Bank# (32.1)
RIRST QUARTER JAN-MAR
1990 2
2674.6 1978 a 8
+65)5.8
5.' .. . CATEOORY
d
INFLOW oUTFT .OW
NETFLOW
+27.8
OmaLOW
' (1) Virfbla
(2) Inviribla
I Debt 8errioo
t) LC& Repaymen*
U) Int. poyment
3. Otherr
(3) Artenomoum
L.. Outflaw
M h v L o w b
SECOND QUARTER APR- JUNE
1989 1
1591.2 1550.0
+41.2
-24.0
+Oe5-21.3
APRIL 1 990
(3)
t1053.9 -31 a?
/ - 4 6-
9W"' 2 5 FOREIGN EXCHANGE CONTROL TOOLS
For e f f e c t i v e moni tor ing and management of f o r e i g n
exchanae r a t e s and v a l u e s , the C e n t r a l Benk of Niger ia
employs d i f f e r e n t t o o l s amongst which i s the exchange
r a t e p o l i c y e a r l i e r d i scussed .
The main i n a t r m e n t s employed i n t h e management of
f o r e i g n exchange r e sources a r e exchange c o n t r o l , po r t -
f o l i o d i v e r s i f i c a t i o n and a d m i n i s t r a t i v e measures.
Olukole (1991) de f ined exchange c o n t r o l as a mechanism
by which a count ry seeks t o conserve, mob i l i s e , cen t r a -
l i s a and r a t i o n a l i s e i t s f o r e i g n exchange r e ~ o u r c e s ~ f o r
the s e t t l e m e n t of i n t e r n a t i o n a l t r a n s a c t i o n s i n
accordance wi th t h e p r i o r i t y of t h e country . Transac-
t i o n s i d e n t i f i e d as being of high p r i o r i t y a r e favoured
f o r the purpose of disbursements whi le t hose of low
p r i o r i t y a r e e i t h e r discouraged o r denied f o r e i g n
exchange f a c i l i t i e s .
Exchange c o n t r o l i s r e s t r i c t i v e , s e l e c t i v e and might
be s t r i n g e n t . The main source of a u t h o r i t y f o r the
a d m i n i s t r a t i o n of f o r e i g n exchange t r a n s a c t i o n s i n 'a
Niger ia i s t h e erchange c o n t r o l a c t 1962. Under t h e
p r o v i s i o n s of t h e a c t , a u t h o r i t y f o r t h e g r a n t o f ,
approva ls i n r e s p e c t of f o r e i g n exchange t r a n s a c t i o n s \k
i s ves t ed i n t h e M i n i s t e r of f i nance . However, most
of the f u n c t i o n s of the p r i v a t e s e c t o r t r a n s a c t i o n s
were de l ega ted t o the Cent ra l Bank of Niger ia which i n
t u r n de l eka ted approving a u t h o r i t y f o r most t r a n s a c t i o n s
t o t h e au tho r i sed d e a l e r s .
The exchange c o n t r o l i n Niger ia was a regime of a b s o l u t e
c o n t r o l , c o n t r o l of i n t e r e s t r a t e s , c o n t r o l o f exchange
rates and c o n t r o l of wages.
The a d m i n i s t r a t i v e c o n t r o l wae e f f e c t e d i n 1902 and
1983 when the Cent ra l Bank used the requirement of
Form "MW r e g i s t r a t i o n a s a supplementary ins t rument o f
import c o n t r o l . The Cen t r a l Bank under t h i s , monitored
t h e u t i l i s a t i o n of import l i c e n s e s . This was t o ensure
t h a t the presc r ibed va lues on t h e l i c e n c e s were not
exceeded and t h a t the i t e m imported were i n keepink
wi th the under ly ing import l i c e n c e s . ?he Comprehensive
Import duperv is ion acheme (CISS) was a l s o a form o f
a d m i n i s t r a t i v e c o n t r o l . I ts o b j e c t i v e was t o ensure
t h a t the count ry rece ived va lue f o r h e r expendi ture .
The t h i r d c o n t r o l t o o l , d i v e r s i f i c a t i o n p o l i c y , was
t o ensure an opt imal p o r t - f o l i o s e l e c t i o n of wsaets of
d i f f e r e n t c u r r e n c i e s and s e c u r i t i e s i n terms o f
m a t u r i t i e s and y i e l d s i n o r d e r t o meet the needs of
l i q u i d i t y , p r o f i t a b i l i t y and s e c u r i t y .
The C e n t r a l Bank of Niger ia set up an Investment
Management Committee i n december, 1974 t o d e a l with the
matters r e l a t i n g t o the investment of t h e Banks f o r e i g n
resources .
The csommitba achieved a l o t a s i n 1976 when t h e number
of c o n v e r t i b l e c u r r e n c i e s i n which the Bank's e x t e r n a l
- 48 - a s s e t s were held increased n ine aa aga in s t four a t
the end of 1974.
When the aost -benef i t e f f e c t s of these con t ro l s were
received, it was found out t h a t the c o s t of implementing
the measures were higher than the gains. I order t o I c o r r e c t t h i s imbalance, t h e 1986 budget sought t o
de-emphasis con t ro l s and adopted pol icy measures aimed
a t expanding the economyla resources base.
Under the decree, the re was among o the r s , a currency
r e t en t i on scheme under which exporters of non-oil 6
commodities were permitted t o r e t a i n 100 per c e n t of
t h e i r export proceeds a s an incen t ive t o produce more
' f o r export . The second was the i n i t i a t i v e of t he
domid.llisry Account Suheme which permitted indivhduals
and corpora te bodies r e s iden t i n Nigeria t o operate
fo re ign currency accounts with banks i n Nigeria. The
ob jec t ive of the domic i l l i a ry account was t o check
t h e outflow of fo re ign exchange by r e s i d e n t s and reduce
the demand pressure on o f f i c i a l fore ign exchange
resources. The budget a l s o hoped t o e s t a b l i s h the
second-tier fo re ign exchange market (SFEM) l a t e r i n
the year as a means of achieving a more r a t i o n a l de ter -
mination of the na i r a exchange r a t e and consequently
a more erfYicient a l l oca t i on o f foreign exchange
resources.
The philosophy behind SAP was economic deregula t ion ,
Under SAP, fo re ign exchange management was based on
providing a mechanism f o r achieving a r e a l i s t i c exchange
r a t e of the na i ra . On the demand s ide , such a r e a l i s t i c
r a t e should reduce excessive demand f o r fo re ign exchange
while on the supply s i de it should e l iminate t he p re -
v a i l i n g d i s t o r t i o n s i n the economy and s t imula te non-oil
expor ts i n p a r t i c u l a r as well a s a t t r a c t inflow of
fo re ign c a p i t a l and funds held abroad by Nigerians.
The SFEM was t h e main i n s t i t u t i o n a t the incept ion of
SAP f o r the achievement of the fo re ign exchange mahage-
ment obdectives.
Despite the good i n t en t i ons of p o l i c i e s under SAP,
a r e s l i s t i c exchange r a t e was s t i l l a mirage.
Prof. A.O. Ekechi (1990) confirmed t h i s when he sa id
t h a t , " in l a t e 1986, however, an unexpected deprecia t ion F
s e t i n t h a t continued u n t i l now, I n addl t fon , the
n a i r a f a l l was i nev i t ab l e because t he huge i n t e r -
na t i ona l borrowing by Nigeria t h a t w a s taking p lace
could no t be sustained forever".
Akingbola (1991) i n one of h i s a r t i c l e s , emphasised
t h a t as t h e na i r a continued t o deprec ia te , the marginal
r a t e system was introduced a s the mechamism f o r de ter -
mining the exchange r a t e . This however d i d not happen,
he s a i d , so the CBN had t o in te rvene on two occasions
. t o s t a b i l i z e the nat ional currency. To subs t an t i a t e
h i s claim, i king bola sa id t h a t the na i r a has s ince the
The philosophy behind SAP was economic deregula t ion .
Under SAP, f o r e i g n exchange management was based on
p rov id ing a mechanism f o r achiev ing a r e a l i s t i c exchange
r a t e of the n a i r a . On t h e demand s i d e , such a r e a l i s t i c
r a t e should reduce excess ive demand f o r f o r e i g n exchange
whi le on the supply e i d e i t should e l i m i n a t e t h e pre-
v a i l i n g d i s t o r t i o n s i n the economy and s t i m u l a t e non-oil
expor t s i n p a r t i c u l a r as we l l a s a t t r a c t inf low of
f o r e i g n c a p i t a l and funds he ld abroad by Niger ians .
The SFEM was t h e main i n s t i t u t i o n a t t h e i n c e p t i o n of
SAP f o r t h e achievement of the f o r e i g n exchange mahage-
ment ob jec t ivea .
Despi te the good i n t e n t i o n s o f p o l i c i e ~ under SAPI
a r o s l i s t i c exahange r a t e was s t i l l a mirage.
Prof . A.O. Ekechi (1990) @onfirmed t h i s when he sa id
t h a t , ,tin l a t e 1986, however, a n unexpected d e p r e c i a t i o n C r - s e t i n t h a t cont inued u n t i l now. I n a d d i t i o n , t h e
n a i r a f a l l was i n e v i t a b l e because the huge i n t e r -
n a t i o n a l borrowing by Niger ia t h a t wae t ak ing p l a c e
could n o t be sus t a ined f orever" .
Akingbola (1991) i n one o f h i s a r t i c l e s , emyhasised
t h a t as t h e n a i r a continued t o d e p r e c i a t e , the marginal
r a t e system w a s in t roduced a s t h e mechamism f o r d e t e r -
mining t h e exchange r a t e . This however d id n o t happen,
he s a i d , s o t h e CBN had t o i n t e r v e n e on two occasions
t o s t a b i l i z e t h e n a t i o n a l currency. To s u b s t a n t i a t e
h i s c la im, Akingbola s a i d t h a t the n a i r a has s i n c e t h e
in t roduc t ion of the FEN, been continously on the s l i d e ,
except f o r the Inter-bank fo r e ign exchange market (IFEM)
period when, with t he CBN i n con t ro l of the determi-
na t i on of t he exchange r a t e and with t i g h t monetary and
c r e d i t p o l i c i e s being implemented, t he exchange r a t e
was r e l a t i v e l y s t a b l e .
The exchange r a t e was uns table as a r e s u l t of the huge
d l f ferenue between demand and supply of fo re ign exchange
a t FEM, the re- in t roduct ion of the Dutch Auction System
and t h e 21 pe r c en t c e i l i n g on l o s t o f funds i n the
money market. b
kingb bola went f u r t h e r t o i nd i ca t e t h a t i n the process
of searching f o r the r e a l i s t i c n a i r a value, the na t ional
currency i s now under-valued and t h a t i f the operat ion
of the Dutch Auction System a t the FEN r e m ~ l n s unchanged,
the n a i r a i s poised f o r f u r t h e r deprec ia t ion .
2.7 FOREIGN EXCHANGE CONSERVATION I N N I G E R I A
I n Nigeria , t h e need t o conserve fo re ign exchange has
become more urgent following the maJor economic problems
w h i ~ h t h e country has faced.
If the na t ion a s a whole is t o conserve i t s fo r e ign
exchange it should t a e k l e the problem of fo re ign
exchange shortage.
According t o Ismai l a Usman (1 291 ) , one way t o overcome
the problem of f o r e ign exchange shortage i s t o diver-
s i f y the expor t base and/or c u r t a i l the imports of
those goods and s e rv i ce s which have a l t e r n a t i v e
-51 - domestic sourcea of supply.
He was of the opinion t h a t d i v e r s i f y i n g t h e expor t
base appears t o be the more e f f e c t i v e way al though it
is r a t h e r complex t o accomplish i n t h e s h o r t run.
Cur ta i lment of impor ts i s u s u a l l y a more f e s i b l e op t ion
w i t h i n t h e s h o r t t o medium-term. H e be l i eve8 t h a t i f
the o b j e c t i v e i s t o save f o r e i g n exchange by reducing
impor ts , t h e s t a r t i n g p o i n t should be a programme of
a g r i c u l t u r a l import s u b s t i t u t i o n because
(1 ) Local product ion of agricultural
products i s t e c h n i c a l l y more e a s i b l e b
than that o f i n d u s t r i a l manufacturers
g iven t h e f a c t o r endownments of most
developing n a t i o n s and
(2) t h e marginal c o s t of import replacement
appears t o be l o ~ e r f o r a g r i c u l t u r a l
p roducts , mainly because some under-
u t i l i z e d r e sources could be mobil ised
a t comparatively lower c o s t s . The
i n d u s t r i a l u s e r s of a g r i c u l t u r a l raw
m a t e r i a l s t h e r e f o r e have a v i t a l r o l e
t o p l a y i n s t i m u l a t i n g and ensur ing
adequate i n p u t s u p p l i e s , i f the n a t i o n
as a whole Is t o conserve i t s f o r e i g n
excharrga. One way to ~ c h i a v e H d l v e r ~ l - 0
f i e d base f o r domestic s u p p l i e s o f
a g r i c u l t u r a l raw m a t e r i a l s i f through
backward i n t e g r a t i o n by which t h e en t re -
- 52 - preneur could produae some of
h i s own inpu t s .
Usman f e e l s t h a t backward i n t e g r a t i o n is a v i a b l e
opt ion f o r the conaervat ion of f o r e i g n exchange i n
Nigeria. H e h igh l igh ted aome s t r a t e g i e s of baokward
i n t e g r a t i o n which included v e r t i c a l i n t e g r a t i o n , i n t e -
g r a t i o n by ownership and leaa ing , c o n t r a c t arrangements .
with primary producers, government sponsored supp l i e s
and producer organisa t iona . we major problem and
chal lenges of backward i n t e g r a t i o n for the purpose of
f o r e i g n exchange conservat ion inc lude weaknesses i n b
t h e enabl ing macro-economic environment, technological
c o n s t r a i n t s , l ack of f inance and l i m i t e d market oppor-
t u n i t i e s f o r t h e products.
PIOURE 2:
PEMAND - SUPPLY OF FOREIGN EXCHANGE (3k.1- ikl A I_ 1 9 9 c,\
*I, 4
A - Mot Available
1 Provimionrl
*Added to individual iternr of dfsburrement
SOURCE: C m L BAHK OF NICmIA, REFURNS OP FOSETGN OFTRATIONS DEPARTMENT ((PINANOIAL & QCONMIC REPIN)
I SOURCE: URN ANNUAL REPORT (various ~ i t i o n r )
F I G U R E 3:
1990 FOREIGN EXCHANGE WWET ALLOCATION /
SOURCE: BUSINESS T I M E S
TABLE 1 0 :
COMPARISON OF THE AUTONOMOUS RATES R A ~ (January - August -881
P E R I O D
JANUARY FEBRUARY MARCH A P R I L MAY
AUTONOMOUS R A T E S (NAIRA PER 1 US
DOLLAR)
JUNE
FEM RATES (NAIRA PER 1 U S
DOLLAR)
- SOURCE: CBN BULLION (Volume 1 5 N o . 1 , J a n / ~ a r 1 9 9 1 )
TABLE 1 1 1
MONTHLY AVER
JANUARY FEBRUARY MARCH A P R I L MAY
JUNE JULY AUGUST
SEPTE3UI BER 4.6174 OCTOBER 4 , 1 2 0 3 NOVEMBER 3 . 5 3 1 1 DECEMBER 3 . 1 8 2 8
,LAR E X C H A W E RATE ,
SOURCE r CBN BULLION ( V 0 1 15 N o . 1 , Jan/~ur 1 991)
TABLE 12 : MONTHLY AVERAGE RATE 1990 #/US DOLLAR
JANUARY
FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST
SEPTEMBER OCTOBER
NOVEMBER a DECEMBER
TABLE 13: LAR EXCHANQE RATE - r . 1YYO
DATE - 3 4 5 6 7
10 11
RATE - 8.6500 8.6500 8.6500 8.6500 8.6500 8.6500 8 .65OO 8.4875 8 3932 8.4697 8.6595 8.7854
N/US & EXCHANGE RATE JANUARY 1991
SOURCE; '
. TABLE 12, 13 and 14: FOREIGN OPERATIONS DEPARTMENT CBN LAGOS (CBN BULLION)
CHAPTER 3 RESEARCH METHODOLOGY
3 1 RESEARCH APPROACH
I n conduct ing t h i s r e s e a r c h , a s t r a i g h t forward approach
was adopted.
The problem and obJec t ive of t h e r e s e a r c h work w a s f u l l y
def ined . This brought i n t o view t h e r e s e a r c h s t e p s t h a t
w a s taken.
Ora l i n t e rv i ewe were conducted wi th most o f f i c i a l s o f t h e
mador m u l t i n a t i o n a l s t h a t o p e r a t e i n Niger ia and Cen t r a l
Bank o f Nigeria .
O f f i c i a l s of some commercial and Merchant Banks were,
a l s o in te rv iewed with the view of comparing t h e i r f i g u r e s
wi th t h a t g o t t e n from the Cen t r a l Bank o f Niger ia .
The v a r i o u s d a t a c o l l e c t e d were mostly hedging p o l i c i e s
adopted by t h e m u l t i n a t i o n a l s a g a i n s t f o r e i g n exchange
and i n t e r e s t r a t e s r i s k s and t h e average i n t e r e s t r a t e s
and f o r e i g n exchange r a t e s f o r t h e p e r i o d s 1986-1990.
The l a t e r was g o t from the v a r i o u s f i n a n c i a l i n s t i t u t i o n s .
These v a l u e s were b u i l t i n t o t a b l e s t o be a b l e t o
a s c e r t a i n t h e i r r e l a t i o n s h i p s and t h e e x t e n t of the e f f e c t 8
of one on the o t h e r . The degree o f f l u c t u a t i o n s were
a180 e v i d e n t on t h e t a b l e s . Also, t he f l u c t u a t i o n s o r
values were p l a t t e d i n t o graphs o r 1lgur.rtn.
I n a d d i t i o n , some e x i s t i n g m a t e r i a l s l i k e texts, f inan-
c i a l magazi,nes and seminars d e l i v e r e d by a u t h o r i t i e s i n
the f i e l d were reviewed. F i n a l l y , an a n a l y s i s was made
on t h e d a t a obtained.
SOURCES OF DATA
Data is a very impor tan t a s p e c t of any r e s e a r c h design.
Without a q u a l i t a t i v e and c o r r e c t d a t a t h e r e w i l l n o t be
any base f o r a n a l y s i s . Care was t aken i n determining t h e
sou rces o f d a t a t h a t were used. The sou rces of informa-
t i o n a r e c l a s s i f i e d i n t o primary and secondary sources .
There are o t h e r p o s s i b l e c l a s s i f i c a t i o n s but f o r t h e
purpose of t h i s r e sea rch work, t he primary and secondary
c l a s s i f i c a t i o n s were p r e f e r r e d .
3.2 m l =MARY SOURCES b
A primary sou rce , i n this con tex t , i a t h e source used
i n c o l l e c t i n g primary data. Primary d a t a r e f e r s t o
d a t a t h a t i s c o l l e c t e d f o r t h e first t ime dur ing a
marketing r e s e a r c h study'? The s c i e n t i f i c mode of
market ing r e s e a r c h is a p p l i c a b l e t o a l l forms o f r e sea rch ,
hence the approach adopted.
I n c o l l e c t i w t h e primary d a t a , o b s e r v a t i o n a l and
survey methods were engaged through t h e conduct of o r a l
i n t e rv i ew.
Most of t h e primary d a t a c o l l e c t e d were the d i f f e r e n t
hedging p o l i c i e s employed by m u l t i n a t i o n a l s with s p e c i a l
emphasise on unconvent ional p o l i c i e s . Unconventional
p o l i c i e s a r e t hose t h a t a r e unique t o t h e d i f f e r e n t
o q a n i s a t i o n s , a s o r t o f in-house package, and a r e n o t
s t anda rd o r ' c o u l d n o t be found on any s t anda rd t e x t .
Most of them are i l l e g a l .
3.2.2 SECONDARY SOURCES
Secondary s o u r c e s , u n l i k e primary sou rces , a r e t h e
sou rces used i n c o l l e c t i n g secondary d a t a . Secondary
19 d a t a i s p rev ious ly publ ished m a t t e r . The secondary d a t a c o l l e c t e d inc luded both i n t e r n a l
and e x t e r n a l data. The i n t e r n a l d a t a comprises those
from t h e o f f i c e s o f t h e m u l t i n a t i o n a l s , Cen t r a l Bank
Of Niger ia and the few commercial and merchant b m k s
t h a t were used. Care was t aken n o t t o mention n m e s
of companies o r banks t h a t r e l e a s e d a p a r t i c u l a r da ta
because it was a pre-condi t ion b e f o r e the d a t a werp
r e l e a s e d .
The e x t e r n a l d a t a c o l l e c t e d inc luded , Annual Reports
of t h e mu1 t i n a t i o n a l s , f i n a n c i a l magazines comprising
of Business Times, F inanc ia l Concord, F inanc ia l Pos t ,
Guardian, Cen t r a l Bank o f Niger ia Bul l ion , Economic
and F inanc ia l Review, Annual r e p o r t and s ta tement of
accounts , Business Magazine, Seminar papers and most
t e x t s on t h e s u b j e c t matter.
The only government source used is t h e Federa l o f f i c e
of S t a t i s t i c s , Lagos. A f e w p r i v a t e sources were
explored. Those used were SKOUP and Management/
F inanc ia l Consul t Limited. The former i s based a t
Enugu and t h e l a t e r i n Lagos.
3.3 DATA ANALYSIS METHOD
I n ana lys ing t h e d a t a c o l l e c t e d , t h r e e approaches were
adopted.
Approach one oonsis ted of DEINC percentage .analys i8 .
The decrease o r inc rease i n value of the r a t e s were
determined f o r the var ious years under study. This
decreases o r inc reases were l a t e r analysed i n t o per-
centages t o g ive an ove ra l l view of t h e i r performance.
DEINC percentage ana ly s i s i s an acronym f o r the above
mode of ana lys i s .
The second method used is the Time s e r i e s ana ly s i s .
This i s a s tudy of the behaviour ( t r end ) of these r a t e s
wi th in t he period under ana ly s i s .
F ina l ly , with fo re ign exchange r a t e as the dependent
v a r i a b l e and i n t e r e s t r a t e , the independent va r i ab l e ,
the r e l a t i o n s h i p between the two was constructed i n t o
a t ab le .
!Fhe average fo re ign exchange r a t e f o r 1991 was fore-
cas ted asaurning the i n t e r e s t r a t e ( lending rate) remains
a t 21.0 pe r cen t throughout t he year ( o the r f a c t o r s
remaining cons tan t ) .
The equat ion used i s
y U a + b x + E s where y Average fo re ign exchange r a t e x = Average i n t e r e s t r a t e (Lending r a t e )
E s = Standard Error
The values of the cons tants , a and b were obtained
us ing the Regression equation. *
b = NEXY - E X N
NEX' - (EX)*
and
where n = no
The s tandard
the equat ion
Es =
a = EY - BEX
IS
of yea r s .
E r r o r of e s t i m a t e was c a l c u l a t e d ueing
E? - AEY - BEXY
The va lue n-2 was used becuase two c o n s t a n t s , a and b,
wore involved. If the other factors that could a f f e c t
t h e f o r e i g n exohange r a t e l i k e Savings d e p o s i t r a t e , b
f i x e d d e p o s i t r a t e and o t h e r s were used, the m u l t i p l e
r e g r e s s i o n a n a l y s i s method would have been employed.
The m u l t i p l e r e g r e s s i o n a n a l y s i a was n o t used because
t h e computat ional t echniques a r e complicated and
Computer hogammrnes a r e normally needed f o r such corn-
p l i c a t e d and advanced techniques .
CHAPTER 4
4 , l RISK STRUCTURE
The r i s k s t r u c t u r e of a n o r g a n i s a t i o n i s t h e n a t u r e
o f t h e v a r i o u s types of r i s k s which it is exposed t o .
The economic environment i s t u r b u l e n t t h a t a l l mul t i -
nationals i n Niger ia a r e exposed t o one r i s k o r t h e
o t h e r , I n t h e a n a l y s i s of t h i s c h a p t e r , emphasis i s
r e s t r a i n e d t o t h e n a t u r e o f f o r e i g n exchange and
i n t e r e s t r a t e r i s k which they contend with. Exchange
r i s k ahould be seen as inc lud ing both p o s s i b i l i t i e s
and a system t o i d e n t i f y , ana lyse and c o n t r o l all types
of exposure. Risk a n a l y s i s i s t h e goa l of f i n a n c i a l
management.
4.1 - 1 FOREIGN EXCHANGE AND INTEREST RATE RISK
The m u l t i n a t i o n a l s o p e r a t e under unpred ic t ab le and
dynamic m a r k e t cond i t ion8 wi th l a c k o f r e a d i l y a v a i l a b l e
s t a t i s t i c a l In format ion on c r u c i a l problems. To be
a b l e t o f o r e c a s t t h e environment i n r e l a t i o n t o f o r e i g n
exchange, t h e r e should be a v a i l a b l e q u a l i t a t i v e d a t a
on c e r t a i n f a o t o r s l i k e I n t a r e s t r a t e s , balance of pay-
ments, i n f l a t i o n r a t e e t c . Experience h a s shown t h a t
t h e f i g u r e s a v a i l a b l e were c a l c u l a t e d , based on a l o t
of assumptions, Working wi th s u c h . f i g u r e s is a r i s k on
The natur; of the r i s k can be ca t egor i sed i n t o
account ing and economic exposure. The account ing r i s k
l i e s i n t h e f a c t t h a t t h e r e i s a p o s s i b i l i t y that
publ i shed f i n a n c i a l s t a t emen t s w i l l show a nega t ive
impaut from currency movements. The r i s k a f f e c t s
cash-flow p r o j e c t i o n s , p r o f i t and l o s s account and
balance sheet.
Due t o the c o n s t a n t movements ( d e p r e c i a t i o n / a p p r e c i a t i o n )
of r a t e s of exchange, t h e m u l t i n a t i o n a l s f i n d i t hard
t o p rodec t t h e i r cash flow. A good p o r t - f o l i o management
i s r equ i r ed f o r n e w t o exact proJec t ionu . AS the r i s k
l a exyrerlericeci, the profit a n d luas accuuti t 1 :I t~dJutlted
t o t ake c a r e o f exchange l o s s .
The a n a l y s i s o f a s s e t s and liabilities of t h e f i r m )
a f f e c t s t h e balance s h e e t p o s i t i o n . AB e a r l i e r s t a t e d ,
p u b l i s h i n g such n e g a t i v e e f f e c t s on t he va r ious f inan-
0 i a l statements, either f o r the share-holders o r
management's consumption, i e a big account ing r i s k .
The economic r i s k o r t r a n s a c t i o n r i s k emanates from
when a n a c t u a l convers ion is made o r where t h e cash
flow effect of a n exchange l o s s i s an impediment t o
t h e o p e r a t i o n s o f a f i r m . The exposure i s such t h a t
changes b r i n g n e g a t i v e r e s u l t s e i t h e r i n account ing
o r r e a l terms. The e f f e c t s of the l u t t e r may dt~ve lop
only i n t h e f u t u r e . a1
The p a r e n t bodies o f t he m u l t i n a t i o n j give them a l l
forms of suppor t t o make s u r e t h a t they succeed l n
t h e i r opeka t ions . A major type of suppor t ob ta inab le
i s i n form of long-term l o a n s wi thout cons ide r ing the
e f f e c t over t i m e of the divergence of t h e i r currency
with t h a t of t he hos t country. If the currency
depreoia tes , the f i rm runs i n t o a l o s s although, i n
some oases, i t is t rans fe r red t o the parent body.
An economic e f f e c t can be seen i n inter-company t rade
accounts , where a l o c a l a f f i l i a t e must produce more
l o c a l currency t o s e t t l e t h e same l e v e l of inter-group
payables, these again w i l l u sua l ly show no pre-tax 2 1 e f f e c t f o r the form on coneolidat ion . The problem
i s worsened when both a f f i l i a t e s have d i f f e r sn t
Corporate t a x r a t e and the payable/receivables i s
denominated i n a t h i r d currency. If the currencied
move i n c e r t a i n d i r ec t i ons , t he r e might be a net loss .
The mul t ina t iona l s source most of t h e i r raw mate r ia l s
abroad. Atimes, they a r e imported v i a t h e i r parent
body. If inventory is b o q h t from foreign hard
currency sources and old i n l o c a l currency, t he r e
i a an immediate economic e f f e c t i f the import currency
apprecia te8 over time and l o c a l p r i c e s cannot be r a i sed .
Monetary and f i s c a l po l i c i s a In a deprecia t ing currency
a country make t h i s a t yp i ca l s i t u a t i o n .
The maJor i n t e r e s t r a t e r i s k is i n the l i q u i d i t y of
the economy and the r a t e a t which money can be procured.
A s aho r t money becomes scarce and the re fore , dearer t o
borrow, banks lend sho r t and a t y e t dea re r r a t e . The
procedures f o r procurement a r e made more compl-ex and s
f r u s t r a t i n g .
4.1,2 CAUSES OF EXPOSURES
There a r e v a r i o u s causes of exchange r i s k . Some a r e
s t anda rd and c o n t r o l l a b l e whi le o t h e r s a r e small and
uncontrollable. The o lase i f l ca t lons a r e based on t h e
degree of t h e i r impact i n de te rmin ing a firms r i s k
p o r t - f o l i o .
The apex f i n a n c i a l i n s t i t u t i o n , C e n t r a l Bank of Niger ia ,
i s meant t o c o n t r o l t he economic and f i n a n c i a l environ-
ment of t h e count ry . They can only succeed i n t h i s
t a s k w i t h t h e h e l p of o t h e r f i n a n c i a l i n s t i t u t i o n s
e s p e c i a l l y banks. The banks compound the problem by
sending f a l s i f i e d r e t u r n s . &wed on t h e s e r e t u r n s , t h e
c o n t r o l p o l i c i e s of the C e n t r a l Bank of Niger ia tend t o
be i n e f f e c t i v e . There i s a l s o , unnecessary d e l a y s i n
foreign exchange procurement even when they a r e
a v a i l a b l e . Because of t h e wide gap between t h e demand
and supply o f f o r e i g n exchange due t o inc reased demand
f o r f o r e i g n c u r r e n c i e s , t h e r e a r e c o n s t a n t f l u c t u a t i o n s
i n t h e exchange r a t e . As t h e va lue demanded and
supp l i ed a r e n o t c o n s t a n t , t h e exchange r a t e f l u c t u a t e s
a longs ide w i t h fluctuations i n the va lue demanded and
auy p l l ert . Devaluat ions and r e v a l u a t i o n s wi th f l o a t i n g exchange
r a t e s causes exchange r i s k of t h e danger o f having
p r o f i t s reduced. On t h e o t h e r hand, f i xed exchange rates
have t h e advantage of avoiding t h e compe t i t i ve depre-
c i a t i o n o f exchange r a t e s t h a t might occur wi th
22 f l o a t i n g exchange r a t e s . In Nigeria , some maJor fo re ign cur renc ies , p a r t i c u l a r l y ,
t he United S t a t e s d o l l a r , have i n recen t times passed
through the i l l e g a l c ruc i b l e of export f o rge r s who have
succeeded t o a l a r g e ex ten t i n r e t a i n i n g the e s s e n t i a l
i ng red i en t s of a p a r t i c u l a r currency with s l i g h t s t ruc -
t u r a l d e f e c t s t h a t only the eagle-eyed fo re ign exchange
d e a l e r can de t ec t . In cases where such f o r g e r i e s a r e
no t de tec ted , t h e exchange l o s s is pushed t o t he
purchaser , The dea l e r s a r e a l s o involved i n uncovered b
a r b i t r a g e , Holders of l i q u i d i t y move l a rge volumes of
currency accross t he exchanges because of short-term
i n t e r e s t f a c to r s .
Adverse balance of payments causes exchange r i s k .
Balance of payment i s adverse when more goods and
s e rv i ce s a r e imported than exported. The s t a t e of t h e
balance of payment a f f e c t s t he exchange r a t e .
Other causes of exchange r i s k include:-
Rising p r i c e s of goods and s e rv i ce s and wages i n
excess of the inc rease i n production arid the l e v e l of
unemployment.
Demand f o r fo re ign exchange is crea ted when a company
c a r r i e s ou t d i r e c t o r i n d i r e c t o r po r t - fo l i o investment
i n another country. Capi ta l f l i g h t involved has a *
s i m i l a r e f f e c t upon t he value o f the currency a s it i s
assumed t o be an import of merchandise,
Qovernment loans and g r an t s , and t r ansac t ion8 with
i n t e r n a t i o n a l i n s t i t u t i o n s a l s o e f f e c t the demand f o r
and the supply of cu r r a rx l e s . If a country i s a member
of any i n t e r n a t i o n a l organisa t ion , subscr ibes i t s
currency t o such an o rgan i sa t ion and the currency is
used by the i n s t i t u t i o n t o g r an t a loan t o another
country, then t h e supply o f t h a t currency on the market
i a increased with a weakening e f f e c t upon i t s value.
~ l s o i f the government lends i t s culSrency o r makee g i f t s
of i t t o o the r coun t r i e s , the same e f f e c t i s experienced.
The percentage changes of the r a t e s can be a p p l i e d on
t he Balance Sheet of the company t o a s c e r t a i n the impact
of the r i s k . Impact cons idera t ions can be based on
t h e company's present and f u t u r e pos i t i ons and t ax consi-
de ra t ions . This involves p red ic t ing market t rends and
c a l c u l a t i n g t h e i r probable e f f e c t on the s p e c i f i c
pos i t i ons of t h e f i r m . Predic t ions from a l l of these
have c e r t a i n l i m i t a t i o n s , depending on the time period
of r i s k involvement and the range of p robab i l i t y needed
f o r dec i s ion making. Any ca l cu l a t i on must take i n t o
e f f e c t the r a t e movements and any hedging t a c t i c .
4.2 TREND A N A L Y S I S
4.2.1 DE- I N C PERCENTAGE A N A L Y S I S
. (- = Decrease , + ~ n c r e a s e )
The average lending r a t e f o r commercial banks increased
by 16.33% from 1987-88, 18.71% from 1988-89 and 31,5396
from 1989-90, showing a general increase from 1987 - 1990, The average percentage increase , f o r the period
1987-90, of average lending r a t e s f o r commercial banks
The percentage increase from 1988-89 t o 7989-90 was
1 higher because of the various monetary policies in t ro -
I duced by the Central Bank of Nigeria within this w r i o d ,
I t h e most popular being the mop up of excess l i q u i d i t y
I from the economy. The f igure8 showed an increase i n
average lending r a t e from 1987-1 990.
The average lending r a t e f o r Merchant Banks increased
from 1989-90 by #5,8 showing a percentage increaee of
25.4496, The monthly average of #/US Dollar exchange
r a t e showed the following percentage increases/decreases
i n value.
TABLE 17
worn t a b l e 19, i n 1987-88, t h e r e was a n i n c r e a s e i n
average monthly #/US Do l l a r exchange r a t e from January
(14.47%) t o February (15.12%) then t h e r e was a drop from
Mardh (8.80%) t o Apr i l (7.60).
I n May t h e economy witnessed a decrease of 1.26%, showing
t h a t t h e n a i r a apprec ia ted a g a i n s t t h e d o l l a r wit$in - this pe r iod while the a c t u a l va lues showed an average
i n c r e a s e of #0.0524 al though the exchange r a t e was
M.1617 (1987) and ~ 4 . 1 0 9 3 (1988) t o one (1 ) US Dollar .
From June t o J u l y i t increased from 3.48% t o 21.03%
which was a h igh inc rease . . This could be a t t r i b u t e d t o
a r i s e i n i n t e r e s t r a t e s , i n f l a t i o n r a t e and a nega t ive
balance of payment. It s t a r t e d t o decrease from
August t o November u n t i l 1 December when t h e r e was a
rjhary Itic~.nase tu 2U.4UX.
I n 1988-89, i t inc reased from January (68.60y,) t o May
(82.64%) while t h e r e was a drop from June (75.30%) t o
December (42.3996). Comparing the f i g u r e s of 1987-88
and 1988-89, showed t h a t t h e percentage i n c r e a s e /
decrease i n 1988-89 was h ighe r than t h a t of 1987-88. S
This showed t h a t t h e r a t e of exchange i n 1989 was h ighe r
than t h a t o f 1987 and 1388.
From 1989-1990, the monthly average increase/decrease
was minimal, The r a t e was f l uc tua t i ng between #7.0389
t o #8.7071. The value increased from January (1 1.70%)
t o April (4.78%) before it increased from May (5.79%)
t o Ju ly (17.40%).
In August i t s t a r t e d decreasing from 9.68% t o October
( 6 . 3 2 % ) . For the months of November and December it
increased from 10.88% t o 14.2396 respect ively . There
haa always been increases In average fore ign exchange
r a t e except i n May when i t decreased by 1.26% from
1987-88 values.
From t ab l e 19, the average monthly exchange r a t e showed
a general inc rease within t he months of May and June
f o r a11 the periods (1987-88, 1988-89, 1989-90).
~ l a o from September t o October, there was a general
decrease f o r a l l the periodg. ~ l l o ther months expe-
rienced i r r e g u l a r f luc tua t ions . One would say t h a t
within the mid-year ( ~ a y , J u n e ) t he re i s always a high
demand f o r fo re ign exchange by those who a r e preparing
t o go on summer holiday8 and bueintiaa-men who want t o
import goods f o r s a l e during the f e s t i v e season of
Christmas.
The decrease towards the end of the year showed tha t
people r a r e ly need foreign exchange within t h i s period,
moreover, most people v i s i t from abroad w i t h ldrge sums *
of f o r e i ~ n currency t h a t the supply f a r exceeds the
demand, thereby bringing down the r a t e of exchange.
The fol lowing aesumytions were made while p r o j e c t i n g
t h e average #/US D o l l a r exchange r a t e because accord ing
t o p r i n d l , no f i r m w i l l be a b l e t o f o r e c a a t p r e c i s e l y 23 a l l of i ts g r o s s positions by cur rency i n t h e f u t u r e .
The major de te rminant of f o r e i g n exchange
i s t h e prime l end ing ra te
The e f f e c t 8 of o t h e r i n t e r e s t r a t e s ( s av ings
and Time d e p o s i t ) a r e minimal
The a c t u a l i n f l a t i o n r a t e and balance of
payment va lue is hard t o determine. They
change on a d a i l y b a s i s and t h e f i g u r e s a l r e a d y
e x i s t i n g a r e n o t r e l i a b l e .
Other f a c t o r s t ha t h e l p i n determining
f o r e i g n exchange r a t e s cannot be q u a n t i f i e d
The i n t e r n a t i o n a l f i n a n c i a l o rganisa t i o n s l i k e
IMF cannot determine or/and i n f l u e n c e the
exchange r a t e of a countr# 'a currency.
If t h e r a t e is l e f t t o the f o r c e s of demand
and supply, t h e t o t a l amount of a cur rency
demanded o r suppl ied cannot be a s c e r t a i n e d
c o r r e c t l y , because of t h e a c t i v i t i e s of t h e
"black market ope ra to r s " and o t h e r s .
The prime l end ing r a t e w i l l remain cons t an t
a t 21% f o r the remaining p a r t of t h e yea r .
8 ) It i s e a s i e r , more reasonable and accura te
t o make projec t iona wi th average values.
9 ) The Dutch auc t ion aystem appl ied i n t he
fo r e ign exchange market w i l l soon be scapped
because it g ives the n a i r a a f a l s e s t a t u s
a g a i n s t o thercurrenciea .
The following values were go t from the var ious t a b l e s
i n Cahpter 2 .
Annual average of the monthly average of #/US D o l l a r change r a t e 6 (Tmb ..I I Y ~ L
YEAR
1986 (Average f o r 4 months from Sept - Dec) ... 3.8629
1987 4,01795 4,0180 1988 4.53246 ... 4.5325
1989 7.39188 ... 7.391 9 1990 8.0374
The ana ly s i s was done using the regress ion equa t ion .
- AVERAGE S A V I N G S
RATE
L
AVERAGE 1 AVERAGE F/DEPOSIT LENDING
RATE RATE 8
21% i n t e r s ~ t rate for 1991
1-1.097 + 0.36 X 21.0 + ES
= -1.097 + 7.56 + Ea = 6.463 + Es
rn 0.8964 = 0.9468
Applying the error fac tor
Yl99l = 6.4630 + 0.9468
= N7.4098
The other factors apart from the average lending rate
were not considered t o avoid multiple regression
analys is whose computation i s complicated and requires
the serv ices of a Computer System.
All things being equal, the average f o r e i g n exchange
o f #/US d*ollar should be 7.4098 f o r 1991.
Comparing the above f i g u r e s with t h a t of t he month8
of January - ~ e ~ t a m b c r 1991, t he r e were some d i f f e r e n c b
which could be explained by unprecedented f l uc tua t i on r
I n t h e value of the na i ra .
4.3 HEDGING P O L I C I E S AGAINST R I S K
Hedging, i n t h i s context , i s the a c t of neu t r a l i z ing ,
minimizing, covering and/or avoiding exchange r i s k s ,
Covering i s defined as the purchase o r s a l e of fo re ign
exchange forward t o o f f s e t completely the r i s k of
f l u c t u a t i o n i n a r a t e of exchange when payments a r e t o 4
be made o r received I n t h a t f o r e ign currency i n the
f u t u r e o r balance shee t poai t iona t o be t r a n s l a t e d a t
s c los ing spo t rote2$ Hedging is defined more broadly
as a l l a c t i o n s taken t o change t he exposed pos i t i ons of
a company i n a currency o r ourrenciea. The word
"Hedging" and WCoveringm can be uaed inter-changeably,
A number of measures a r e ava i l ab l e t o mul t ina t iona l 25 f i rms f o r minimising fo re ign exchange lossea .
Exchange r a t e planning has become a highly developed
t a c t i c i n many mul t ina t ional e n t e r p r i s e s j i nkac t t he
fo re ign exchange fo recas t ing s t a f f of one l a r g e multi- ,
na t iona l i n Nigeria claims t o have made more p r o f i t s
f o r t he company than the production and s a l e s s t a f f . I
A number of mul t ina t iona l s i n Nigeria p ro t eo t t h e m s e l ~ e r ~ i
aga ina t f o r e i p exchange l o s r from i n f l a t i o n and deva-
l u a t i o n by borrowing c a p i t a l wi th in Nigeria I and then I
A . I . . en te r ing i n t o forward exchange con t r ac t s according t o I
which c u r r e n c i e s w i l l be de l ive red on s p e c i f i c f u t u r e
dates. In a d d i t i o n , they ar range f o r the payment of1
imports o r expor t s i n hard cu r renc ies .
Company XYZ, a major computer company opera t ing i n
Niger ia , with i ts pa ren t body and o t h e r s u b s i d i a r i e s
abroad, e n t e r i n t o forward exchange c o n t r a c t s with
t h e i r customers. They do no t s t o r e equipment8
( inventory) i n Nigeria r a t h e r they make r e q u i s i t i o n s
from t h e i r pa ren t body when t h e r e i s ready market f o r
them. ~ l s o , customers a r e n o t allowed t o pay i n b
advance r a t h e r they pay when the equipments has a r r i v e d
i n t o the country. This payment can only be accepted i n
d o l l a r s , so t h e i r customers procure f o r e i g n exchange
before e n t e r i n g i n t o any bus iness wi th them thereby
s h i f t i n g the burden of exchange r i e k t o t h e i r customera.
Most of t h e m u l t i n a t i o n a l s use t h e advantage of t h e i r
mul t ip le base t o c u t ' down money c o s t . They t a k e
advantage of low i n t e r e s t r a t e e i n o t h e r c o u n t r i e s t o
supply t h e working c a p i t a l needs of t h e i r opera t ions i n
Niger ia , where t h e r e is high i n t e r e s t r a t e s . They
s h i p components o r f i n i s h e d goods between s u b s i d i a r i e s I
on open account and t ake no immediate payment thereby
u t i l i s i n g the excess working c a p i t a l i n one suba id ia ry
f o r t h e b e n e f i t of another and t ak ing advantage of lower
i n t e r e s t r a t e a . On the o t h e r hand, they might deaide
t o go t o t h e c a p i t a l market t o source the c a p i t a l f o r I
, , . .. . ., .. . . . . , .,. . . , t h e i r opera t ions .
. - With t h i s , t h e involvement of t h e i r pa ren t body is
reduced wi th the r e s u l t a n t e f f e c t t h a t Nigerians t a k s
a good sha re of t h e e f f e c t s of the exchange l o s s . They
a l s o ar range a l l o r most short- term borrowing from
Nigeria . Use of l o c a l aources, could t a k e the form of
o u t r i g h t bank loans , i ssuance of bonda and s o on.
They minimize vulnerable ba lances through t h e a c t of
a c c e l e r a t i n g remission o u t s i d e the count'ky when they
sense t h a t t h e monetary a u t h o r i t i e s appear l i k e l y t o
i n s t i t u t e exchange r e s t r i c t i o n s . Recently, t h e r e a r e b
such measures l i k e t h e t r a n s f e r of the c o n t r o l of a l l
f i n a n c i a l i n s t i t u t i o n s from the Federal Minis t ry of
Finance t o t h e Cen t ra l Bank of Nigeria a l though the
i s s u e of Bureau de Change i a a t i l l c o n t r o v e r e i a l ,
a n t i c i p a t i o n that t h e Dutah Auction System w i l l be
scrapped, expec ta t ions that t h e government w i l l e i t h e r
peg t h e exchange rate a g a i n s t maJor cu r renc iee o r the
de terminat ion of a range, only wi th in which the exchange
r a t e could f l u c t u a t e and t h e mopping up of excess
l i q u i d i t y from t h e economy by the Cent ra l Bank of
Nigeria through t h e banks which has heightened i n t e r e a t
r a t e s , among o the r s . A t t imes they br ing i n hard
c u r r e n c i e s i n t o the country t o exchange f o r n a i r a when I
I
t h e exchange ra te i s high. They use such proceeds f o r
l o c a l runs l i k e purchases, h i r i n g of labour , a p o n s o r ~ h i p
of even t s , expansion e t c . To move away money from t h e
count ry , most f o r e i g n s u p p l i e r s i n s i s t bn pre-payment
a s a convenient excuse. I
They eeduce r e c e i v a b l e s t o t h e e x t e n t t h a t l o c a l
ope ra t ing c i rcumstances permi t under i n f l a t i o n a r y 1
c o n d i t i o n s . Companies can promote r a p i d payment through
d i s c o u n t s f o r e a r l y payments a s long a s t h e v a l u e of
t h e d i scoun t does n o t exceed t h e expected l o s s . I t
might be p r o f i t a b l e t o buy s u r p l u s m a t e r i a l s before
a n t i c i p a t e d exchange c o n t r o l measures, h i g h e r t a r i f f s
and deva lua t ions come i n t o f o r c e , o therwise it is wise r
t o minimise investment8 i n i n v e n t o r i e e . b
X - 0 - x pharmaceut ical company based i n Lagos, makes
s u r e t h a t i t s l o c a l p r o f i t margin must be h igh enough
t o absorb t h e d e c l i n e i n cur rency va lue and s t i l l provide
a good r e t u r n on investment . They have been a b l e t o
achieve t h i s by f r e q u e n t l y a d J u s t i n g the p r i c e of t h e i r
p roducts and s a l e s terms t o t h e e x t e n t of keep ingahead
of o r a t l e a s t up t 9 t h e r a t e of i n f l a t i o n . Thei r
p r i c i n g r e f l e c t e d , maJorly, ext imated replacement c o s t s
and n o t e x i s t i n g inventory c o s t . The changes must pro-
v i d e enough l ead time t o cover the c y c l e from purchase
t o c o l l e c t i o n . The i r cash d i s c o u n t s and past-due i n t e -
r e s t charges r e l a t e only t o l o c a l money c o s t s . -r
The ~ o n ~ l o i e r a t e s , a l s o employ ' i n t e r n a l techniques t o A
reduce exchange r i s k . The i n t e r n a l c o n t r o l s a r e mainly
o r i g i n a t e d and implemented v i a t h e i r p a r e n t body. This
i n c l u d e s t h e pre-payment of e x i s t i n g Third Pa r ty * .
Committments. Most of them are permi t ted t o e n t e r
i n t o j o i n t ven tu res with o t h e r m u l t i n a t i o n a l s o r l o c a l
companies l i k e the UAC of Nigeria PLC which has signed
an agreement with General Motors Corporat ion o f USA t o
manufacture, assemble and d i s t r i b u t e motor v e h i c l e s i n
Nigeria and provide r e l a t e d s e r v i c e s , inc luding spa re
p a r t s .
Import commitments a r e normally pre-paid i f the currency
i n which they a r e invoiced i s expected t o apprec ia te
v is -a-v is t h a t of t h e importer. They employ the
technique of leading o r lagging which i s a c c e l e r a t i n g o r b
delaying the o r i g i n a l payment d a t e s inorde r t o change
the bas ic currency p o s i t i o n of the group i n Nigeria.
Their pa ren t body t r a n s f e r funds among a f f i l i a t e s pro-
vided the c o s t of argumenting one s u b s i d i a r y ' s l i q u i d i t y
could outweigh t h e expected exchange ga ins . The
e f f e c t s of leading and lagging i s f e l t through i n t e r -
company p o s i t i o n s , which a r e a l t e r e d i n advance of
movements of exchange r a t e s .
The s u b s i d i a r i e s i n Nigeria , a r e expected t o employ
p r i c e adjustments a f t e r due cons ide ra t ion of marketing
cond i t ions w i t h i n t h e i r unique context . P r i c e adjustments
can be i n the form of r a i s i n g i t s p r i c e before depre-
c i a t i d n o r devalua t ion occurs , lexport p r i c e inc reases I
and t r a n s f e r p r i c i n g through t h e exchange r a t e , t h a t
i s t o lower o r r a i s e inter-group s e l l i n g p r i c e s by
b i l l i n g r a t e adJustments os t h a t p r o f i t s a r i s e i n hard I
I
currency. This has t h e mis-guided goal of t a x minimi-
A mador manufacturing i n d u s t r y i n Niger ia bases t h e i r
hedging p o l l c i e a around a s a e t / l i a b i l i t y management.
This i s i n t h e form of reduced a s s e t s and increased
l i a b i l i t i e s when the n a i r a i s l i k e l y t o d e p r e c i a t e ,
and inc reased a s s e t s and reduced l i a b i l i t i e s when it i s
expected t o a p p r e c i a t e . They could achieve t h i s ,
through t h e i n c r e a s e i n Net-Short term a s s e t s by
bu i ld ing up cash , short - term inves tments , r e c e i v a b l e s
and/or i n v e n t o r i e s . Also, r educ t ion i n L i a b i l i t i e s
through t h e r educ t ion of shor t - term d e b t denominated b
i n hard c u r r e n c i e s and pre-payment of hard currency
payables , and f i n a l l y , long-term a s s e t and l i a b i l i t y
changes through pre-payment o r o therwise of long-term
deb t . Thei r p a r e n t body i n U S A p l a y s a mador r o l e i n
t h e i r a a s e t / l i a b i l i t y management.
Most p a r e n t bodies s e t up expor t f i n a n c i n g v e h i c l e s t o
h e l p reduce t h e exposure of t h e i r s u b s i d i a r i e s . 'Phis
i s p a r t o f long-range s t r u c t u r a l changes t o r e - d i r e c t
and c e n t r a l i s e exchange r i s k . M u l t i n a t i o n a l s always
have problems because hedging of f o r e i g n commitments,
by whatever means, , i s cons t r a ined by t h e r e s t r i c t i o n s
, imposed by each exchange c o n t r o l and exchange market
s t r u c t u r e more e s p e c i a l l y i n Niger ia where exchange I
c o n t r o l s a r e changed i n t e r m i t t e n t l y . P r i n d l a s s e r t s
t hu t "an imagina t ive way t o r e t i o n a l l z e t h i a a i t u a t i o n
i s t o c r e a a e a , f i n a n c e company v e h i c l e which buys the I
I
. . . . expor t r e c e i v a b l e s of t h e group and assume8 the c r e d i t
r i s k and covering r e s p o n s i b i l i t y , The veh i c l e needs
t he freedom o r s p e c i f i c exchange con t ro l p e m i s s i o n t,o
f inance i t s rece ivab le po r t - fo l i o i n the Euro-market
w i t h t h e same o r d i f f e r e n t cu r renc ies and with unmatched
ma tu r i t i e s . If such f l e x i b i l i t y can be obtained, the
expor t exchange r i s k s of the group a r e c en t r a l i z ed i n
t h i s veh ic le dur ing the l i f e of the rece ivab les . Local
a f f i l i a t e s s e l l t h e i r export r e c e i v a b l e s ' t o it a t f u l l
va lue ( o r d i scoun t them depending on l o c a l requirements) 26 and a r e ou t of t he t r ansac t ion" .
b 3 CALCULATING COST OF HEDGING
Calcula t ing c o s t of hedging he lps i n fashioning hedging
p o l i c i e s , t he r e fo r e , it i s a form of hedging,
One method is t o c a l c u l a t e ga in s and c o s t .of ga ins
when a company buys ;r s e l l s i t s f u t u r e currency commit-
ments forward. A USA importer of Nigeria t e x t i l e s
through i t s subs id ia ry i n Nigeria has a s i x ( 6 ) months
c r e d i t w i t h a n invo ice amount of #5,000,000 under the
fol lowing r a t e quotations:-
Spot r a t e a t #9.85 per US Dollar
6 month8 forward r a t e a t m.32 pe r U S Dol lar
If t h e Spot r a t e ramains s t a b l e , t h e i p p o r t e r w i l l have
t o pu t up $507,614.21 t o purchase the Nigerian n a i r a a t I
I
matur i ty . The r i s k involved can be covered by buying W5,000,000
forward a t #9,32 t o coincide w i t h the f i n a l se t t l ement I
# .
6 months hence i n this case , t h e importbr w i l l have t o
pay $536,480.68 a t s e t t l e m e n t Gate. No m a t t e r what I
happens t o t h e d o l l a r / n a i r a r e l a t i o n s h i p , h i s o b l i g a t i o n
is f ixed and known.
For a p r i c e of $536,480.68 - $507,614.21 = $28,866.47
over t h e booked payable va lue , t h e impor t e r h a s covered
h i s r i s k e n t i r e l y . I n US t h e impor t e r might i n c r e a s e
the p r i c e of t h e product t o c o v e r , t h i s c o s t .
The c o s t of t h e forward exchange c o n t r a c t can be p u t
i n t o annual percentage terms f o r a n a l y t i c a l purposes
and comparison wi th o t h e r hedging methods. The premium b
o r d i s c o u n t i s c a l c u l a t e d by
Discount (or Premium) = Dif fe rence i n forward 12 100 jn 9( terms and Spot r a t e m%e x"T
t o m a t u r i t y
I n t h e example above, t h e premium is
- 9*85e l2 loo = 10.76% p e r annum -5 ,-I-
The f i r m may wish t o be covered a g a i n s t the n a i r a du r ing
a per iod s t a r t i n g t h r e e months and ending s i x months
from p r e s e n t d a t e , based on i t s own p r o j e c t e d currency
p o s i t i o n s o r i t s pe rcep t ion of market t r e n d s . & I t could
buy t h e cur rency forward f o r 3 months d e l i v e r y , and s e l l ,
* i t 6 months forward, t h u s being covered only i n t h e
d e s i r e d t ime per iod . This i s c a l l e d swapping. I
To c a l c u l a t e hedging c o s t s i n a swap d e a l , t h e U.S
company may wish t o cover a $1,000,000 exyoaure i n the I
per iod 3 months t o 6 months from t h e p r e s e n t . Calcula- . , .
t i ny . tht' coa t of d o i n g this,
Spot Naira/Dollar r a t e = m.85
6 months d o l l a r s e l l i n g r a t e = H9.32 x $1000000 =#9)20000
3 months d o l l a r buying rate = m.56 x $1000000 =#9560000
Net c o s t of hedging wi th in t he period = #240,000
This i s cheaper than the c o s t of hedging on a s t r a i g h t
l i n e of 6 months forward s a l e of ~9 ,850,000-~9,320,000
#530,000
A l l the var ious hedging p o l i c i e s employed by t h e
mul t ina t iona l s have adverse e f f e c t s on Nigeria. For t h e
government t o reduce the burden, firms should be
allowed t o g r an t o r accep t c r e d i t terms only w i t h b the
framework of t h e i r indus t ry . They w i l l n o t lag payments
ou t of o r accept e a r l i e r than normal payments i n t o the
country un less they agree t o pu t a f ixed percentage of
the add i t i ona l funds say 50% i n t o i n t e r e s t f r e e rese rves
a t t h e Centra l Bank of Nigeria.
CHAPTER 5
5 1 C O N C L U S I O N
The r o l e of m u l t i n a t i o n a l s i n t h e development of
under-development has a l ready been discussed. Their
a c t i v i t i e s has always been s e l f i s h , i n the sense t h a t
they a r e n o t o u t t o c o n t r i b u t e t o t h e development of
t h e i r hos t ' country r a t h e r t h e i r main i n t e r e s t l i e s i n
t h e t r a n s f e r of commendable proceeds t o t h e i r pa ren t
bodies. Not t h a t they a r e incapable of c o n t r i b u t i n g
t o development but , r a t h e r , they a r e no t w i l l i n g t o do b
ao and i n cases where they tend t o he lp , t h e i r mal-
p r a c t i c e s wipe away any con t r ibu t ion8 t h a t they can
make. The m u l t i n a t i o n a l o i l companiee baaed i n Nigeria
award scho la r sh ips t o indigenes of the areas where they
opera te and a t the same time i n f l i c t unto ld hardahip
t o them through o i l s p i l l a g e and sapping of t h e i r
n a t u r a l resources,
Their a c t i v i t i e s has always been condemned wi th in and
o u t s i d e Nigeria . I n their r e a c t i o n , a group known a s
Croup of 77 s p e l t o u t a r e a s of concern regarding t h e
opera t ions and a c t i v i t i e s of t r a n s n a t i o n a l co rpora t ions ,
The word N t r a n a n a t i o n a l l and"multinationa1" can be
used inter-changeably, I
The main a r e a s which they noted included
1 ) The t r ans -na t iona l o r mul t i -na t iona l s demand
p r e f e r e n t i a l t rea tment i n r e l a t i o n t o n a t i o n a l I 1
. . . e n t e r p r i s e s j
- 87 -
2 ) The r e f u s a l by t h e m u l t i n a t i 6 n a l s t o a d J u s t t o
the l e g i s l a t i o n of the h o s t c o u n t r i e s i n t h e
ma t t e r s , i n t e r - a l i a of f o r e i g n investment and
p o l i c i e s concerning c r e d i t s exchange, f i s c a l
ma t t e r s , p r i c e s and commercial ma t t e r s , i n d u s t r i a l
proper ty and labour p o l i c i e s
3) me non-posit ive a t t i t u d e of the mul t ina t iona le t o
re -negot ia te o r i g i n a l concessione i f such e x i s t e d
and i f t h i s should be considered necessary by t h e
government of the h o s t country; b
4 ) Their r e f u s a l t o accept exc lus ive J u r i s d i c t i o n of
domestic law i n cases of l i t i g a t i o n ;
5 ) D i r e c t and i n d i r e c t involvement i n the domestic
a f f a i r s of h o s t c o u n t r i e s by the m u l t i n a t i o n a l s ;
6) Request by m u l t i n a t i o n a l s t o t h e country of
o r i g i n t o i n t e r c e d e wi th t h e h o s t government,
with t h e hos tgovernment , wi th a c t i o n s of a
p o l i t i c a l o r economic n a t u r e i n eupport of t h e
p r i v a t e i n t e r e s t of the mul t ina t iona l s ;
7 ) The r e f u s a l of t h e mul t ina t iona l s t o accep t
exc lus ive J u r i s d i c t i o n of domestic law i n ma t t e r s
of compensation i n n a t i o n a l i s a t i o n ;
8) Extension by t h e m u l t i n a t i o n a l s of laws and I
r e g u l a t i o n s of the country of o r i g i n t o t h e h o s t
country;
9 ) The a c t i v i t i e s of mul t ina t ivna la a4 instruments 1
of fo re ign pol icy , including f o r i n t e l l i ~ e n c e
purposes, con t ra ry t o t h e i n t e r e s t s of t h e country;
10) The p r a c t i c e of m u l t i n a t i o n a l s t o c o n t r i b u t e i n t h e I
maintenance of r a c i s t and c o l o n i a l regimes and support
of p o l i c i e s of apa r the id and f o r e i g n occupat ion;
11) me r o l e of m u l t i n a t i o n a l s i n the i l l e g a l t r a f f i c of
arms ;
12) Obst ruc t ion by m u l t i n a t i o n a l s of the e f f o r t s of t h e
h o s t country t o assume i t s r i g h t f u l r e s p o n s i b i l i t y
and e x e r c i s e c o n t r o l over the development and
management of i t s resource8 i n cont ravent ion of t h e b
accepted p r i n c i p a l of permanent sovere ignty of
c o u n t r i e s over t h e i r n a t u r a l r e sources ;
13) me tendency of mul t ina t iona l s n o t t o comply with
n a t u r a l p o l i c i e s , obJec t ives and p r i o r i t i e s f o r
development e s t a b l i s h e d by t h e government of h o s t
c o u n t r i e s ;
14) With-holding of infobnat ion of t h e i r a c t i v i t i e s
by m u l t i n a t i o n a l s , thereby making it d i f f i c u l t f o r
h o s t c o u n t r i e s t o c a r r y out e f f e c t i v e supervis ion
and r e g u l a t i o n of those a c t i v i t i e s ;
15) Excessive r e p a t r i t i o n of f i n a n c i a l resources from
h o s t c o u n t r i e s and f a i l u r e t o genera te expected
1 fo re ign exchange earn ings i n the h o s t country;
16) Acquis i t ion and c o n t r o l by m u l t i n a t i o n a l s of
n a t i o n a l , l o c a l c a p i t a l i z e d e n t e r p r i s e s through
c o n t r o l l e d p roy i s ion of technology among o t h e r means; 1
17) Super-imposit ion of imported technology wi thout
any a d a p t a t i o n t o l o c a l c o n d i t i o n s , c r e a t i n g I
v a r i o u s types of d i s t o r t i o n s ;
18 ) F a i l u r e by m u l t i n a t i o n a l s t o promote r eaea rch
and development i n h o s t c o u n t r i e s ;
19) Obst ruc t ion o r l i m i t a t i o n by m u l t i n a t i o n a l s of
a c c e s s by h o s t c o u n t r i e s t o world technology;
20) Imposi t ion of r e s t r i c t i v e bus iness p r a c t i c e s ,
i n t e = - a l i a , on a f f i l i a t e s i n developing c o u n t r i e a
a s a p r i c e f o r t e c h n i c a l know-how;
21 ) Lack o f r e s p e c t of t he s o c i o - c u l t u r a l i d e n t i e
27 of h o s t c o u n t r i e s . I n e f f e c t i n g t h e i r a c t i v i t i e s i n Niger ia , they work t o
unders tand t h e f o r c e s t h a t a f f e c t f o r e i g n 'exchange r a t e s
and g e t i n fo rma t ions on t h e market c l a s s i f i e d by t h e
l e g a l and p o l i t i c a l problems of fund movement8 and the
economics of fo re ign ' exchange t r a n s a c t i o n s and t h e t a x
i m p l i c a t i o n s of v a r i o u s a l t e r n a t i v e e .
The f o r e i g n exchange r a t e is normally a f f e c t e d by
i n t e r e s t r a t e s , e s p e c i a l l y t h e l end ing r a t e s , balance of
payments p o s i t i o n and r a t e of i n f l a t i o n .
An i d e a l s i t u a t i o n is one where t h e lending r a t e i s
determined by t h e market f o r c e a of demand and eupply. 1
I
But the c h a r a c t e r i s t i c s of the Niger ian Money Market
ghows t h a t t h e I n t e r e s t r a t e s o f f e r e d d e p o s i t o r a and
charged t o borrowers by the comrrlercial and Merchant 1
, - . banks a r e l a r g e l y determindd by i n s t i t u t i o n a l i n s t e a d
of market f o r c e s . The e x t r a c o s t imposed by t h e small
and i n s o l v e n t banks on themselves a r e covered i n the '
h i g h e r lending r a t e s they charge t h e i r customers.
Under t h i s s i t u a t i o n , t he presence of a l a r g e number
of banks no twi ths tanding , I n t e r e s t r a t e s cannot be
comparat ively determined.
The balance of payments theory i n , i t s a o p h i s t l c a t i o n
a s s e r t s t h a t t h e balance of payments p o s i t i o n a f f e c t s
t h e supply of and demand for f o r e i g n exchange. This
a s s e r t i o n i s c o r r e c t because t h e theory i s compar,tible
w i t h t h e g e n e r a l theory o f va lue which s t a t e s t h a t the
exchange r a t e should behave l i k e t h e p r i c e of a commodity
whose value i s determined by t h e supp1.y o f and demand
f o r t h e commodity. The balance of payments which
i n f l u e n c e the supply of and dewand f o r f o r e i g n exchange
i s determined by e x p o r t s and impor t s and o t h e r s i g n i - 28 f i c a n t f o r c e s which a r e in f luenced by p r i c e s .
The problem wi th the balance o f payments theory is that
it assumes the balance of payments to be a f i x e d q u a n t i t y ,
and a l s o t r e a t s t h e demand f o r many imported raw m a t e r i a l s
a s p e r f e c t l y p r i c e i n e l a s t i u and consequent ly independent
of changes i n p r i c e s and f o r e i g n exchange r a t e .
The measures employed by m u l t i n a t i o n a l s t o reduce A
f o r e i g n exchange and i n t e r e s t r a t e r i s k i n c l u d e s ,
exchange r a t e planning through f o r e - c a s t i n g , sourc ing
o f funds w i t h i n the h o s t coun t ry , forward exchange I
I
. , . .
c o n t r a c t s , leading and lagging and ob ta in ing funds
from low i n t e r e s t a reaa f o r high i n t e r e a t a reaa . The
mechanics behind t h e implementation of t h e s e p o l i c i e s
a r e normally designed by t h e i r pa ren t bodies, while those
s u b s i d i a r i e s i n Nigeria e f f e c t them.
I n ensuring the s a f e t y and continued p r o f i t a b i l i t y of
t h e i r o rgan i sa t ions , the economy of t h e country i s a
d i r e c t l y o r i n d i r e c t l y a f f e c t e d adversely.
Inorder t o minimise the va r ious hedging p o l i c i e s used
by the mul t ina t iona l s i n Nigeria , t h e r e a l i s t i c exchange b
r a t e should be determined. Economists and non-economists
a l i k e have f a i l e d t o reach an agreement whether t h e r e
i s any such th ing a s a r e a l i s t i c va lue f o r the n a i r a
and the r e s u l t i s t h a t the n a i r a cont inues t o apprec ia te
and d e p r e c i a t i o n (deprec ia t ing most of t h e t ime). This 1
adds t o t h e ques t ion , whether t h e n a i r a exchange r a t e
ahould be s t a b l e o r ' f loa t ing . Although, i t i s widely
bel ieved t h a t i t i s necessary t o al low t h e exchange r a t e
t o f l u c t u a t e t o enable it f i n d i t s " n a t i o n a l v l e v e l ,
some i n d i v i d u a l s be l i eve t h a t t h e r e i s no such th ing -...
a s t h e n a t i o n a l l e v e l f o r t h e r a t e of exchange of a
currency. The proper r a t e , i n each case , depends upon
t h e economlc, f i n a n c i a l and moqetary p o l i c i e s pursued 1
by t h e country concerned a t a p a r t i c u l a r p o i n t i n t ime,
and by o t h e r c o u n t r i e s with which she has important
economic r e l a t i o n s . Moreover, whether o r no t a given I
. , . exchange r a t e i s a t t h e " c o r r e c t w l e v e l can be determined
only a f t e r t he r e has been time t o observe the couree I
of the i n t e r n a t i o n a l balance of payments of a country
i n response t o t h a t r a t e of exchange.
5.2 SUCQESTIONS AND RECOMMFADATIONS
The mul t ina t iona l s should cont inue with those hedging
p o l i c i e s , provided t h a t they do not adversely a f f e c t
t he Nigerian economy. The c r i t i c a l element i n exposure
management i s t o pin-point a s p r ec i s e ly a s poss ib le , t h e
p o s i t i o n of t he group i n each currency. Local balance
sheet should d i s t i n g u i s h those i tems denominated i~
l o c a l currency from those i n each s p e c i f i c currency,
l ikewise budget r epo r t s . They should engage i n fore-
c a s t i ng , that is i den t i f y ing changes overtime i n a l l
currency r i s k s of t h e group and i t s subs id i a r i e s .
Monthly repor t ing of balance shee t s i s e s s e n t i a l . This
w i l l enable the parent body des ign t h e i r exposure
management. I n cases , where a l o t of time i s involved
i n preparing balance shee t s , t e l e x o r telephone r epo r t s
could be made.
Each subsidiary should prepare a monthly exposure r e p o r t
which does not r equ i r e a f u l l accounting procese. This
provides t h e i r head o f f i c e with t he a t a t e of group
exposure and enables them determine the e x t e n t of scono-,
mic exposure of the subs id i a r i e s .
Exposure can be based on f u t u r e cash flows. This cash
flow bee ia o e r t a i n l y i d e n t i f i e a all t r eneac t iona l I
. . , - . exposure and provide8 a rough b a s i s f o r a s ce r t a i n ing ,
the probable account ing r i s k s . I
Another r e p o r t that could h e l p formula te good hedging
p o l i c y is the f o r e i g n exchange g a i n s and l o s s e s r e p o r t .
The r e p o r t is a management t o o l which should be prepared
on a monthly o r y e a r l y b a s i s .
As e a r l i e r s t a t e d , f l u c t u a t i o n s i n t h e exchange r a t e ,
c r e a t e exchange r i s k f o r t h e v a r i o u s firms and t h e
government of Nigekia.
S ince f l u c t u a t i o n s i n t h e exchange r a t e a f f e c t the
government adve r se ly , measures should be t aken to ' s ta -
b i l i z e t h e n a i r a value. The a c t i v i t i e s of banks i n
t h e second- t i e r f o r e i g n exchange market hae been iden-
t i f i e d as one of t h e maJor causes of exchange r a t e
f l u c t u a t i o n s e s p e c i a l l y t o t h e h igh s i d e .
The s o l u t i o n l i e s i n t h e C e n t r a l Bank of Niger ia
s a t i s f y i n g t h e demand of a l l t h e bankers a s this would
f o r c e them t o reduce t h e i r h igh bid r a t e s as they would
a l l be a s su red of s u c c e s s f u l b ids .
The C e n t r a l Bank of Niger ia should i n c r e a s e t h e supply
of f o r e i g n c u r r e n c i e s t o t h e market. They should intervend
i n t h e u n e t h i c a l p r a c t i c e s of most banks by imposing
s t i f f e r p e n a l t i e s on e r r i n g banks. There should a l a o ,
be s t a b l e monetary and f i s c a l p b l i c i e s a s a c o n t r i b u t o r y
measure.
u n s t a b l e
r e a c t i o n
l . . . . . r _ ,, .
Incessan t over r e g u l a t i o n makee t h e environment
a n d . e a c h r e g u l a t i o n seema t o encourage over
from t h e market. I 1
- 95 - The low va lue of t h e n a i r a is caused by t h e count ry ' s
t a s t e f o r f o r e i g n ~ o o d s . Increased l o c a l sourc ing of
raw m a t e r i a l s i s suggested as a n answer t o exchange
r a t e s problem.
The government can e i t h e r s u b s i d i s e borrowing r a t e t o
some s e c t o r s of the economy a s we have under expor t
r e f i n a n c i n g scheme o r a l low a l l bdnks a c c e s s t o a
generous r e d i s c o u n t window a t t h e C e n t r a l Bank of Niger ia .
More generous and d e l i b e r a t e i n c e n t i v e t o e x p o r t e r s ,
e s p e c i a l l y e x p o r t e r s of manufactured goods, should,be
encouraged. I n c e n t i v e s such a s IBw I n t e r e s t r a t e , low
s e a f r e i g h t and 100% t a x ho l idays i s adv i sab le .
The r o l e of d i r e c t f o r e i g n exchange a l l o c a t i o n s t o
i n d u s t r i e s should be added t o t h e wide powers g iven t o
t h e apex bank r e c e n t l y by t h e New Banka and o t h e r
f i n a n c i a l i n s t i t u t i o n s dec ree 25 of 1991. If t h i s
happens, dubious p r a c t i c e s of some banks a t t h e o f f i c i a l
f o r e i g n exchange market (FEM) l i k e f a l s i f i c a t i o n of
r e t u r n s , unnecessary de lays i n f o r e x procurement e t c .
may be so lved . The f i n a n c i a l p o s t i n one of $ t s
e d i t o r i a l s , o u t l i n e d t h e r o l e t h e C e n t r a l Bank of Niger ia
played i n t h e p r e s e n t predicament of t h e n a i r a .
The C e n t r a l Bank of Niger ia , through e i t h e r t h e o r i t i c a l
misconception
f i t t o manage
n a i r a a g a i n s t , .
o r m i s d i r e c t i o n o r both h a s n o t seen it
t h e internal and e x t e r n a l va lues of t he
t h e back-ground of t h e foillowing premises; '
f i r s t , givdl ' t h k t th6 n a i r a is '%on-market conver t ib le
and that Nigeria has a very import- intensive economic
s t r u c t u r e , then much of the i n f l a t i o n i n Nigeria i s
imported i n f l a t i o n and the Centra l Bank of Nigeria only
g ive s g r a t u i t o u s f i l i p t o i n f l a t i o n a r y p ressure i n
Nigeria by allowing t h e na i r a t o deprec ia te interminably
i n ex t e rna l value. Second, because credi t .makes t h e
bus iness world go round, and i n t e r e s t , t h e p r i c e of
c r e d i t i s the fundamental c o s t item i n t h e p r i c e of any
good o r s e rv i ce i n any organised money economy, them,
it cannot be t r u e t h a t the domestic value of the na i r a
i s enhanced, o r the Nigerian i n f l a t i o n r a t e reduced, by
a scorched-earth a n t i - i n f l a t i o n (?) pol icy of dear and
scarce nai ra . Third, s ince the n a i r a is no t market
conver t ib le , then the dubious and in-eff e c t i v e western
rules-of-thumb f o r t h e management of t he ex t e rna l &nd
i n t e r n a l va lues of market conver t ib le
t o t a l l y inadequate f o r t h e management
and ex t e rna l values of the non-market
cur renc ies a r e
of t he i n t e r r ~ a l
conver t ib le na i ra .
Fourth and consequently, any non-market conver t ib le
currency economy l i k e Nigeria which seeks economic progress
with s t a b l e p r i c e s must de-link p r i c e formation i n i ts - fo r e ign exchange market from price-formation i n i ts money ;
and c a p i t a l markets.
I n e f f e c t , the external value of the non-market conver-
t i b l e na i r a should no t be causa t ive ly l ipked t o i t 8
i n t e r n a l value o r t o t he Nigerian l e v e l and s t ruc tu re ,
of i n t e r e s t r a t e s , f i e f a i l u r e of the Central Bank of
Nigeria t o adopt the above as i ts po in t s of depar ture
for managing the naira has led t o the very awkward and
paradoxical s i t ua t ion ' t oday where Nigeria has an inverted 29 y i e l d curve f o r term investmentan ,
Fina l ly , the Central Bank of ~ i g e r i a should endeavour
t o c u t Niger ia ' s monetary coa t according t o h e r monetary
c l o t h ,
b
Bahnnan, J . N . 1969. Some Pa t t e rn s i n t he r i s e of Mul t ina t ional En te rp r i se , North Carol ina: Chapel H i l l :
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Financial Post, Feb.18-March 3, 1990, P.3.
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Bailey, D.K. 1978. Methods of Soc ia l &search, New Yorkt Macmillan h b l l s h i n g
Campbell, A. and Converse, P.E 1972. The Human Meanlna I>f, New work: Russel Sage Foundation
CBN Monthly Report, February 1990
CBN Monthly Report, October 1990
CBN Monthly Report, September 1990 b
Darre l , ~ ~ 1 9 3 4 . How t o l i e wi th S t a t i s t i a s , New Yorkr W .W. Norton and Company
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Hymer, S. 1973. "A w r i t t e n s ta tement t o the group of Eminent peruonsn. United Nations.
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