University of Nigeria - unn.edu.ng in Nigeria Hedging...University of Nigeria ... # Jl~u main them...

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 .

- 15 - I t i s believed that subsequent researchers w i l l

continue from where I stopped.

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 deregula 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

SOURCEr Various values picked from

Tableps 4 and 5 o f Chapter 2

. (- = 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

AVERAGE FOREIGN EXCH RATE

( Y )

AVERAGE LEND l NG RATE

NEXY - EXEX

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 :

Hylaer, S.1973. w r i t t e n s tatement t o t h e group of eminent persons*. United Nations

Kolde, E.J. 1968. I n t e rna t i ona l Business En te rp r i se , New Jersey: Prent ice-Hall Inc.: pp230-39

Prasad, S .B, and Shet ty , Y .X. 1976. An ~ n t r o d u c t i o n t o Mult inat ional Management, New Jeraey: Prent ice-Hall hc.: p.56

P h i l i p s , T.1991. CBN Bullion: Vo1.15 No.2 ~ p r i l / ~ u n e P.1 5 h

Nwankwo, A.A. 1981. Can Nigeria Survive?, Enugu: Fourth Dimension Co. : P.123

I b id , p.124

Pr ind l , A .R. 1976. Foreign Exchange r i s k , London: John Wiley and sons Ltd : P.l

LOC c i t , p.36-38

The 1976-7 Budget speech

Oresotu, F.O. 1991. CBN Bullion: Vo1.15 No.1 Jan/March, P.15

DWivedi, D.N. 1967. Macro Economic Theory, Delhi: Vikas Pub. House Ltd: P.583

Olukole, R.A. 1991. CBN Bullion: Vol.13 No.1 January /March, P. 6

CBN Monthly Report, February 1990, p.19

CBN Monthly Report, september 1990, p.21

CBN Monthly Report, October 1990, P.27

CBN Monthly Report, January 1990, P -27

Kurtz, D .L, and, Boone, L. E. 1981. Marketing, USA: John Wiley and Sona Ltd: p.143

I

Hanke, JOE, and Reitch, A.G 1986. Fundementala of

Business S t a t i s t i c 8 0 Columbus: A Bel l and Howell

COY*: p.251

Pr ind l , Loc c i t , p.24

Whiting, .D.P. 1979, Finance of f o r e i ~ n t rade and

fore ign exchange, Plymouth: Mac Donald and Evans Ltd:

Pr ind l , Loc c i t , P.32

Pr ind l , Loc c i t , P.58 b

Bahrman, Loc c i t , p.62

Commission on Transnational ~ o r ~ o r a t i o n s , (1 -1 2) March, 1976, P.21-22

Vaish, H.C. 1982. Honey, Banking and In te rna t iona l

Trade, New Delhi: ,Vikas Pub. House Ltd. : p.420

Financial Post, Feb.18-March 3, 1990, P.3.

Bahrman, J.N. 1969. Some P a t t e r n s i n the rise of Mul t ina t ional m t e r p r l s e , North Caroline: Chapel )ill1

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

Dwiredi, N. 1967. Macro Economic Theory,. Delhi t V i k a s Pub. House Limited

Einzing, P.A* 1967. A Dynamic Theory of forward exchange, London: Macmillan

Hanke, J O E , and Rei tch, A.G. 1986. Fundermentals of Business S t a t i s t i c s , Columbus: A ell and Howell Coy

Hymer, S. 1973. "A w r i t t e n s ta tement t o the group of Eminent peruonsn. United Nations.

Kolde, E. J. 1968. I n t e r n a t i o n a l Buainesa E n t e r p r i s e , New Je r sey : Prent ice-Hall Inc

Kurtz, D.L., and Boone, L.E. 1981. Marketin&, 'USA# John Wiley and Sons Ltd.

I

Nwankwo, A .A. 1981 . Can Nigeria Survive?, Enugu t Fourth Dimension Co. l

Olukole, R.A. 1991. CBN h l l i o n ; Vo1.15 No.1 ~ a n / ~ e r c h

Prasad, SOB, and, Shet ty , Y.K. 1976. An In t roduc t ion t~ Mul t ina t iona l Management, New Jerseyr Prgntice-Hall I

20. ~ r i n d l , A . R . 1976. Fore* Exxchange r i s k , London* John Wiley and sons-~td.

21. Vaish, M.C. 1982. Money, Banking and International Trade, New Delhir - P

22. Whiting, D.P. 1979. Finance of. Foreign trade and Foreign Exchange, Plymouth: Mac-Uonald and Evans Ltd.

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