Writing
on Olukola (1992) and note of October 3rd, 19823 the I.M.F.
complained about the higher quotation having risen about the cause by arbitrage
incidence in our naira exchange rate quotation could be minimized. In December, 1985 it was agreed that
one currency intervention system be adopted with the system the naira exchange
rate was quoted against a simple intervention currency-dollar reducing the
degree of divergence and with a Nil arbitrage position Vis-a’-vis the U.S
dollar and pound sterling.
Although the incidence of arbitrage
was wiped out, the system had a disadvantage of making the naira to sink with
U.S dollar or float with it as the case may be in the world foreign exchange
market. The system in effect was maintaining the U.S dollar and naira rate at
point about $ 1.00 and deriving the cross rate of other currencies Vis-a’vis
the naira Vis such quoted U.S dollar and naira.
Fixed exchange rate system the
exchange values of currencies are fixed in terms of some common units such as
gold or other currencies. Thus system operated in the international economy
before 1944. the essential feature of fixed exchange rate system was that each
country had its currency value defined in terms of gold standard. This regime
provided for fixed exchange rates between countries, it is also relatively
simple understand the following terms in the fixed exchange rate.
Gold Bars
In the fixed exchange rate, the gold
bars is quite inconvenient to carry around for spending purposes for government
that were pledged to be redeemed in gold metal by definition there would be no
foreign exchange rate problem if gold will be common world currency.
Gold Coins:
Since silvers and blobs of gold are
inconvenient to carry and easy for party and for weight, it became customary
for each country in the early days, the prince to stamp out in coin from a
specified number of ounce of gold carrying the seal of the state to guarantee
parity and weight.
Floating exchange rate is a system
where supply and demand are left free to determine the velocity exchange rate.
If the dollar and pound were tied to gold the exchange at $5 per £1. but might
not have floated at $4 or $6 per £1 in the absence of my tie gold. If the
floating or flexible exchange rates are rule, the pound sterling exchange rate
will bobble up and down in the $1 to $2 ranges during the late. 1980s.
Floating exchange rate allows
currency price changes to assist in correcting a balance of payments. The value
of its currency declines and lower price of currency stimulates exports and
decreases imports whenever a nation ahs a deficit in its balance of payments,
the value of its currency rises and the higher currency price decreases export
and import increases. Under this system, the Nigeria naira exchange rate is
determined by the force of supply and demand of foreign exchange.
Within the class of exchange rate
regime that are called floating or flexible, we can distinguish the two
important sub-cases a free floating system, and managed floating system
efficiency of the foreign exchange market. However, as a result of renewed
demand pressures and speculative activities, the parallel market premium stated
to widen again. This prompted market. However, as a result of renewal demand
pressures and speculative activities, the parallel market premium stated to
widen again. This prompted the fixing of the exchange rate at N21.9960 to U.S
$1.00 in the later part of 1993. Following the dismal performance of the
economy at the end of 1994, a system of managed float exchange rate had brought
about on the economy. Thus, the autonomous foreign exchange market (AFEM) was
introduced in January, 1995. as a way of further liberalization of the market,
AFEM was replaced by the daily inter-bank foreign exchange market (IFEM) in
October, 1999 which has been retained since then. A flexible and well -managed
floating exchange rate regime is typically suited for Nigeria’s unique economic
characteristics. In particular, it helps the economy to absorb the impact of
volatile price shocks, as well as enhance domestic production, which relies on
foreign, inputs. The CBN’S legislative grant of instrument autonomy can only be
meaningful within the operational framework of a flexible exchange rate system
and the Banks prerogative to change its minimum Rediscount Rate (MRR)
Pro-actively.