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THE IMPACT OF FOREIGN EXCHANGE POLICIES
ON THE OPERATION OF MANUFACTURING INDUSTRIES
(A CASE STUDY OF ROYAL FOAM PRODUCTS
(NIG) LTD.)
CHAPTER ONE
1.0 BACKGROUND TO THE PROBLEM
The
need for foreign exchange policy and management arises only within the
framework of countries engaged in international trade in contrast to a closed
economy, whose scope does not transcend its intra country trade transactions.
This need is under scored by the economic theory of comparative advantage, theory
of comparative cost as well as international resource endowment differentials
and imbalance. The interdependence of countries in terms of trade has grown so
much that perhaps no country can lay absolute claim on self – sufficiency in
its resources requirements or lay absolute claim on perfectly balanced supply
of resources. By extension, since resources are limited and scarce, the need
for policy formulation and management of resources becomes inevitable.
Foreign
currency, otherwise known as foreign exchange, is one of the scare resources
particularly in developing countries. Unless the policy framework and
management of this scarce resource is properly articulated in terms of its
revenue generation and expenditure (inflow and outflow), a country runs the
risk of balance of trade or balance of payment problems. Moreover, in order for
a country to optimize the advantages of international trade, it becomes
imperative for that country to institute appropriate foreign exchange policy
and management. One major aspect of the Federal Government in Nigeria budget
statement every year is the monetary policy under which the foreign exchange
market policies, procedures, strategies or guidelines are articulated. The
polices which are subjugated to change every year are formulated and
implemented by the Federal Government through the ministry of finance and
Central Bank of Nigeria (CBN) regulating, monitoring and disbursing the flow of
its scarce foreign exchange earnings to the various sectors of the economy both
private and public sectors.
However,
sometimes some of the guidelines contained in the foreign exchange market
policies are formulated without taking into consideration their future effects
on the produce sectors of the economy, or are not properly managed/implemented
to achieve a desired goal. At times they are changed before they achieve
results. This and other irregularities from financial institutions are
responsible for the poor performance of the manufacturing industry in Nigeria and the
economy as a whole vis-à-vis slowing down economic activities in the country.
If
there is one index today that speaks volumes of various in Nigeria
economy, it is the Autonomous foreign exchange market policy introduced in
1995/1996 like a bubbling economy a few years back (under the foreign market
policies). Trade in foreign exchange was perhaps the most lucrative profit
centre of financial institutions. Then even a junior officer in the foreign
exchange department of a bank could be picked out of a group of his peers. Reason is that he is in an area where
things are happening, all at the expenses of the few genuine manufacturers who
are starved of their required foreign exchange allocation to feel irrelevant
sectors.
Today
foreign exchange business like the Nigerian economy has ebbed to an all time
how one. It is so bad that some banks bow treat the business like a contagious
disease, which must be touched. Yet it is bad and becoming worse very fast too
due to the recent policies packed in the new method of selling and buying of
foreign exchange under Autonomous foreign exchange market (AFEM) in 1995 and
1996 budget. Generally foreign exchange in any country is fundamental and
important to its economy.
Foreign
exchange is the exchange of goods and services across one country and another,
this has actually attracted the investors in one country to order for the raw
materials or goods which they are not having from another country that is
having it in abundance. In this case there is no amount of interaction of one
country to another that will not call for government policy, such as Tarife,
Taxation and Vat etc.
In
the course of this, capitals need to be taking into consideration as currency
barrier may not allow easy flow of trade within countries, therefore the
Central Bank should hasten through the world Bank the easy flow of
international monetary transfer.
The
epileptic/eratic nature of power supply has been a great hindrance to the
effective performance of the industry i.e the Nigeria power is not regular
compare to other countries as a result preventing foreign investors, Nigeria
should as a matter of urgency emulate other countries that have regular supply
of power to be able to meet up with the demand of foreign exchange policy.
1.1
STATEMENT OF THE PROBLEM
The application of
foreign currency operation of Manufacturing Industry differs from one
organization to another in approach and dimension, and also in sourcing
application and uses. Funds are raised for definite uses, where this is not
true it would be useless. But whatever these varying needs and uses are they
are for the manufacturing and procurement of raw materials from countries other
than their host countries. But there are however, some constraints in the
obtaining of these foreign currencies.
-
It
could be difficult to get in the government market
-
It
is difficult and costly to obtain through the open/public market
-
Where
it is even available, there are risks involved in their safekeeping from the
point of purchase.
-
Transfer
of such currencies are also not always easy.
-
Time
constraint is another factor that could militate against the easy procurement
of the currencies.
-
Rate
of exchange is very high and most often the currencies are short in supply.
All these constitute
fundamental problem which this research, seek to address.
1.2
PURPOSE OF THE STUDY
The aim of this research
is to particularly evaluate and appraise the management and acquisition of
foreign exchange for the manufacturing companies and such other operators and users
of foreign currencies others are:
-
To
find out the need for application and used of foreign currency in the operation
of Royal Foam Nigeria
Limited.
-
To
examine the application of foreign exchange in the production of goods and
services by the firm.
-
To
see the effect in respect of cost, price, quality and benefit of foreign
currency in manufacturing concerns.
-
To
find and proffer possible and reasonable solutions on the best approach to the
management and impact of foreign exchange on the operation of manufacturing
firms especially Royal foam Nigeria Limited.
1.3 RESEARCH QUESTIONS
These are the questions which I
derive from the hypothesis
1. Can
the business entity operation alone?
2. Is
foreign exchange have any impact on the manufacturing industries?
3. Can
manufacturing industries finance the raw materials?
4. Can
manufacturing Industries effectively market their product alone?
5. Can foreign exchange policies have
advantages on manufacturing industries?
6. Is the manufacturing Industries depend on
imported raw materials and machinery?
7. Can unfavourable tariff measures result
to decline in capacity utilization?
8. Can price be an indicator for goods and
services in foreign exchange.
HYPOTHESIS
Hypothesis
is a tentative proposition suggested as a solution to a problem or as
explanation of some phenomenon.
The
hypothesis for this study are set in consideration of the problem raised and
drawn base on the research topic.
The
research has the following drawn hypothesis to the appropriate standard.
HI: All the business entity can be
operated.
HO: Not all
the business entity can be operated by the foreign exchange.
HI: The
business entity can finance their raw materials
HO: The
business entity can not finance their raw materials.
HI: Manufacturing
industries can not effectively market their products.
HI: All
manufacturing industries can render door to door distribution of
their goods.
HO: All
manufacturing industries can not render door to door distribution of their goods.
HI: Foreign exchange have impact on the
manufacturing industries
HO: Foreign exchange have impact on the
manufacturing industries
1.3
SIGNIFICANCE OF THE STUDY
This study is important
and very useful in many ways even to Nigeria small scale business
enterprises on the procurement of its raw materials for manufacturing. The
management of the capital of any business buts across the local currencies, but
touches on all that makes production of goods and services possible, hence the
knowledge of foreign exchange problem in this research should be of help to
students of business administration and management, the public and as well as
manufacturing concerns. Bankers, decision makers, planning researchers, fellow
students as well as policy makers in government will find this work useful for
the improvement of its economic policy thrust.
1.4
SCOPE OF THE STUDY
The scope of this work
covers the impact of foreign exchange on the manufacturing industry. The case
study is taken from Royal foam limited. The study touches on a very wide area
and issues in the capital management and the impact of dearth foreign exchange
on the manufacturing firms. The need for such area of coverage becomes
imperative because of the complexity of the topic and the vast need for foreign
currency by manufacturing firms with diverse areas of operation and manufacturing.
Major areas of the filed were covered such as areas concern on the need for
foreign exchange, types of currencies in use by firms operating in Nigeria, and
the characteristic of foreign exchange operation to manufacturing firms. At the
end of this research work. It is expected that organizations would be able to
see the need for the use of foreign currency and the effect of exchange rate in
our system. It is expected that researchers could be very much acquainted with
how organization manage their working capital in relation to raw materials
purchase in the foreign countries of the globe. It is also assumed that by the
end of this project, possible and reasonable solution would have been proffered
to sourcing and management of foreign exchange in respect to different
countries that Royal Foam trade with,. in the use of their raw materials for
the manufacturing of goods and services in the firm.
1.5
LIMITATION OF THE STUDY
The scope of this is
limited to Royal Foam Nigeria Limited. All data pertaining to this study would
be sought from this organization, but the findings emanating therefore would be
largely applicable to all organizations where capital are sought for and
managed for the survival of the company. The use of the period 1984 -1989 in chapter two is
considered to ensure the authenticity of the secondary sources of data
available. The study emphasized more on the effect of foreign exchange and
recommendation to the manufacturing firms.
The hypothesis testing,
therefore, is based on primary data collected as depicted by tabular
presentation in chapter four.
1.6
DEFINITION OF TERMS
FOREIGN EXCHANGE: This is a system of exchanging the goods and services between two or
more countries.
MANUFACTURING INDUSTRIES: This is a process whereby raw-materials are converted into
finishing goods.
ADMINISTRATION:
This is the totality of planning, organizing, coordinating, motivating
controlling and operating work.
ACCOUNTABILITY:
This is the obligation to carry out responsibility and exercise the authority
in terms of performance standards established.
ACQUISITION:
This means the procurement of any thing, stock, element, potential and
ownership.
APPRAISAL:
This means to evaluate, to see or find out the state of something to analyze.
STAFF: This
refers to those organizations components that exist primarily for the purpose
of providing advice and service to other units.
ASSISTANT: It
means helpmate, render service that another person would have rendered, do
service in place of another.
ORGANIZATION:
This is a structure that enables living things to work effectively together.
This is true to all forms of living organizations.
MANAGEMENT: It
means first identifying the work that must be done to attain objectives, and
doing them well.
DECENTRALIZATION: This refers to the consistent and systematic delegation of authority to
the levels where action takes place.
DATA: This
means facts of basic importance for any organization.
OUTPUT: It
means the returns made by an organization as a result of its performance and
evaluation.
INPUT:
Whatever comes in as a mark of progress to the organization is input.
STORAGE: The
element which hold stocks together for safekeeping.
WAREHOUSE:
Means a place where goods are stored and kept for future use or safekeeping.
CONTROL:
Measure of standard involved to avoid waste.
SYSTEM: This
is a set of concerned elements or parts, which enable functioning of events.
EXCHANGE: The
rate at which goods or currency is transferred to another.
INDUSTRY: It
is a collection of firms that produce similar products or service.
STOCK: Goods
or equity valued in cash or goods form.
IDR: Import
Duty Report
IFEM: Inter
Bank Foreign Exchange Market
AFEM:
Autonomous Foreign Exchange Market
CBN: Central Bank
of Nigeria
MAN:
Manufacturers Association of Nigeria
SAP:
Structural Adjustment Programme
NEPC: Nigeria Export
Promotion Council
EPZ: Export
Processing Zone
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