THE IMPACT OF FOREIGN EXCHANGE POLICIES ON THE OPERATION OF MANUFACTURING INDUSTRIES

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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