EXCHANGE RATE FLUCTUATION AND EXPORT PERFORMANCE IN NIGERIA (1961-2011)
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EXCHANGE
RATE FLUCTUATION AND EXPORT PERFORMANCE IN
NIGERIA
(1961-2011)
CHAPTER ONE
1.0 BACKGROUND OF THE STUDY
Exchange
rate is a prominent determinant of world trade, receiving much attention in the
context of global imbalances. The subject of exchange rate fluctuation came to
be a topical issue in Nigeria because it is the goal of every economy to have a
stable rate of exchange with its trading partners. In Nigeria, this goal was
not realized in spite of the fact that they embarked on the devaluation of the
naira and adopted the Structural Adjustment Program (SAP) in 1986. The failure
to realize this goal subjected the Nigerian manufacturing sector to the
challenge of a constantly fluctuating exchange rate.
One
objective of the SAP was the restructuring of the production base of the
economy with a positive bias for the production of agricultural export. The
foreign exchange reforms that facilitated a cumulative depreciation of the
effective exchange rate were expected to increase the domestic prices of
agricultural exports and hence boost domestic production.
Empirically
many researchers like Oyejide (1986), Ihimodu (1993) and World Bank (1994)
analyzed the effects of cumulative depreciation of the effective exchange rate,
as it resulted in the change in the structure and value of Nigeria’s exports.
The depreciation increased the prices of agricultural exports and the result
indicated a worked increase in the volume of agricultural exports over the
years. However, very little achievements were made in stabilizing the rate
exchange. As a consequence, the problem of exchange rate fluctuations in
Nigeria
persists up
till date.
Fluctuation
is a major constraint on development of an economy, making planning more
problematic and investment more risky. For instance, fluctuation in exchange
rate may reduce the activities of potential investors in Nigeria because it
increases uncertainty over the returns of a given investment. Potential
investors will invest in a foreign location only if the expected returns are
high enough to cover for the currency risk (Gerado, 2002). Risk in international commodity trade usually
arises from two main sources; changes in world prices or fluctuation in
exchange rate. Therefore, understanding the behavior of the exchange rate is
very important for many reasons. First, the relationship between a country’s
exchange rate and economic growth via trade is a crucial issue from both the
descriptive and policy prescription perspective. As Edwards (1994; 61) asserts;
“it is not an overstatement to say that the issue of real exchange rate
behavior now occupies a central rate in policy evaluation and design”. A
country’s exchange rate behavior is an important determinant of the growth rate
of its exports and it serves as a measure of its international competitiveness
(Bath and Amusa, 2003), Chukwu (2007)observed the instability exchange rate as
a determinant of trade in Nigeria; having a positive influence on export trade
and at other times a negative influence. This suggests an erratic change in its
value having a long-run effect on export and economic growth. This research
aims to determine the impact of fluctuations in the naira exchange rate on
Nigerian’s export performance.
1.1
STATEMENT OF THE PROBLEM
Despite the
existence of literature on the influence of exchange rate fluctuations on
exports in Nigeria, theoretical and empirical works on the subject are yet to
produce a consensus. The two major trends in the literature review indicate
thus; the first argues that exchange rate fluctuations represent uncertainty
and will impose costs on risk- adverse economic agents which as a result
respond by favoring domestic- foreign trade just at the margin. In other words,
it might hamper the growth of international trade (Chowdhury, 1993, Cushiman,
1983, 1988 Kenen and Rodrik, 1986). The second strand of literature argues that
if the economic agents are sufficiently risk lovers, an increase in exchange
rate raises the expected marginal utility of export revenue and thus induces
them to increase their exports in order to maximize their revenue. Therefore,
exchange rate fluctuations may actually catalyze trade flows (De Grauwe:
1988, IMF:
1984, Klein: 1990 and Chambers, R. G. and Just, R. E. (1991). Only few attempts
have been made to examine them for developing countries, Nigeria inclusive
because of the lack of reliable time –series data. The available instances
include Vergil (2002) for turkey and Bah and
AMUSA (2003)
and Takendesa, (2005) for South Africa, Ajayi (1988), Adubi, A. A. and
Okunmadewa, F. (1999), Osagie (1985) for Nigeria.
The research
will differ from the existing ones as it will carefully examine exchange rate
fluctuations and export for both the oil sector and non-oil sectors. Previous
studies assessed only the influence of exchange rate fluctuation on either oil
export, neglecting the non-oil export or on non-oil export alone excluding the
oil export. They failed to ascertain its effect on both the oil and non-oil
(like agricultural and manufacturing) sectors export. Analyzing only oil
exports or non-oil exports exclusively may not really give a value judgment and
conclusion on the effect of exchange rate fluctuations and export performances
in Nigeria. Furthermore, the study will provide deep insight into the
relationship existing between exchange rate fluctuations and exports by
adopting a popular econometric methodology for a measure of fluctuations which
is Generalized Autoregressive Conditional Heteroscedasticity (GARCH) modeling
technique, which was not used by some of the previous studies.
In view of
the above problem, the following research questions are raised:
1. How does oil export respond to exchange
rate fluctuation?
2. How does manufacturing export respond to
exchange rate
fluctuation?
3. How
does agricultural export respond to exchange rate
fluctuation?
1.2
OBJECTIVES OF THE STUDY
The broad
objective of the study is to determine impact of exchange rate fluctuations on
export performance in Nigeria. Specifically, the study addresses the following
objectives:
1. To trace how oil export respond to
exchange rate fluctuation.
2. To trace how manufacturing export respond
to exchange rate fluctuations.
3. To trace how agricultural export respond
to exchange rate fluctuation.
1.3
SIGNIFICANCE OF THE STUDY
This research will serve as a future guide to
the policy makers in the formulation of better and efficient policy options for
managing exchange rate fluctuations in Nigeria. Also, the research will be of
immense help to the general economy, as it will provide possible measures the
monetary authority could adopt in order to maintain exchange rate stability so
that exchange rate can influence importantly export growth, consumption,
resource allocation, employment and private and foreign investments as research
has shown. Above all, it will add to the existing literature thus, providing
relevant information that could guide further researchers on this subject.
1.4 SCOPE OR
DELIMITATION OF THE STUDY
This study intends to look at the export
performances and
exchange
rate fluctuations in Nigeria. Thus, it is restricted to tracing the responses
of some export components to shock to the exchange rate over some periods;
hence it omitted the test of hypothesis. The study covers a period of 51 years
that is 1961-2011. This range is chosen to give room for enough degree of
freedom that will ensure reliable estimates.CHAPTER ONE
1.0 BACKGROUND OF THE STUDY
Exchange
rate is a prominent determinant of world trade, receiving much attention in the
context of global imbalances. The subject of exchange rate fluctuation came to
be a topical issue in Nigeria because it is the goal of every economy to have a
stable rate of exchange with its trading partners. In Nigeria, this goal was
not realized in spite of the fact that they embarked on the devaluation of the
naira and adopted the Structural Adjustment Program (SAP) in 1986. The failure
to realize this goal subjected the Nigerian manufacturing sector to the
challenge of a constantly fluctuating exchange rate.
One
objective of the SAP was the restructuring of the production base of the
economy with a positive bias for the production of agricultural export. The
foreign exchange reforms that facilitated a cumulative depreciation of the
effective exchange rate were expected to increase the domestic prices of
agricultural exports and hence boost domestic production.
Empirically
many researchers like Oyejide (1986), Ihimodu (1993) and World Bank (1994)
analyzed the effects of cumulative depreciation of the effective exchange rate,
as it resulted in the change in the structure and value of Nigeria’s exports.
The depreciation increased the prices of agricultural exports and the result
indicated a worked increase in the volume of agricultural exports over the
years. However, very little achievements were made in stabilizing the rate
exchange. As a consequence, the problem of exchange rate fluctuations in
Nigeria
persists up
till date.
Fluctuation
is a major constraint on development of an economy, making planning more
problematic and investment more risky. For instance, fluctuation in exchange
rate may reduce the activities of potential investors in Nigeria because it
increases uncertainty over the returns of a given investment. Potential
investors will invest in a foreign location only if the expected returns are
high enough to cover for the currency risk (Gerado, 2002). Risk in international commodity trade usually
arises from two main sources; changes in world prices or fluctuation in
exchange rate. Therefore, understanding the behavior of the exchange rate is
very important for many reasons. First, the relationship between a country’s
exchange rate and economic growth via trade is a crucial issue from both the descriptive
and policy prescription perspective. As Edwards (1994; 61) asserts; “it is not
an overstatement to say that the issue of real exchange rate behavior now
occupies a central rate in policy evaluation and design”. A country’s exchange
rate behavior is an important determinant of the growth rate of its exports and
it serves as a measure of its international competitiveness (Bath and Amusa,
2003), Chukwu (2007)observed the instability exchange rate as a determinant of
trade in Nigeria; having a positive influence on export trade and at other
times a negative influence. This suggests an erratic change in its value having
a long-run effect on export and economic growth. This research aims to
determine the impact of fluctuations in the naira exchange rate on Nigerian’s
export performance.
1.1
STATEMENT OF THE PROBLEM
Despite the
existence of literature on the influence of exchange rate fluctuations on
exports in Nigeria, theoretical and empirical works on the subject are yet to
produce a consensus. The two major trends in the literature review indicate
thus; the first argues that exchange rate fluctuations represent uncertainty
and will impose costs on risk- adverse economic agents which as a result
respond by favoring domestic- foreign trade just at the margin. In other words,
it might hamper the growth of international trade (Chowdhury, 1993, Cushiman,
1983, 1988 Kenen and Rodrik, 1986). The second strand of literature argues that
if the economic agents are sufficiently risk lovers, an increase in exchange
rate raises the expected marginal utility of export revenue and thus induces
them to increase their exports in order to maximize their revenue. Therefore,
exchange rate fluctuations may actually catalyze trade flows (De Grauwe:
1988, IMF:
1984, Klein: 1990 and Chambers, R. G. and Just, R. E. (1991). Only few attempts
have been made to examine them for developing countries, Nigeria inclusive
because of the lack of reliable time –series data. The available instances
include Vergil (2002) for turkey and Bah and
AMUSA (2003)
and Takendesa, (2005) for South Africa, Ajayi (1988), Adubi, A. A. and
Okunmadewa, F. (1999), Osagie (1985) for Nigeria.
The research
will differ from the existing ones as it will carefully examine exchange rate
fluctuations and export for both the oil sector and non-oil sectors. Previous
studies assessed only the influence of exchange rate fluctuation on either oil
export, neglecting the non-oil export or on non-oil export alone excluding the
oil export. They failed to ascertain its effect on both the oil and non-oil
(like agricultural and manufacturing) sectors export. Analyzing only oil
exports or non-oil exports exclusively may not really give a value judgment and
conclusion on the effect of exchange rate fluctuations and export performances
in Nigeria. Furthermore, the study will provide deep insight into the
relationship existing between exchange rate fluctuations and exports by
adopting a popular econometric methodology for a measure of fluctuations which
is Generalized Autoregressive Conditional Heteroscedasticity (GARCH) modeling
technique, which was not used by some of the previous studies.
In view of
the above problem, the following research questions are raised:
1. How does oil export respond to exchange
rate fluctuation?
2. How does manufacturing export respond to
exchange rate
fluctuation?
3. How
does agricultural export respond to exchange rate
fluctuation?
1.2
OBJECTIVES OF THE STUDY
The broad
objective of the study is to determine impact of exchange rate fluctuations on
export performance in Nigeria. Specifically, the study addresses the following
objectives:
1. To trace how oil export respond to
exchange rate fluctuation.
2. To trace how manufacturing export respond
to exchange rate fluctuations.
3. To trace how agricultural export respond
to exchange rate fluctuation.
1.3
SIGNIFICANCE OF THE STUDY
This research will serve as a future guide to
the policy makers in the formulation of better and efficient policy options for
managing exchange rate fluctuations in Nigeria. Also, the research will be of
immense help to the general economy, as it will provide possible measures the
monetary authority could adopt in order to maintain exchange rate stability so
that exchange rate can influence importantly export growth, consumption, resource
allocation, employment and private and foreign investments as research has
shown. Above all, it will add to the existing literature thus, providing
relevant information that could guide further researchers on this subject.
1.4 SCOPE OR
DELIMITATION OF THE STUDY
This study intends to look at the export
performances and
exchange
rate fluctuations in Nigeria. Thus, it is restricted to tracing the responses
of some export components to shock to the exchange rate over some periods;
hence it omitted the test of hypothesis. The study covers a period of 51 years
that is 1961-2011. This range is chosen to give room for enough degree of
freedom that will ensure reliable estimates.
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