Home Project-material EXCHANGE RATE FLUCTUATION AND EXPORT PERFORMANCE IN NIGERIA (1961-2011)

EXCHANGE RATE FLUCTUATION AND EXPORT PERFORMANCE IN NIGERIA (1961-2011)

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Abstract

This paper “exchange rate fluctuation and export performances in Nigeria” aim to determine the effect of foreign exchange dynamism on the country’s export performance from 1961-2011. Research results from the economic tool of regression analysis obtained shows that fluctuations in the naira exchange rate affect manufacturing and agricultural exports more than it affects oil export. To reduce the impact of this fluctuations on these export, monetary authorities in Nigeria should stabilize the naira exchange rate through monetary and fiscal policies, exporters should take advantage of the futures worked to eliminate the negative effects of this fluctuations on export income and performance, and fiscal and monetary policies should be initiated by the government to increase local production to meet local consumption, reducing foreign exchange demand for import consumption and reduce pressure on the naira exchange rate.

CHAPTER ONE

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.

12Empirically 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

13relationship 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

14fluctuations 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

15export 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?

161.2 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

17export 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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