Abstract
Exchange rate is the price of one currency in terms of another currency.
Exchange rate stability has to do with government actions in order to
stabilize exchange rate so as to increase export in Nigeria especially export
of primary products (agricultural produce) over the years, Nigeria has
adopted various exchange rate regimes ranging from fixed exchange regime
to floating exchange regime. The main purpose of this work is to determine
to what extend does the volatility and risks of exchange rate affect exports of
agricultural produce in Nigeria. To do this, the classical Linear Regression
Model is applied and the ordinary least square econometric technique is also
used to estimate the impact of exchange rate on agricultural export trade
earning. The variables used are export trade earnings as the dependent
variable and exchange rate, interest rate, inflation and agricultural out put as
the independent variables. Economic test shows the piori criteria of the
param
1.1 BACKGROUND OF THE STUDY
For clarity, it is pertinent that we start by defining the subject of this
work. Exchange rate is the price of one currency in terms of another
currency. It is the price of one foreign currency in terms of the domestic
currency. It sends signals that affect consumption and investment decisions
and therefore influences both the composition and value of aggregate
demand and supply (CBN: Contemporary Economic Policy issues, 2003).
Exchange rate stability is therefore commitment of the government to
allow the macro-economic policies to control the balance of payment. The
government may fix the exchange rate policies either by legislation or by
intervention in the Nigerian currency market.
According to Johnson (1984), the case for exchange rate stability is
part of a more general argument for National Economic Policies conducive
to international economic integration.
From a broader perspective, for exchange rate to be stable is to
encourage international trade by making price of goods involved in trade
more predicable and to promote economic integration. At the
individual level, such decisions are usually taken in order to improve
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future consumption prospects, investment and because exchange rate
involves an increase in wealth of a nation which is desirable, it then
influences the society. The Agricultural sector in the Nigeria context
embraces all the sub-sector of primary industry, they include; farming
(which include livestock, application of modern implements such as tractors
and chemical), Anyanwu, (1997). Before independence, the reliance of this
economy on agricultural income led to the establishment of marketing
boards with monopolist powers to buy these crops from farmers and sell
them overseas. The role of marketing board was very important especially in
stabilizing farm incomes and generating funds for executions of
development projects in the country.
The exchange rate stability has a lot of contributions to the volume of
export and the level of the domestic production. Although given that
agricultural output is influenced by prices among other factors, the
depreciation of the naira and the abolition of the commodity boards were
expected to result in an overall increase in production of exports. According
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to Kwanashie et al (1994), the degree of fluctuation in prices is a major
determinant of the changes in earnings given the trend in output over the
years. But the exchange rate when applied in conjunction with other macroeconomic policies
was expended to lead to the achievement of the goals of price stability,
improved and sustained economic growth, reduced unemployment, balance
of payment stability and increased agricultural exports. A stable exchange
rate system would help
in meeting these goals, but in case when it is unstable, these achievements
become difficult and often impossible.
According to economic indicators, the monetary Approach of
Exchange rate determination confirmed exchange rate as a function of
relative shifts in money, inflation rate or its proxy and domestic output
between an economy and the trading partner. More so, the exchange rate of
any counting is determined by the number of factors which include the state
of the economy, the competitiveness and the volume of export, the level of
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domestic production of foreign reserve which is the nation worth, because of
its role as the determinant of the relative price of tradable to non-tradable, it
is a major instrument affecting the structural change in an economy.
Exchange rate policies in Nigeria as in other countries are often
sensitive and controversial mainly because the kind of structural
transformation required such as reducing imports or expanding agricultural
exports, invariably imply a depreciation of the nominal exchange rate.
In the quest for stability of exchange rate, the Nigeria Monetary authorities
tried several bidding system, including the Dutch
Auction system (DAS) and the Marginal Rate System. An attempt to ensure
viability in the market led to many amendments of the rules, intervention by
Central Bank of Nigeria (CBN), and opening of different exchange windows
for operation during this period. Despite all these fluctuations, rate of
exchange
continued to be an issue of concern to the authorities. This is as a result of
causes
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of changes in the exchange rate which are as follows;
? Changes in prices
? Capital flows
? Changes in exports and imports
? Political conditions
? Influence of Banks
This formed the basis of this study “Exchange Rate Stability and Export
performance. The case of Agricultural produce in Nigeria, (1978-2010)”.
1.2 STATEMENT OF THE PROBLEM
in the most developing country in general and Nigeria in particular, some of
the economic tools used for both planning and implementation of the
economic programme are normally based on educated guesses or on models
which have been designed for other countries. The direction of this work
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will be to understand the cardinal reasons for the inability of Nigeria to
maintain a favourable external reserve.
What factors capture most the exchange rate instability on export
performance in Nigeria? This will show succinctly the conformity of
exchange rate in Nigeria to a priori economic expectations.
Economic theory informs that decision to exchange rates depend demand
and supply of foreign exchange, that is change in income earnings of export
crop producers which come as a result of either increase or decrease in
International World price of exports or devaluation of currency and
subsequent prices. Such exchange rate change may lead to a major decision
in the future output if they are unpredictable and erratic.
How true these economic assertions in Nigeria exchange rate profile are
becomes the question.
1.3 OBJECTIVE OF THE STUDY
the overall objective of this study is to determine empirically the dynamic
effect of exchange rate stability and export performance of agricultural
produce in Nigeria from (1978-2010).
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The trust of the research will be to
? Evaluate the nature and extent of the impact of exchange rate stability
on agricultural exports in Nigeria.
1.4 STATEMENT OF HYPOTHESIS
To test for the statistically significance or non-significance of data,
Ho represents the Null Hypothesis
H1 represents the Alternative Hypothesis
Ho = H1 there is no relationship between exchange rate stability and export
performance of agriculture produce in Nigeria.
Results; If Ho > H1 then we accept the alternative hypothesis and reject the
null hypothesis that exchange rate stability does not affect the export
performance of agriculture produce in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY
One of the most dramatic events in Nigeria over the past decade was the
devaluation of the Nigerian naira with the adoption of a structural
Adjustment programme (SAP) in 1986. significantly, this depreciation
resulted in changes in the structure and volume in Nigeria?s agricultural
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export as empirically determined by many research (Oyejide, 1986; Ihimodu
1995; Osuntogun et al 1993; World Bank, 1994). The depreciation also
increased the prices of agricultural exports and studies have shown a marked
increased in volume of agricultural exports over the years. Appreciation of a
country?s real exchange rate caused by the sharp rise in export of a booming
resources sector like oil draws capital and labour away from a country?s
manufacturing and agricultural sectors, which can lead to a decline in export
of agricultural goods and inflate the price of non-tradable goods
(Corden 1982) and Corden and Nearly (1984) however, the volatility,
frequency and
instability of the exchange rate movements since the beginning of the
floating exchange rate raise a concern about the impact of such movements
on agricultural trade flows.
1.6 LIMITATIONS OF THE STUDY
The concept of exchange rate stability has been generally acknowledged to
have a strong relationship with economic development in Nigeria.
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? The scope of this work will be limited to the rate of exchange in the
geographical area Nigeria using its changes in the world prices or
fluctuation in exchange rate (1978-2010) that is thirty (32) years.
? The study takes the United States Dollar ($) as widely most used
currency in international trade by pitching it against the Nigeria naira
(N).