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.
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TABLE OF CONTENT
Title Page i
Certification ii
Dedication iii
Acknowledgment iv
Abstract v
Table of Contents vi
Chapter one
1.0 Background of Study—————————————————————————————1
1.1 Statement of the Problem——————————————————————————–3
1.2 Objectives of the Study———————————————————————————–6
1.3 Significance of the Study———————————————————————————-6
1.4 Scope of Delimitation of the Study———————————————————————7
Chapter two
2.0 Exchange Rate Fluctuation in the Context of Nigeria Economy———————————–8
2.1Introduction—————————————————————————————————-8
7
2.2 Nigeria’s Foreign Exchange Regimes And its Volatility (1961-2011) —————————-8
2.3 Foreign Exchange Rate Volatility Export Performance and Economic Growth——————
12
2.4 Nigeria’s Export Performance——————————————————————————–
16
2.5 Literature Review———————————————————————————————–
-21
2.5.1 Theoretical Literature—————————————————————————————-
-15
2.6 Alternatives——————————————————————————————————-
–29
2.7 Conceptual Issues In Exchange Rate Fluctuations——————————————————-
-32
2.8 Empirical Literature———————————————————————————————
–33
2.9 Theoretical Framework—————————————————————————————-
—40
2.9.1 Policy in the Mundell-Fleming Model——————————————————————–
–40
8
2.10 The Real Exchange Rate and Trade Balance————————————————————-
—41
2.11 Determinants of the Real Exchange Rate—————————————————————-
—42
2.12 Limitations of the Previous Studies———————————————————————–
—-43
Chapter Three
3.0 Research Methodology—————————————————————————————-
—-46
3.1 Analytical Framework of the Models Used—————————————————————
—–46
3.2 Data Transformation——————————————————————————————-
—–48
3.3 Model Specification———————————————————————————————
—-50
3.4 Sources of Data and Variables Used————————————————————————
—–56
3.5 Estimation Technique——————————————————————————————
——57
Chapter Four
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4.0 Presentation and Interpretation of Research Findings————————————————-
——-58
4.1 Impulse Response Function Analysis———————————————————————–
——–61
4.2 Dynamic Responses to One S.D Innovation to Exchange Rate—————————————
———62
4.3 Variance Decomposition of Real Outputs Growth rates—————————————-
——–62
Chapter Five
5.0 Summary of Findings, Recommendation and Conclusion———————————————
———65
5.1 Summary of Findings ——————————————————————————————
———–65
5.2 Recommendations ———————————————————————————————
———–66
5.3 Conclusion——————————————————————————————————–
————67
BIBLIOGRAPHY——————————————————————————————————–
———–69
10
APPENDIX————————————————————————————————————–
———–74
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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.
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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
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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
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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
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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?
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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
17
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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