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
parameters used to determine if it conforms to the economic theory. The
statistical criteria employed are the F – test, the T – test and R2
which tests
the significance of the parameters. The econometric criteria (second order
test) used are the Durbin Watson test, which tests for the auto correlation
and the randomness of the residuals. The Jarqu-Bera criteria is used to test
for normality of the residuals. From the analysis of the result, it shows that
there is a relationship export performance of agricultural product and real
exchange rate stability in Nigeria. Exchange rate stability has a positive and
significant effect on agricultural export. An increase in exchange rate
stability raises the marginal utility of export revenue and therefore induces
them to increase exports.
6
TABLE OF CONTENTS
TITLE PAGE – – – – – – – – I
APPROVAL PAGE – – – – – – – II
DEDICATION – – – – – – – – III
ACKNOWLEDGEMENT – – – – – – IV
ABSTRACT – – – – – – V
TABLE OF CONTENTS- – – – – – – VI-VIII
CHAPTER ONE INTRODUCTION
1.1 BACKGROUND OF THE STUDY – – – – 1-5
1.2 STATEMENT OF THE PROBLEM – – – – 6-7
1.3 OBJECTIVE OF THE STUDY – – – – – 7
1.4 STATEMENT OF HYPOTHESIS – – – – 7-8
1.5 SIGNIFICANCE OF THE STUDY – – – – 8-9
1.6 LIMITATION OF THE STUDY – – – – 9
CHAPTER TWO LITERATURE REVIEW
2.1 THEORITICAL LITERATURE – – – – 10
7
2.1.1 APPROACHES OF EXCHANGE RATE – – – 11-15
2.1.2 EXCHANGE RATE REGIME IN NIGERIA – – 15-19
2.1.2 STRUCTURAL ADJUSTMENT AND AGRICULTURAL EXPORT
PERFORMANCE – – – – – – – 19-25
2.2 EMPIRICAL LITERATURE – – – – – 25-38
CHAPTER THREE RESEARCH DESIGN AND
METHODOLOGY
3.1 METHODOLOGY – – – – – – 39-40
3.2 MODEL SPECIFICATION – – – – – 40-41
3.3 METHOD OF EVALUATION – – – – – 41-42
3.4 DATA SOURCES – – – – – – – 42-43
3.5 ECONOMETRIC SOFTWARE PACKAGE – – – 43-44
CHAPTER FOUR PRESENTATION AND ANALYSIS OF
REGRESSION RESULTS
4.1 PRESENTATION AND ANALYSIS OF DATA AND
RESULTS – – – – – – – 44-45
4.2 EVALUATION OF RESULT – – – – – 45-46
4.3 STATISTICAL CITERIA (FIRST ORDER) – – – 46-50
8
4.3.1 COEFFICIENT OF DETERMINATION (R2
) – – 46-55
CHAPTER FIVE SUMMARY OF FINDING, CONCLUSION
AND POLICY RECOMMENDATION
5.1 SUMMARY OF FINDINGS – – – – – 56-57
5.2 CONCLUSION – – – – – – – 57-58
5.3 POLICY RECOMMENDATION – – – – 58-59
BIBLIOGRAPHY – – – – – – – 60-63
APPENDIX REGRESSION DATA 1
APPENDIX 11
APPENDIX B
APPENDIX F
APPENDIX G
APPENDIX H
CHAPTER ONE
9
1.0 INTRODUCTION
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
10
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
11
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
12
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
13
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
14
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.