THE IMPACT OF EXCHANGE RATE ON EXPORT OF AGRICULTURAL PRODUCT IN NIGERIA

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THE IMPACT OF EXCHANGE RATE ON EXPORT OF AGRICULTURAL PRODUCT IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF STUDY

One of the most dramatic events in Nigeria over the past decade was the devaluation of the Nigeria naira with the adoption of structural adjustment programme (SAP) in 1986.

Significantly ,this devaluation resulted in changes in the structure and volume of Nigeria’s agricultural export as empirically determined by many researchers (Oyejide, 1986,Ihlmodu,1993; Osuntogun et al,1994; World Bank 1994 the depreciation also increased the prices of agricultural exports and studies have shown a marked increase in volume of agricultural exports over the years .However ,the volatility ,frequency and instability of the exchange rate movement since the beginning of the floating exchange rate raise a concern about the impact of such movements on agricultural trade flows.

Among other measures, the structural adjustment programme (SAP),which started in 1986 abolished the commodity Board, the body that since 1960 had been responsible for organization and purchase of agricultural exports .As a result farmers could sell their products directly to foreign and local processors without any intermediary ,thus obtaining higher prices for their products .This was expected to remove the excessive taxation on farmers products by the erstwhile marketing board and leave producer prices to be determined by market forces. Given that agricultural output is influenced by prices among other factors, the depreciation of the naira and abolish of the commodity boards were expected to result in an overall increase in production of exports.

1.2 STATEMENT OF THE PROBLEM

Change in income earning of exports crop producers come as a result of either increase or decrease in international world price of exports or devaluation of the currency and the subsequent increase in product prices. Such price/exchange rate changes, however, may lead to a major decline in future output if they are unpredicted and erratic. Fluctuation -whether positive or negative is not desirable as it increase risk and uncertainty in international transactions costs. An IMF (1984) study cites arguments that exchange rate variability would also tend to induce macroeconomic phenomena that are undesired, for example inflation and protectionism. Despite this assertion and that of other studies more recent research explains why a positive effect could also be possible (de Grauwe, 1988); Caballero and Corbo, 1989).

If firms hedge against exchange rate risk, one could not expect to find a strong negative effect on trade .Hedging against risk can be done via future or forward market Where forward markets exist, the nature of the uncertainty faced by traders is transformed .Forward market represents, in effect, a guaranteed forecast of the exchange rate that will prevail at the end of the contract period, which a trader can take advantage of by payment of a small margin around the forward rates .Since currency uncertainty can be removed from short run trading transaction by payment of this margin ,the cost of such uncertainty cannot be higher than the cost of purchasing insurance against it.

1.3 REASEARCH QUESTION

From the above research problems, the following research question was formulated to provide solution to the problem under investigation. These are thus:

i. Does exchange rate contributed to export of agricultural product in Nigeria?

ii. To what extent export of agricultural product contribute to economic growth of Nigeria?

iii. What are challenges of agricultural development in Nigeria?

1.4 OBJECTIVES OF THE STUDY

The general objective of this study is to determine the impact of exchange rate on export of agricultural product in Nigeria.

The specific objectives are as thus:

i. To examine the contribution of exchange rate on export of agricultural product in Nigeria.

ii. To determine the extent which export of agricultural product contributed to Nigeria economy

iii. To examine the challenges of agricultural development in Nigeria.

1.5 STATEMENT OF HYPOTHESIS

The research study empirically tested hope to achieve the following

Hi: There is positive significant contribution of export agricultural Output to economic development in Nigeria.

Ho: There is no positive significant contribution of export of Agricultural output to economic development in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

The inefficient and ineffectiveness on the export of agricultural products in the provision of competitive goods in the foreign market has been ascribed to a combination of factors including low level of industrialization, inadequate financing of export industries, inefficient performance of export promotion agencies, inadequacy of incentive schemes, inappropriate export promotion strategies, inadequate infrastructural facilities ,high cost of production. Series of efforts have been made to arrest this problems but with little or no effect in the sector.

i. Enhancing export supply capacity

ii. Formulate and implement effective strategies to strengthen productivity and growth in output

iii. Ensuring that agricultural export business remains profitable.

iv. Ensuring that exporter attains international competitiveness.

1.7 SCOPE AND LIMITATION

The bases of our research on the impact of exchange rate fluctuation on the export of agricultural products in Nigeria will be limited to the agricultural export because of the non-feasibility of caring out a research on the agricultural sector as a whole.

Despite the fact that the research is limited to the scope of the agricultural export of the sector, we are still going to be faced with difficulties like the variation in the data obtained from different official i.e. political data, conversion of such data into a whole since the data were complied with different base years and irregularities in the process of data collection in the society pose a big problem, for the researcher.

1.8 METHODOLOGY

Volatility or risk in international commodity trade usually emanates from two main sources changes in world prices or in fluctuations in exchanges rates. These may affect trade by increasing the uncertainties of trade or effecting a change in the cost of transaction, processing etc. The state of the two major sources determines the eventual domestic trade price of a commodity over a period of time.

Thus, a decision to produce for export involves uncertainties about the prices foreign exchange that such sales will realize as well as the exchange rate at which foreign exchange receipts can be converted into domestic currency .In a period of fixed exchange rates, the major source of concern in international trade for a developing country (Nigeria) is the fluctuation that may arise from the world price of primary commodities.

There has been substantial literature on the effects of exchange rate volatility on the volume of trade .Most of these studies focus on the argument that exchange rate volatility increases risk and uncertainty in international transaction and thus discourages trade. If traders are risk averse, they will be willing to incur an added cost to avoid the risk associated with the exchange rate volatility .Thus, a firm’s export supply (import demand) curve will shift to the left (right) in the presence of exchange rate volatility; for any quantity of export or imports, the corresponding price will be higher under exchange rate volatility (risk) than without it (Quran and Varangis 1992) .Some studies (e.g. Grauwe,1988,Caballero and Corbo 1989; Kumar and Dhawan 1991 ) have in fact concluded that due to the political economy effects of exchange rate volatility, its increase was responsible for the slowdown in trade in the 1970s.

1.9 MODEL OF SPECIFICATION

It has been shown that the analytical framework and testing procedure used to measure the effect of exchange rate volatility determine the conclusion thereof.

The model used in the majority of studies based on the a linear regression form;

Where Q1 is the quantity of exports or imports Y1 is a measure of real economic activity (GNP, or index of industries production), RPJ is a measure of relative prices relevant to the analysis ,V1 is a measure of volatility ,and El is a random error .In this model ,a statistically significance and negative coefficient for a, indicates the existence of a negative relationship between volatility and trade .The most notable variations of this methodology are by Koray and Lastrapes{l989),who use the vectors auto-regression (VAR) model, and Kroner and Lastrapes ( 1991) .who use the generalized autoregressive conditional heteroskedasticity (GARCH) in mean model.

There are three issues regarding the model. The first is how to measure exchange volatility, the second is which measure of volatility, nominal or real exchange rates, is proffered in modeling. Third issue is the effects of aggregate or bilateral trade data on the study.

1.1 0 ORGANISATION OF STUDY

The project has been divided into four chapters’ easy understanding. Chapter one consists of introduction, statement of problems, objectives of study, methodology, hypothesis, significance of study and scope and limitation. Chapter two deals with literature review in which the works of previous authors will be analyzed and this would be compared with existing states of knowledge with empirical finding and the theoretical framework. lt discusses the impact of exchange rate fluctuation on the export of agricultural products in Nigeria towards economic development and macro-economic adjustment . The importance and significance of agricultural sector to national development and the role of exchange of export agricultural products. After look at the industrialization process, the opportunities and challenges of export of agricultural products in Nigeria will be discussed. Chapter three is the research methodology; the methodology will be viewed and model specification and estimation of problems and interpretation of empirical results. Chapter five is summary of the work, conclusion and recommendations.

1.11 DEFINITION OF TERM

Balance of Trade: This is the difference between the total value of the country exports and imports of visible term. It is an important part of balance of payment which takes account of visible items of capital transfer.

Currency Devaluation: This is the reduction in the value of currency in terms of the supporting monetary method or in terms of another country currency. i.e. a decrease in the value of fixed exchange rate .This is done sometimes when other countries lose confidence in the value of the country currency.

Export / Import : Export are the sales of goods and services of foreign countries . While goods are classified as visible exports services that include banking, insurance and tourism are invisible export .Export and import from foreign sector of any economy .Import refers to the goods and services purchased from a foreign in other to control her balance of payment.

Economic growth and development: This is an expansion or increase of the national output if an economy .It may result from quantity increase and not quality .i.e. an increase in population may increase the output bit this does not necessitate improvement in welfare of the citizen e.g. pollution and index of poverty, when considering economic development we are looking at how stable the growth is and the standard of living measured by the per capital income.

Industrialization: This is a policy adopted by the government to promote export and growth in an economy.

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