Exchange rate stability and export performance: the case study of agricultural produce in nigeria, (1978-2010).

Thesis Overview

<p> </p><p>1.0 INTRODUCTION<br>1.1 BACKGROUND OF THE STUDY<br>For clarity, it is pertinent that we start by defining the subject of this<br>work. Exchange rate is the price of one currency in terms of another<br>currency. It is the price of one foreign currency in terms of the domestic<br>currency. It sends signals that affect consumption and investment decisions<br>and therefore influences both the composition and value of aggregate<br>demand and supply (CBN: Contemporary Economic Policy issues, 2003).<br>Exchange rate stability is therefore commitment of the government to<br>allow the macro-economic policies to control the balance of payment. The<br>government may fix the exchange rate policies either by legislation or by<br>intervention in the Nigerian currency market.<br>According to Johnson (1984), the case for exchange rate stability is<br>part of a more general argument for National Economic Policies conducive<br>to international economic integration.<br>From a broader perspective, for exchange rate to be stable is to<br>encourage international trade by making price of goods involved in trade<br>more predicable and to promote economic integration. At the<br>individual level, such decisions are usually taken in order to improve<br>10<br>future consumption prospects, investment and because exchange rate<br>involves an increase in wealth of a nation which is desirable, it then<br>influences the society. The Agricultural sector in the Nigeria context<br>embraces all the sub-sector of primary industry, they include; farming<br>(which include livestock, application of modern implements such as tractors<br>and chemical), Anyanwu, (1997). Before independence, the reliance of this<br>economy on agricultural income led to the establishment of marketing<br>boards with monopolist powers to buy these crops from farmers and sell<br>them overseas. The role of marketing board was very important especially in<br>stabilizing farm incomes and generating funds for executions of<br>development projects in the country.<br>The exchange rate stability has a lot of contributions to the volume of<br>export and the level of the domestic production. Although given that<br>agricultural output is influenced by prices among other factors, the<br>depreciation of the naira and the abolition of the commodity boards were<br>expected to result in an overall increase in production of exports. According<br>11<br>to Kwanashie et al (1994), the degree of fluctuation in prices is a major<br>determinant of the changes in earnings given the trend in output over the<br>years. But the exchange rate when applied in conjunction with other macroeconomic<br>policies<br>was expended to lead to the achievement of the goals of price stability,<br>improved and sustained economic growth, reduced unemployment, balance<br>of payment stability and increased agricultural exports. A stable exchange<br>rate system would help<br>in meeting these goals, but in case when it is unstable, these achievements<br>become difficult and often impossible.<br>According to economic indicators, the monetary Approach of<br>Exchange rate determination confirmed exchange rate as a function of<br>relative shifts in money, inflation rate or its proxy and domestic output<br>between an economy and the trading partner. More so, the exchange rate of<br>any counting is determined by the number of factors which include the state<br>of the economy, the competitiveness and the volume of export, the level of<br>12<br>domestic production of foreign reserve which is the nation worth, because of<br>its role as the determinant of the relative price of tradable to non-tradable, it<br>is a major instrument affecting the structural change in an economy.<br>Exchange rate policies in Nigeria as in other countries are often<br>sensitive and controversial mainly because the kind of structural<br>transformation required such as reducing imports or expanding agricultural<br>exports, invariably imply a depreciation of the nominal exchange rate.<br>In the quest for stability of exchange rate, the Nigeria Monetary authorities<br>tried several bidding system, including the Dutch<br>Auction system (DAS) and the Marginal Rate System. An attempt to ensure<br>viability in the market led to many amendments of the rules, intervention by<br>Central Bank of Nigeria (CBN), and opening of different exchange windows<br>for operation during this period. Despite all these fluctuations, rate of<br>exchange<br>continued to be an issue of concern to the authorities. This is as a result of<br>causes<br>13<br>of changes in the exchange rate which are as follows;<br>ï‚· Changes in prices<br>ï‚· Capital flows<br>ï‚· Changes in exports and imports<br>ï‚· Political conditions<br>ï‚· Influence of Banks<br>This formed the basis of this study “Exchange Rate Stability and Export<br>performance. The case of Agricultural produce in Nigeria, (1978-2010)”.<br>1.2 STATEMENT OF THE PROBLEM<br>in the most developing country in general and Nigeria in particular, some of<br>the economic tools used for both planning and implementation of the<br>economic programme are normally based on educated guesses or on models<br>which have been designed for other countries. The direction of this work<br>14<br>will be to understand the cardinal reasons for the inability of Nigeria to<br>maintain a favourable external reserve.<br>What factors capture most the exchange rate instability on export<br>performance in Nigeria? This will show succinctly the conformity of<br>exchange rate in Nigeria to a priori economic expectations.<br>Economic theory informs that decision to exchange rates depend demand<br>and supply of foreign exchange, that is change in income earnings of export<br>crop producers which come as a result of either increase or decrease in<br>International World price of exports or devaluation of currency and<br>subsequent prices. Such exchange rate change may lead to a major decision<br>in the future output if they are unpredictable and erratic.<br>How true these economic assertions in Nigeria exchange rate profile are<br>becomes the question.</p><div><div></div></div><br> <br><p></p>