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.

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.

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 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 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 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?

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 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.

CHAPTER TWO

2.0            EXCHANGE RATE FLUCTUATION IN THE CONTEXT OF NIGERIAN 

      ECONOMY

2.1 INTRODUCTION

  The exchange rate arrangements in Nigeria have undergone

significant changes over the past four decades. It shifted from a fixed regime in the 1960s to a pegged arrangement between the 1970s and mid1980s, and finally, to the various types of the floating regime since

1986, following the adoption of the Structural Adjustment Program (SAP). A regime of managed float, without any strong commitment to any particular parity, has been the predominant characteristic of the floating regime in Nigeria since1986 (Sanusi: 2004).

2.2 NIGERIA’S FOREIGN EXCHANGE REGIMES AND ITS VOLATILITY (1961-2011)

 Nigeria’s foreign exchange rate was fairly stable from 1980 to1985: at #0.5464, #0.61, #0.6729, #0.72, #0.76, and #0.89 to a US $ in 1980, 1981, 1982, 1983, 1984 and 1985 respectively. The introduction of the structural adjustment in 1986 depreciated to naira exchange rate to #2.02, #4.01, #4.5, #7.39, #8.03, #9.9, #17.298, #22.3 and #21.88 to a US $ in 1986, 1987, 1988, 1989, 1990, 1991, 1992, 1993 and 1994 respectively. In 1995, the Central Bank of Nigeria (CBN) interviewed six times in the Autonomous Foreign Exchange Market (AFEM), meeting inn full the US $1.748 billion demanded by this market. The inability of some end-users to effectively back their foreign exchange demand with naira deposit at the CBN, led to the allocation of the US $1.748 billion. This action stabilized both the Autonomous Foreign Exchange Market and the Parallel Market Rates; converging and stabilizing at US $1 to #82.3and US $1 to 83.7 respectively. The CBN (1995) attributed this to its “guided depreciation” policy adopted at the beginning of that year which allowed it to intervene periodically at the AFEM at marketed- determined rates.

 In 1996, the CBN maintained dual exchange rate with the official rate at #22/US $ and the AFEM rate averaging #82.5/US $1. The CBN intervention policy of 1995 was retained in 1996 to further stabilize the naira exchange.to enhance the naira rate stability, the CBN continued the suspension of the use of bills of collection and open accounts for import financing: the requirement that all imports into the country be accompanied by duly completed form as well import dully reports (IDRS).

 In 1997, the dual exchange rate system was retained with the official exchange rate at #21.997/ US $1; while the AFEM rate was #85/

US $1. The naira exchange was #84.4/ US $1 and #88.1/ US $1 in the AFEM and parallel markets respectively in 1998.

 In 1999, the foreign exchange management in Nigeria transited from the autonomous foreign exchange market to the inter-bank foreign exchange market (IFEM). During the year, the CBN intervened in the foreign exchange market 43 times against 51 times in 1998. IFEM rate in the year averaged #92.3/ US $1; while the bureau-de-change rate (BDC) averaged #92.26/ US $1, reducing the parallel market premium to 3.2%.

 The exchange rate of the naira depreciated in all segments of the foreign exchange market in 2000. At the IFEM, the naira depreciated on the average by 6.5% to #101.65/ US $1. The rate was relatively stable during the first nine months of the year, but depreciated thereafter against US $. A higher level of depreciation was experienced in the parallel market falling by 10.7%.

 In 2001, the naira depreciated in both the IFEM and the BDC. At the IFEM, the naira exchanged at #111.96/US $1. A sharp initial depreciation of the naira was experienced at the IFEM in January 2001, stabilizing in the remaining part of the year. A steeper depreciation of the naira was experienced in the BDC market with an appropriate decline of 10.32% to #132.57. The CBN (2001) attributed this decline to increase in demand for foreign exchange at $14.7billion and inflows reducing to US $15.7 billion; caused by increased funding of the IFEM, external debt service payments and fall in oil receipts. Exchange rates at the IFEM and BDCs in 2002 were #121/US $1 and #137.57/US $1 respectively.

 The naira maintained a stable exchange rate during the first half of 2003; disrupted in the fourth quarter by market exuberance and speculative activities. Consequently, the naira exchange rate depreciated by 6.5% at the Dutch auction system (DAS) - introduced to replace IFEM, resulting in the average exchange rate of #129.36/US $1. In the parallel market, the naira depreciated from #137.79/US $1 to #141.99/US $1. The premium between the DAS rate and the parallel rate declined from 14.8% in 2002 to 9.8% in 2003.

 The naira maintained a relatively stable exchange rate to the US $ in 2004 and 2005. The CBN (2005) attributed this to a combination of the non-accommodating monetary policy stance of the CBN, the prudent fiscal policy of the federal government, and increase in foreign exchange. As a result, end of the year exchange rate appreciated in nominal terms by 3.1% in the DAS market. Analyzing the exchange rate on an annual basis, the CBN confirmed a rate of depreciation of 3.1% compared to 6.6% in 2003, having traded on the average at #133.5/US$1. At the BDC, the naira appreciated by 0.8% to 140.9/US$1, narrowing the premium between DAS and BDC rates to 5.5% from 9.8% in 2003. 

2.3 FOREIGN EXCHANGE RATE VOLATILITY, EXPORT PERFORMANCE AND ECONOMIC GROWTH

Fluctuations, positive or negative are not desirable to producers of export products as it has been found to increase risk and uncertainty international transactions which according to Adubi and Okunmadewa

(1999) discourage trade. Findings by the international monetary fund (1984) reveal that these fluctuations induce undesirable macro-economic phenomena. Inflation, through caballero and Carba (1989) observed positive effect of exchange rate fluctuations on export trade in European

Union Countries. Viewing the effect of these fluctuations first from the impact on foreign direct investments, Walsh and Yu (2010) noted that low exchange rates favor the importation of productions machinery, and production and exports in periods of high foreign exchange rate. In addition, Foot and Stein (1991) found a strong evidence of a weak host country currency increase inward foreign direct investment within an imperfect capital market models depreciation (down change in exchange rate) makes a host country less expensive than export destination countries. Making a firm-specific-asset analysis argument, Blonigen (1997) argued that exchange rate depreciation in host countries tend to increase foreign direct investment inflows; adding that a strong real exchange rate strengthens the incentives of foreign companies to produce at home for export instead of investing in a host country for export.

 To Lawa and Meding (2010), different open economies experience different episodes of exchange rate appreciation in response to different types of stocks, contending that an appreciation in exchange rate induces a contraction of the exporting manufacturing sector. Maintenance of export performance to them require the depreciation of the real exchange rate of a country’s currency, through monetary injections; noting that a policy of exchange rate depreciation can successfully prevent a contraction of export output, having an allocative effect in the economy. 

 Adubi and Okunmadewa (1999) posited that Nigeria, a developing nation is expected to gain from export conversion price increase as a result of currency devaluation. Findings by Obadan (1994) and Osuntogun et al (1993) on the effect of stable exchange on export performance showed that exchange rate affect a country’s performance; adding that instability in an exchange rate with its attendant risk affect export earnings, performance and growth: positive to exporters when devalued.

 Poor results from the floating regimes of the 1970s necessitated a change in foreign exchange rate management. The structural adjustment project was introduced in 1986 with cardinal objective of restructuring the production base of the economy with a positive bias agricultural export production. The reform facilitated the continued devaluation of the Nigerian naira with the expected increase in domestic prices of agricultural export boasting domestic production. Empirical findings by Oyejide (1986), Osuntogun (1993), and Ihimodu (1993) reveal changes in both structure and volume of Nigeria’s trade as a result of the devaluation of naira.

To Srour (2006), diversification of countries export base is one reason given by developing nations for changing foreign exchange rates and regimes which in turn according to the World Trade Organization (2010) increases local production, employment, income and economic growth. Concluding, Chukwu (2007) and Adubi and Okunmadewa (1999) noted that foreign exchange rate is a determinant of export trade and economic growth in Nigeria. 

 In their study of Canada, Lawa and Medina (2010) observed  a coincidence in exchange rate appreciation with a contraction of 3% in the country’s gross domestic product in the manufacturing sector; with a 2% average decline in manufacturing GDP over a 20 years period

characterized foreign exchange rate appreciation.

 Though carrying attendant risks, foreign exchange rate movement are monetary policy instruments to achieve export growth, economic growth and development of any nation.

2.4 NIGERIA’S EXPORT PERFORMANCE

 Non-oil export performance was poor from 1980-1984. Nigeria’s total non-oil export resulted in a net inflow of foreign exchange totaling #362.1 million (in naira value) in 1984. This contrasted with the net inflows of #244.8 million in 1983 and #1.398 billion in 1982. Export performance maintained a fairly stable growth rate of 19% to 1989, reducing sharply to 5% annual growth rate to #21.8765 billion in 1993; with a 5% decline in 1994. Nigeria’s export trade is dominated by all exports accounting for 95%of her export value. Notwithstanding, improvements have been recorded in the non-oil exports. From non-oil export value of #23,091.1 in 1995, contributions from this sector of the economy increased to #95.09 billion (unadjusted) at the end of 2003.

 Export items from Nigeria, as in the world over, are measured using the Standard International Trade Classification (STTC) of the quantities and values of goods moved out of the country. It classifies export goods into 10 main groupings with codes 0-9. These are: 0- food and live animals; 1- beverage and tobacco; 2- crude materials, inedible;

3- mineral fuel; 4- animal and vegetable oil; 5- chemical; 6- manufactured goods; 7-machinery and transport equipment; 8-miscellaneous

manufactured articles and; 9-miscellaneous transactions unclassified.  

 Nigeria according to the Central Bank of Nigeria (2005) has recorded consistently surplus in its trade balance. However, this has fluctuated widely along with petroleum export earnings. The balance in services and income on the other hand, has consistently been in deficit reflecting Nigeria’s position as a net importer of services. The current account deficit was reduced from US $5.1 billion in 2002 to US $1.6

billion in 2003.

 Exports are pivotal to Nigeria’s development prospects, as they have been a major driver of economic growth, employment, and government revenue and carry potential for poverty reduction. Since

1999, merchandise exports have accounted for between 34% and 52% of GDP; its share was 47.6% in 2003. Nigeria’s exports are dominated by crude oil and natural gas. Together, these two commodities have accounted for between 95% and 99% of total merchandise exports (WTO 2005), thus rendering export performance heavily susceptible to the vagaries of the international oil market. In 2003, Nigeria was the third largest oil exporter amongst the members of the Organization of the

Petroleum Exporting Countries (OPEC), and the fifth largest in the world (OPEC 2004; quoted by WTO 2005). Her oil earnings increased from US $ 17.7 billion in 2002 to US $27.7 billion in 2003 on account of the increase in its OPEC quota and in international oil market prices.

Exports of natural gas rose significantly from US$ 27million in 1999 to US$ 1.7 billion in 2003, contributing to the diversification of Nigerian exports. This could be attributable to Nigerian government effort to reduce the level if gas flaring associated with oil production, as well as measures to encourage the exploration of Nigeria’s huge natural gas resource, largely untapped until recently.

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