EXCHANGE RATE FLUCTUATION AND EXPORT PERFORMANCE IN NIGERIA (1961-2011)

EXCHANGE RATE FLUCTUATION AND EXPORT PERFORMANCE IN NIGERIA (1961-2011)

Chapter one

INTRODUCTION

1.0 Background of the Study

The exchange rate is a key factor of global trade, and it has received a lot of attention in the context of global imbalances. Exchange rate fluctuation has become a hot topic in Nigeria because every economy strives for a stable exchange rate with its trading partners.

Despite the fact that Nigeria began devaluing the naira in 1986 and implemented the Structural Adjustment Program (SAP), this goal was not met. Failure to achieve this goal exposed the Nigerian manufacturing sector to the difficulty of a constantly shifting currency rate.

One of the SAP’s objectives was to restructure the economy’s production base with a positive bias towards agricultural export production.

Foreign exchange changes that allowed for the cumulative depreciation of the effective exchange rate were projected to raise domestic agricultural export prices, hence increasing domestic production.

Many empirical researchers, including Oyejide (1986), Ihimodu (1993), and the World Bank (1994), examined the effects of cumulative depreciation of the effective exchange rate on the structure and value of Nigerian exports.

The depreciation improved agricultural export prices, resulting in a gradual increase in agricultural export volume over time. However, no progress was made towards stabilising the currency rate. As a result, the problem of exchange rate volatility in Nigeria exists to this day.

Fluctuation is a fundamental limitation on economic progress, making planning difficult and investing riskier. For example, exchange rate fluctuations may restrict the activity of potential investors in Nigeria by increasing uncertainty about the returns on a given investment.

Potential investors will only invest in a foreign site if the predicted returns are sufficient to offset the currency risk (Gerado, 2002).

Risk in international commodity trade is typically caused by one of two factors: changes in global pricing or currency fluctuations. Understanding the behaviour of the exchange rate is critical for a variety of reasons.

First, the relationship between a country’s exchange rate and economic growth through trade is an important topic from both a descriptive and policy-making standpoint.

In the words of Edwards (1994; 61), “it is not an overstatement to say that the issue of real exchange rate behaviour now occupies a central rate in policy evaluation and design” .

A country’s exchange rate behaviour is an important determinant of the growth rate of its exports and serves as a measure of its international competitiveness (Bath and Amusa, 2003).

Chukwu (2007) observed exchange rate instability as a determinant of trade in Nigeria, with a positive influence on export trade at times and a negative influence at others.

This means that irregular changes in its value will have a long-term impact on exports and economic growth. The purpose of this research is to investigate the influence of naira exchange rate variations on Nigerian export performance.

1.1 Statement of the Problem

Despite the presence of literature on the impact of exchange rate variations on Nigerian exports, theoretical and empirical research on the topic has yet to provide a consensus.

The two key tendencies in the literature review reveal as follows: the first claims that exchange rate swings represent uncertainty and will impose costs on risk-averse economic agents, who would respond by favouring domestic-foreign trade only marginally.

In other words, it may impede the progress of international trade (Chowdhury, 1993, Cushiman, 1983, 1988; Kenen and Rodrik, 1986).