Project Materials

CHAPTER ONE

INTRODUCTION     

1.1. BACKGROUND OF THE STUDY

Nowadays in Nigeria, exchange rates and its constant movement are of great importance to the overall public as a result of a technique or the other its fluctuation has an effect on the competence of the economy to attain optimal productive capacity.

This is appalling given its macro-economic importance specifically in a high import dependent country like Nigeria (Olisadebe, 1991). The rate of exchange reflects the quantitative relation at that one currency may be exchanged with another currency, specifically the magnitude relation of currency costs.

It is the worth of a remote nation’s currency in terms of the house nation’s currency. It additionally specifies what quantity one currency is value in terms of the other. A correct or more acceptable exchange rate has been one amongst the most vital factors for economic growth in the economies of most developed countries, whereas regular fluctuations or inappropriate exchange rate has been a major obstacle to economic growth of many African countries of which Nigeria is inclusive.

Exchange rate is an important macroeconomic policy instrument. Changes in exchange rates have powerful effects on tradable and non-tradable of countries concerned through effects of relative prices of goods and services (Bobai, Ubangida & Umar, 2013).

More particularly, there has been an ongoing debate on the appropriate exchange rate policy in developing countries (Kandil, 2004). In other word, in an export-led growth country, a major concern will be to make its export sector open to external shocks, especially in regards to exchange rates volatility.

With the Nigerian economy in a state of exchange rate fluctuation, especially with the fluctuations in the currency of her major trading partners, question arises as to whether trade can continue to be a reliable source of economic growth for Nigeria.

This major problem which this study is designed to solve is whether the exchange rate has any bearing on export growth. The present contribution is expected to rekindle research interest in this direction for purpose of achieving greater stability and sustainability in foreign exchange management in Nigeria through internationally competitive productivity in Nigeria.

It is hypothesized that there is no causal relationship between exchange rate (EXR) and export growth (EXP) in Nigeria. In judging the desirability of exchange rate fluctuations, it becomes, therefore, necessary to evaluate their effects on the performances of macroeconomic variables in Nigeria.

Export performance is of paramount importance because it contributes to the economic development of nations by influencing the amount of foreign exchange reserves as well as the level of imports a country can afford.  It enhances societal prosperity and help national industries to develop EXCHove productivity and create new jobs (Lages and Montgomery, 2014).

Thus, no country of the world is entirely an island of itself without having anything to do with other countries. In this case, globalization of trade has increasingly rendered the world borderless. This scenario has widened the consumption choice bundles of consumers in various countries because more goods and services are available to them as a result of international trade.

The state of demand for Nigeria’s exportable products in the international market in particular is an injection into the economy as financial resources are received into the domestic economy and being responsible for the increase in the level of external reserve of the country. In the periods of 1960s and 1970s, large proportions of Nigerian exports were dominated by the agricultural sector and it was a major source of foreign revenue.

Nigeria had been recognized as the major exporter of rubber, groundnut, cocoa and other agricultural products which this trend has changed in favour of oil. The revenues expected from the proceeds from exports are strongly affected by the incessant nature of the changes in the exchange rate.

Unpredictable changes in exchange rate, which is normally dubbed as exchange rate volatility, have pervasive effects on the performances of the export sector of the country. About three decades ago, the focus of Nigeria, like other countries in the Sub-Saharan Africa was on Import Substitution Industrialization (ISI) where increased production of goods that were largely imported were encouraged as a means for achieving high level of economic growth.

Considering the fact that the economy of Nigeria was predominantly agrarian, the policy of ISI was to encourage the productive capacity of the agricultural sector of the economy with the realization that exports spur economic growth.

the growth of the economy of Nigeria was encouraging as export volumes of products like groundnuts, cocoa, rubber and other agricultural produces were high as a result of the fact that exchange rate of the naira relative to other currencies of the trading partners of Nigeria appreciated.

However, with the Bretton wood system, exchange rates of various developing countries, including Nigeria were encouraged to be devalued as part of the Structural Adjustment Programme (SAP) recommended by the International Monetary Fund (IMF) and World Bank (IBRD) as one of the best economic policies if not the best for economic growth.

With this development, unpredictable nature of volatilities in exchange rate, oil prices and commodity prices at the international markets which imply low profitability from exports were the consequences.

Thus there have been dismal performances of both agricultural and the oil sector due to fluctuations of prices, which are believed to be caused by incessant volatilities of exchange rate at the international market. This suggests an erratic change in the value of having a long term impact on exports and economic growth. This research aims to determine the impact of exchange rate fluctuations on export performance on Nigerian economy.

1.2 STATEMENT OF PROBLEM

Following the depreciation of the Naira in 1986, a policy induced by the Structural Adjustment Programme (SAP), the subject of exchange rate fluctuations has become a topical issue in Nigeria. This is 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 the country embarked on devaluation to promote export and stabilize the rate of exchange. The failure to realize this goal subjected the Nigerian industrial sector to the challenge of a constantly fluctuating exchange rate. Fluctuation is a major constraint on the development of an economy that makes more problematic planning and riskier investments.

For example, fluctuations in the exchange rate can reduce the activities of potential investors in Nigeria, as it increases uncertainty about the returns of a given investment. Potential investors should invest in a foreign country if the expected returns are high enough to cover the foreign exchange risk (Gerado, 2002).

Risk in international trade in raw materials usually arises from two main sources; changes in world prices or fluctuations in exchange rates. This was not only necessitated by the devaluation of the naira but the weak and narrow productive base of the sector and the rising import bills also strengthened it (Opaluwa et al., 2010).

In order to stem this development and ensure a stable exchange rate, the monetary authority (i.e Central Bank of Nigeria) put in place a number of exchange rate policies. However, very little achievement was made in stabilizing the rate of exchange.

Benson and Victor (2012) and Aliyu (2011) noted that despite various efforts by the government to maintain a stable exchange rate, the naira has depreciated throughout the 80‘s to date. It is sad to note that Nigerian economy is under industrialized and its capacity utilization is also low.

The industrial sector has become increasingly dependent on the external sector for import of non-labour input (Okigbo, 1993). Exchange rate reforms according to Bakare (2011) were expected to put the Nigerian economy on the path of macroeconomic stability, recovery and sustainable development.

But rather, the country has continued to be at disadvantage in terms of macroeconomic performances. The different regimes have been accompanied by instability and uncertainties. Against this backdrop, this study aimed to evaluate the impact of exchange rate fluctuation on export performance in Nigerian economy between 1990- 2018.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine the impact of exchange rate fluctuation on export performance on Nigeria economy. Other general objectives of the study are:

1. To determine the impacts of the unstable exchange rate of the naira on export performance.

2. To examine the impact of gross domestic product (GDP), exchange rate fluctuation (EXCt) and foreign direct investment on export performance (Xt) in Nigeria.

3. To examine the impact of exchange rate fluctuation on export performance on Nigeria Economy from 1990-2018.

4. To examine the economic growth of Nigeria from 1990-2018.

5. To determine the relationship between exchange rate fluctuation and export performance on Nigeria economy.

6. To suggest ways or possible methods by which this risk associated with exchange fluctuations can be minimized in Nigeria.

1.4 RESEARCH QUESTIONS

1. What are the impacts of the unstable exchange rate of the naira on export performance?

2. What is the impact of gross domestic product (GDP), exchange rate fluctuation (EXCt) and foreign direct investment on export performance (Xt) in Nigeria?

3. What are the impacts of exchange rate fluctuation on export performance on Nigeria Economy from 1990-2018?

4. How is the economic growth of Nigeria from 1990-2018? 5. What is the relationship between exchange rate fluctuation and export performance on Nigeria economy?

6. What are the ways or possible methods by which this risk associated with exchange fluctuations can be minimized in Nigeria?

1.5 RESEARCH HYPOTHESIS      

H0: There is no impact of exchange rate fluctuation on export performance on Nigeria Economy from 1990-2018.

H1: There is a significant impact of exchange rate fluctuation on export performance on Nigeria Economy from 1990-2018.

1.6 SIGNIFICANCE OF THE STUDY

The study findings will provide pertinent information on how exchange rate fluctuation affects the export performance structure. The study findings will be of interest to the government of Nigeria, shareholders, as well as scholars and academicians.

The study will benefit scholars and academicians who would wish to undertake further studies and increase the body of knowledge on the exchange rate fluctuation and the performance of export on Nigeria economy. It will increase knowledge on the relationship between exchange rate fluctuation and performance of export on Nigeria Economy from 1990-2018.

The significance of this study therefore, lies on the recommendation made at the end of the study and their implementation. In general, the research is immense benefit to importers and exporters who always trade and are in need of direct finance, policy makers of the central bank of Nigeria who issue guideline governing international trade practices and the general public who have a right to contribute and informed to the activities of banking institutions.

It is hoped that the, findings and recommendations of this study will be of great importance to the above mentioned group. It will also suggest areas where gap in literature exist and where further research studies are required so that scholars in the field of finance and economics can do further studies in them.

1.7    SCOPE OF THE STUDY 

The study is based on the impact of exchange rate fluctuation on export performance on Nigeria economy 1990-2018

1.8 LIMITATION OF STUDY

Financial constraint– Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint– The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Exchange Rate: Price for which the currency of a country can be exchanged for another country’s currency. Factors that influence exchange rate include (1) interest rates, (2) inflation rate, (3) trade balance, (4) political stability, (5) internal harmony, (6) high degree of transparency in the conduct of leaders and administrators, (7) general state of economy, and (8) quality of governance.

Exchange Rate Fluctuation: Currency fluctuations are a natural outcome of the floating exchange rate system, which is the norm for most major economies. The exchange rate of one currency compared to another is influenced by numerous fundamental and technical factors.

Export: It means sending of goods or services produced in one country to another country. The seller of such goods and services is referred to as an exporter; the foreign buyer is referred to as an importer. Export of goods often requires involvement of customs authorities. An export’s counterpart is an import.

Economy: An economy is an area of the production, distribution, or trade and consumption of goods and services by different agents. ‘The economy is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the production, use, and management of resources’.

Economic agents can be individuals, businesses, organizations or governments. Economic transactions occur when two parties agree to the value or price of the transacted good or service, commonly expressed in a certain currency. However, monetary transactions only account for a small part of the economic domain.