IMPACT OF EXCHANGE RATE VOLATILITY ON EXPORT GROWTH IN NIGERIA

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IMPACT OF EXCHANGE RATE VOLATILITY ON EXPORT GROWTH IN NIGERIA

ABSTRACT

This study investigates exchange rate volatilitys and export growth in Nigeria using the Mundell-Fleming model as the theoretical framework and an ordinary least square regression method for the period 1986 to 2015. Empirically, it was discovered that Exchange rate and exchange rate volatilitys are found to have a negative and significant effect on Nigeria’s export growth and output growth measured by growth in the real domestic product has a positive and significant relationship with export growth. The study recommends that policy-makers should encourage export diversification to improve output performance and Exporting Firms in conjunction with the government should minimize exchange rate risks through the use of future contracts.

TABLE OF CONTENT

Cover page – – – – – – – – – – i

Declaration – – – – – – – – – – ii

Certification – – – – – – – – – – iii

Dedication – – – – – – – – – – iv

Acknowledgements – – – – – – – – – v

Abstract – – – – – – – – – – vi

Table of content – – – – – – – – – vii

CHAPTER ONE

1.0 Introduction – – – – – – – – – 1

Background to study – – – – – – – – 1
Statement of problem – – – – – – – – 2
Objective of the study – – – – – – – – 3
Research questions – – – – – – – – 3
Research hypotheses – – – – – – – – 3
Significance of study – – – – – – – – 4
Scope of the study – – – – – – – – 4
Organization of study- – – – – – – – 4

CHAPTER TWO

LITERATURE REVIEW

2.1 Conceptual Review – – – – – – – – 5

2.1.1 Exchange Rate Regimes in Nigeria – – – – – – 6

2.1.2 Exchange Rate Volatilitys in Context of Nigeria – – – – 7

2.1.3 Export Performance in Nigeria – – – – – – – 9

2.2 Theoretical literature – – – – – – – – 9

2.2.1 Alternatives – – – – – – – – – 13

2.3 Empirical literature – – – – – – – – 14

2.4 Theoretical framework – – – – – – – – 17

2.4.1 Pick’s Expansion of the Mundell–Fleming model – – – – 17

2.5 Summary of related literature – – – – – – – 20

2.6 Limitations of the previous studies – – – – – – 22

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Specification of the model – – – – – – – 23

3.2 Data transformation – – – – – – – – 24

3.3 Description of variables and a priori expectations – – – – 24

3.4 Data Requirement Estimation – – – – – – – 25

3.5 Data evaluation technique – – – – – – – 26

3.6 Description of statistics- – – – – – – – 27

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS, INTERPRETATION AND DISCUSSION OF RESULT

4.1 stylized facts- – – – – – – – – – 29

4.2 correlation analysis result – – – – – – – 31

4.3 Unit root analysis and result – – – – – – – 32

4 Cointegration analysis result – – – – – – – 34

4.5 Result of vector error correction model estimation – – – – 35

4.6 OLS result – – – – – – – – – 37

4.7 Diagnostic test result – – – – – – – – 39

4.8 Granger causality test result – – – – – – – 39

CHAPTER FIVE

CONCLUSIONS AND RECOMMENDATIONS

5.1 Conclusions – – – – – – – – 41

5.2 Recommendations- – – – – – – – – 42

REFERENCES

APPENDIX A

APPENDIX B

CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND TO SYUDY

Nigeria is well endowed with natural resources but like many well endowed African countries, Nigeria exports almost all of its natural resources in their unprocessed state to its trading partners for further processing. Consequently revenues accruing from export of these natural resources are highly dependent on the volume of export of these natural resources and the export prices. Thus the importance of export to the Nigerian economy cannot be over emphasized. The volume of export of an economy is determined by several factors of which exchange rate is cardinal (smith, 2004).

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 mid 1980s and finally, to the various types of 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 since 1986. (Sanusi, 2004).

Exchange rate is a predominant determinant of world trade, receiving much attention in the context of global imbalances. The subject of exchange rate came to be a topical issue in Nigeria because it is the goal of every economy to have a stable exchange rate 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 the adoption of the structural adjustment program (SAP) in 1986.

The key element of the structural adjustment program (SAP) was the free market determination of the naira exchange through auction system. This was the beginning of the unstable exchange rate. The government had to establish the foreign exchange market (FEM) to stabilize the exchange rate depending on the balance of payments, the rate of inflation, domestic liquidity and employment. Between 1986 to 2003 the government had experimented different exchange rate policies without allowing any of them to make a remarkable impact in the economy before it was changed. This inconsistency in policies and lack of continuity in the exchange rate policies aggregated unstable natural of naira rate (Gbosi, 2005).

The volatility in exchange rate is a major constraint on development of an economy, making planning more problematic and investment more risky. For instance, volatility in exchange rate may reduce or increase the activities of potential investors because it increases uncertainty in the determination of 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 arise from two main sources changes in the world price or the changes in the exchange rate. 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 (Bah and Amusa, 2003).

Chukwu (2007) observed the instability of the exchange rate as a determinant of trade (imports and exports) in Nigeria; having a positive influence on trade. Ajayi (1988) in his analysis on the effect of exchange rate volatility on foreign trade observed a negative relationship between exchange rate volatility and non-oil export in Nigeria and other LDCs. This contradicting result is the motivation for this research to determine empirically, the impact of exchange volatility on the Nigeria’s oil and non-oil export performance.

1.2 STATEMENT OF PROBLEM

Despite the existence of literature on the influence of exchange rate volatility on trade in Nigeria, theoretical and empirical works on the subject are yet to produce a consensus. The first strand of literature argues that it might hamper the growth of international trade (Chowdhury, 1993, Cushman, 1983, Kenen, 1988 and Rodrik, 1986).

The second argues that if the economic agents are sufficiently risk lovers, an increase in the exchange rate raises expected marginal utility of export revenue and thus induce them to increase their export s in order to maximize their revenue. Therefore exchange rate volatilitys may actually catalyze trade flows (Klein, 1990, Chambers and Just, 1991). Only a few attempts have been made to examine them for developing countries Nigeria inclusive because of lack of reliable time-series data. The available instances include vergil (2002) for turkey, Bah and Amusa (2003) for south Africa, Ajayi (1988) for some selected developing countries, Adubi and Okunmadewa (1999) for Nigeria.

This research is aimed at providing an empirical insight into the relationship between exchange rate volatilitys and total export growth in Nigeria. Previous studies reviewed assessed either the influence of exchange rate volatility on oil export neglecting the non-oil export or on non-oil export neglecting the oil export. They fail to ascertain the general effect on the total export of all goods and services. Analyzing only the oil and non-oil export exclusively may not really give a value judgment and conclusion on the effect of exchange rate volatility on export performance in Nigeria. This research was designed to fill this gap in the reviewed literature.

1.3 OBJECTIVE OF THE STUDY

The broad objective of the study is to empirically examine the nature of the relationship between exchange rate volatility and export performance in Nigeria. Specifically, the study addresses the following objectives:

To determine if exchange rate Volatility causes export growth in Nigeria.
To determine the effect of exchange rate Volatility on Export Growth in Nigeria.

To determine if the output performance have a significant impact on export growth in Nigeria.

1.4 RESEARCH QUESTIONS

In view of the above objectives, the research questions raised are:

Does exchange rate Volatility cause export growth in Nigeria?
What is the effect of exchange rate Volatility on Export in Nigeria?

Does output performance have a significant impact on export growth in Nigeria?

1.5 RESEARCH HYPOTHESES

Based on the above objective of the study, the following hypothesis was formulated: