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An Evaluation of Impact of Foreign Exchange on Importation and Exportation of Goods in Nigeria From 1980-2018

 

Abstract

This study investigates the impact of foreign exchange rate on importation and exportation of goods in Nigeria. The research is carried under the assumption that exchange rate are deemed to impact on the volume of export and import trading activities. The study made use of Secondary data from 1980 to 2018. Econometric tools were used to ascertain relationships. The study established a mixed result between the variables under review. While some of the tests did not provide adequate and predictive information on the relationship between exports, imports and real effective exchange rate, others did. The VAR model estimates indicate an inverse relationship between Export, Import and REER in current periods. A unit increase in export and import in a particular year leads to about 0.9% and 0.4% decrease in REER respectively. Variance decomposition analysis suggests that the shocks partially explain fluctuations in REER, as well as exports and imports. The Impulse response analysis indicates a negative association between export and real effective exchange rate while it was majorly positive for imports throughout the ten periods. The causal effect reveals that import causes exports but that exports do not granger cause imports. The ARCH modelling approach suggests the existence of a first-order Arch effect and a significant GARCH term. Though the Coefficient of GARCH in a mean term is negative; it produced a singular covariance which by itself is not unique. Results show evidence of volatility of REER clustering on import and export trading activities in Nigeria. This could have serious implications for growth in Nigeria, as a reduction in the growth of exports could reduce the foreign exchange earnings available for the financing of developmental projects. At the same time, a decline in imports could affect domestic production and consumption. It could also impinge negatively on the balance of payment positions for Nigeria. In line with these observations, monetary and fiscal interventions are required to mitigate the adverse effects since financial shocks often exacerbate exchange rate.

 

CHAPTER ONE

INTRODUCTION

1.1 Background to the study

Exchange rate plays an important role in the broad allocation of production resources and spending in the domestic economy between foreign and domestic goods and as well as influences export growth, consumption, resource allocation, employment and private investments (Takaendesa, Isheole and Aziakpono, 2005). Thus, Nigeria as a very large market in foreign trade operates an open economy with other countries of the world with the use of foreign currencies. Foreign/international trade is a trade that cuts international boundary of the world and involves the use of foreign currencies. It is also the trade between two or more countries that makes it becomes possible to exchange the currency of one to another (Udoka and Ubom 2003).Thus, exchange rate is the price of one country’s currency expressed in terms of some other currency. It determines the relative prices of domestic and foreign goods, as well as the strength of external sector participation in the international trade. Also, exchange rate fluctuation is the rate of change in price over a given period. It is expressed as a percentage and computed as the annualized standard deviation of the percentage change in the daily price.

A rise in the value of the naira raises the value of the price of Nigerian goods on the international market, while a fall in naira will lower these prices. The fluctuation of exchange rates will make the exports/imports of industrial and agricultural sectors goods costlier or cheaper and also the unstable tendency of this variable attaches a level of uncertainty or risk to trade.Variation in exchange rate leads to uncertainty, which has a negative effect on trade flows. This fluctuation in the exchange rate will create severe macroeconomic disequilibrium, which will lead to balance of payment deficit. The Nigerian economy has been trying to resolve the problem of external and internal balance which is caused by the disequilibrium in our balance of payment and causing the economy balance of payment deficit but the main aim of this currency devaluation was to encourage export thereby improving the economy, however this objective of increasing export through devaluation of the naira has not been achieved, instead despite the various effort of the government to stabilize the exchange rate, the naira has continued to depreciate and making the naira worthless in terms of other country’s currency.

Exchange rate regime remain important issues of discourse in the international finance as well as in developing nations, with more economies embracing trade liberalization as a requisite for economic growth (Obansa, Okoroafor, Aluko and Millicent, 2013). In Nigeria, exchange rate has changed within the time frame from regulated to deregulated regimes. Ewa, (2011) agreed that the exchange rate of the naira was relatively stable between 1973 and 1979 during the oil boom era and when agricultural products accounted for more than 70% of the nation’s gross domestic products (GDP).

Historically speaking, international trade is as old as civilization. From ancient times, authors and scholars alike deemed international trade to be a catalyst for industrial productivity and overall economic growth and development. Since no nation is a pariah state, they all depend on one another for goods and services that are produced more efficiently elsewhere (Analogbei 1987). International trade consists of import and export trades. Basically, the volume of exports in Nigeria hovers around a mono-product, i.e. crude oil. In 1996, there was a gradual but progressive increase in the volume of Nigeria’s export. The price of oil reached the historic high amounting to 115 USD per barrel by mid-2008 (IFS, 2015). This continued unabated following the adoption of a democratic dispensation in 1999 and peaked in 2012.

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