ASSESSMENT OF THE IMPACT OF EXCHANGE RATES ON THE VOLUME OF IMPORT
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ASSESSMENT OF THE IMPACT OF EXCHANGE RATES ON THE VOLUME OF IMPORT
Chapter one
Introduction
1.1 Background of the Study
After several years of floating exchange rates among countries, academic economists have yet to reach a consensus on the influence of exchange swings on economic factors such as imports.
The conventional wisdom holds that exchange rate variations affect relative domestic and international pricing, prompting expenditures to move between domestic and overseas items (Obstfeld, 2002). According to the new theory, exchange rate swings have little effect on relative pricing in the near run (Obstfeld, 2002; Engel, 2002).
In contrast to the dispute among academic economists, entrepreneurs appear to believe that exchange rate swings have actual consequences.
Executives, particularly those of import enterprises, are concerned about decreased imports when their native currency depreciates in nominal terms. This was stated by a Nigerian importer during one of the business meetings conducted in Abuja.
Importers devote significant time and resources to developing hedging techniques to mitigate the impact of exchange rate volatility on their imports.
They also spend a lot of time and money lobbying authorities to stabilise currencies, whether by intervening in foreign currency markets or taking more drastic actions like fixing exchange rates.
The available evidence implies that most developing countries’ foreign exchange profits have been steadily declining since the early 1980s. This is partly due to the collapse of commodity prices on the global market.
In addition to this, there are two major variables. The first is a reduction in international financing, while the second is an increase in external borrowing costs.
This sparked a succession of developments in most developing countries. External commerce accounts for the vast majority of government revenue in these countries.
Both developing countries’ imports and exports are subject to cyclical swings in the global market, as evidenced by the 2008 global economic catastrophe, and revenue from this source varies correspondingly.
Thus, it was not surprising that the early 1980s drop of commodity export prices triggered budgetary crises in the majority of African countries, as evidenced by their massive budget deficits. This contributed to the implementation of economic reform plans.
However, there is little systematic research into how currency rates affect Nigerian imports. This study fills the void by investigating how exchange rate variations affect the amount of imports into Nigeria.
Statement of the Problem
Foreign trade’s relevance in the development process has piqued the interest of both development economists and policymakers. Imports play an important role in international trade, and the import of capital goods is especially important for economic growth.
This is because imported capital goods have a direct impact on investment, which is the primary driver of economic growth. Economic reform is projected to have an impact on imports as part of the plan for restoring external balance.
However, unless policymakers understand the fundamental factors influencing the currency rate and how they effect imports, such a policy decision can be detrimental to investment and output if domestic production is dependent on imports. This study will look at how exchange rate variations affect the number of imports in Nigeria.
GOALS OF THE STUDY
The primary goal of this research is to investigate the relationship between exchange rates and the volume of imports to Nigeria.
Specifically, the study seeks to:
(i) Examine the trend of Nigeria’s exchange rate over the years;
(ii) To empirically evaluate the influence of exchange rate variations on Nigeria’s imports.
(iii) Identify the macroeconomic factors influencing Nigeria’s exchange rate.
Research Hypotheses
The fundamental hypotheses to be empirically tested based on the study topics indicated above are as follows:
(1) Hypothesis: Exchange rate variations have no effect on the amount of imports to Nigeria.
H1: Exchange rate variations affect the volume of imports into Nigeria.
(2) H0: Nigeria’s exchange rate is not determined by inflation, interest rates, or the volume of foreign direct investment.
H1: Nigeria’s exchange rate is determined by inflation, interest rates, and the volume of foreign direct investment.
Significance of the Study
In view of the stated aims that this study is aimed to attain, the significance of the study is as follows:
(a) It would provide empirical evidence of the relationship between exchange rate changes and Nigeria’s import volume.
(b) It would serve as a measure for assessing the Nigerian government’s exchange rate policy.
(c) The study would also advance knowledge by indicating how imports could be exchange rate responsive.
Scope and Limitations of the Study
The study’s scope includes an assessment of the impact of currency rates on import volume in Nigeria from 2005 to 2020. The researcher faces various constraints that limit the scope of the investigation;
a) AVAILABILITY OF RESEARCH MATERIAL: The researcher has insufficient research material, which limits the investigation.
b) TIME: The study’s time frame does not allow for broader coverage because the researcher must balance other academic activities and examinations with the study.
1.7 Definition of Terms
EXCHANGE RATE: In finance, an exchange rate is the rate at which one currency is traded for another. It is also defined as the worth of one country’s currency in comparison to another.
VOLUME OF IMPORT: World export (import) volumes are generated by aggregating measures of the volume of exports (imports) from different countries on a constant price basis.
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