AN EVALUATION OF IMPACT OF FOREIGN EXCHANGE ON IMPORTATION AND EXPORTATION OF GOODS
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AN EVALUATION OF IMPACT OF FOREIGN EXCHANGE ON IMPORTATION AND EXPORTATION OF GOODS
Abstract
This study looks into how Nigeria’s import and export of goods are affected by foreign exchange rates. The volume of export and import trading activity is assumed to be influenced by exchange rates in the research. From 1980 to 2018, secondary data were used in the study.
Relationships were found using econometric methods. The study found conflicting results for the variables under consideration. Despite the fact that some of the tests did not adequately and predictably reveal the connection between exports, imports, and the real effective exchange rate, others did.
Estimates from the VAR model show that export, import, and REER have an inverse relationship during the current periods. In a given year, a unit increase in export and import causes a 0.9% and 0.4% fall in REER, respectively.
According to variance decomposition analysis, shocks can partially account for changes in REER as well as exports and imports. The Impulse Response Analysis shows a big positive correlation between imports and real effective exchange rate during the 10 periods,
but a significant negative correlation between exports and real effective exchange rate. The causal relationship shows that imports cause exports but do not directly cause imports. The first-order Arch effect and a strong GARCH term are predicted by the ARCH modelling strategy.
Despite the fact that the GARCH coefficient in a mean term is negative, it nonetheless produced a singular covariance that is not singular on its own. Results demonstrate the erratic nature of REER clustering on Nigerian import and export trading operations.
This might have a significant impact on Nigeria’s economic development since it could restrict the amount of foreign exchange available to fund infrastructure projects. A decrease in imports could also have an impact on domestic production and consumption.
Additionally, it can have a detrimental effect on Nigeria’s balance of payments. According to these findings, monetary and fiscal policies are necessary to reduce the negative impacts, as financial shocks frequently worsen exchange rates.
CHAPITER 1
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
According to Takaendesa, Isheole, and Aziakpono (2005), the exchange rate has a significant impact on the distribution of domestic economic spending and production resources between domestic and foreign goods as well as on export growth.
It also affects resource allocation, employment, and private investments. Thus, Nigeria conducts an open economy with other nations of the world using foreign currencies as it is a very huge market in international trade. Trade that crosses international borders and uses foreign currencies is referred to as foreign or international trade.
The ability to exchange one currency for another is also a result of commerce between two or more nations (Udoka and Ubom 2003).The price of one country’s currency stated in terms of another currency is hence its exchange rate.
It establishes the relative costs of domestic and imported commodities as well as the degree to which the external sector participates in world trade.
Additionally, price change over a specific time period is referred to as exchange rate fluctuation. It is calculated as the annualised standard deviation of the percentage change in the daily price and is reported as a percentage.
Nigerian export prices increase when the value of the naira increases, while export prices decrease when the value of the naira declines. The exports and imports of items from the industrial and agricultural sectors will alter in price depending on the movement of exchange rates.
Additionally, because of this variable’s erratic nature, commerce is subject to some level of risk or uncertainty. Uncertainty brought on the exchange rate fluctuation has a detrimental impact on trade flows. A significant macroeconomic imbalance brought on by this exchange rate fluctuation will result in a balance of payments deficit.
The main goal of this currency devaluation was to encourage export in order to improve the economy, but this goal of increasing export through naira devaluation has not been achieved, instead despite the various efforts of the government to stabilise the naira.
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.
With more economies adopting trade liberalisation as a requirement for economic progress, exchange rate regime continues to be a contentious topic in both the international financial community and in developing countries (Obansa, Okoroafor, Aluko, et Millicent, 2013).
The exchange rate in Nigeria has transitioned over time from regulated to unregulated regimes. According to Ewa (2011), the naira’s exchange rate remained largely constant between 1973 and 1979, the height of the oil boom and the time when agricultural products made up more than 70% of the country’s gross domestic product (GDP).
International trade has existed for as long as civilization. International commerce has long been considered a stimulus for increased industrial productivity and general economic growth and development by writers and academics alike.
They all rely on one another for goods and services that are produced more effectively elsewhere since no country is a pariah state (Analogbei 1987). Import and export trades make up international trade. Basically, Nigeria’s export volume revolves around one single product, namely crude oil.
The amount of Nigeria’s exports increased gradually but steadily in 1996. By the middle of 2008, the price of oil had risen to an all-time high of 115 USD a barrel (IFS, 2015). After a democratic regime was adopted in 1999, this continued unabatedly until it reached its pinnacle in 2012.
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