IMPACT OF EXCHANGE RATE ON EXPORT OF AGRICULTURAL PRODUCT IN NIGERIA.
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IMPACT OF EXCHANGE RATE ON EXPORT OF AGRICULTURAL PRODUCT IN NIGERIA.
Chapter one
INTRODUCTION
1.1 Background of Study
One of the most dramatic occurrences in Nigeria over the last decade has been the devaluation of the Nigerian naira following the implementation of the structural adjustment plan (SAP) in 1986.
Significantly, this devaluation led in changes in the structure and volume of Nigeria’s agricultural export, as experimentally determined by various scholars (Oyejide, 1986; Ihlmodu, 1993; Osuntogun et al, 1994; World Bank).
The 1994 depreciation also increased the pricing of agricultural exports, and studies have demonstrated a significant increase in the volume of agricultural exports over time.
However, the volatility, frequency, and instability of currency rate fluctuations since the implementation of the floating exchange rate raise concerns about their impact on agricultural trade flows.
Among other measures, the structural adjustment plan (SAP), which began in 1986, disbanded the Commodities Board, which had been in charge of organising and purchasing agricultural exports since 1960.
As a result, farmers could sell their crops directly to foreign and local processors, resulting in better prices.This was supposed to end the former marketing board’s excessive taxation of agricultural products and allow producer pricing to be established by market forces.
Given that agricultural output is impacted by pricing, among other variables, the naira’s depreciation and the abolishment of commodities boards were predicted to result in an overall increase in export production.
1.2 Statement of the Problem
Changes in income earned by export crop farmers are caused by a rise or drop in the international global price of exports, as well as a currency devaluation and accompanying increase in product prices.
However, if such price/exchange rate fluctuations are unexpected and unpredictable, they can result in a significant decrease in future output. Fluctuation, whether positive or negative, is undesirable because it increases risk and uncertainty in international transaction costs. An IMF (1984) research provides concerns that exchange rate unpredictability would tend to create undesirable macroeconomic phenomena, such as inflation and protectionism.
Despite this assumption and others’ findings, new research explains why a positive effect is also feasible (de Grauwe, 1988; Caballero and Corbo, 1989).
If firms hedge against currency rate risk, one would not expect a significant negative impact on trade.Hedging against risk can be done through futures or forward markets. Forward markets change the nature of the uncertainty that traders encounter.
The forward market is essentially a guaranteed projection of the exchange rate that will prevail at the end of the contract period, which a trader can benefit from by paying a small margin around the forward rates.
Because currency uncertainty can be eliminated from short-term trading transactions by paying this margin, the cost of such uncertainty cannot be more than the cost of obtaining insurance against it.
1.3 RESEARCH QUESTION
Based on the preceding research problems, the following research question was developed to propose a solution to the topic under examination. They are as follows:
i. How has the exchange rate affected Nigeria’s agricultural product exports?
ii. To what extent do agricultural exports contribute to Nigeria’s economic growth?
iii. What are the challenges to agricultural development in Nigeria?
1.4 Objectives of the Study
The overall goal of this research is to investigate the influence of currency rate fluctuations on agricultural product exports in Nigeria.
The precise objectives are as follows:
i. To investigate the impact of currency rates on agricultural exports in Nigeria.
ii. Determine the extent to which exports of agricultural products contributed to the Nigerian economy.
iii. Investigate the obstacles of agricultural growth in Nigeria.
1.5 Statement of Hypothesis
The research study empirically examined hopes to achieve the following:
Hi: Export agricultural output contributes positively and significantly to Nigeria’s economic development.
Ho: The export of agricultural output makes no major beneficial impact to Nigeria’s economic development.
1.6 Significance of the Study
The inefficiency and ineffectiveness of agricultural product exports in providing competitive goods in the foreign market has been attributed to a number of factors, including low levels of industrialization, insufficient financing of export industries, inefficient performance of export promotion agencies, inadequacy of incentive schemes, ineffective export promotion strategies, insufficient infrastructural facilities, and high production costs. A number of efforts have been made to address these issues, but with little or no influence on the sector.
i. increasing export supply capacity.
ii. Develop and implement effective techniques to increase productivity and output.
iii. Ensuring that agricultural exports remain lucrative.
iv. Ensure that the exporter achieves international competitiveness.
1.7 SCOPE AND LIMITATION.
Our research on the influence of exchange rate fluctuations on agricultural product exports in Nigeria will be limited to agricultural exports due to the impossibility of conducting a study on the agricultural sector as a whole.
Despite the fact that the research is limited to the agricultural export of the sector, we will still face difficulties such as variation in the data obtained from different official, i.e. political data, conversion of such data into a whole because the data were complied with different base years, and irregularities in the process of data collection in society pose a significant problem for the researcher.
1.8 Methodology.
Volatility or risk in international commodity trade is typically caused by one of two factors: variations in global pricing or fluctuations in exchange rates.
These may have an impact on trade by creating uncertainty or changing the cost of transactions, processing, and so on. The state of the two major sources determines a commodity’s final domestic trade price throughout time.
Thus, a choice to produce for export entails uncertainty regarding the foreign exchange values that such sales would realise, as well as the exchange rate at which foreign cash earnings can be converted to local currency.
During a period of fixed exchange rates, the most significant cause of concern in international trade for a developing country (Nigeria) is the fluctuation in the global price of primary commodities.
There is a considerable body of study on the effects of exchange rate volatility on trade volume.Most of these research argue that exchange rate fluctuation increases risk and uncertainty in foreign transactions, discouraging trade.
If traders are risk-averse, they will be willing to pay a higher price to minimise the risk associated with exchange rate fluctuation.Thus, in the presence of exchange rate volatility, a firm’s export supply (import demand) curve shifts to the left (right); for any quantity of exports or imports, the associated price is greater than without it (Quran and Varangis 1992).
Some research (e.g., Grauwe, 1988; Caballero and Corbo 1989; Kumar and Dhawan 1991) have found that the increase in exchange rate volatility was responsible for the 1970s trade slowdown.
1.9 Model of Specification
It has been demonstrated that the analytical framework and testing technique used to assess the impact of exchange rate volatility influence the conclusion reached.
The majority of studies utilised a linear regression model.
Q1 represents the quantity of exports or imports. Y1 is a measure of real economic activity (GNP, or the index of industrial production), RPJ is a measure of relevant relative prices, V1 is a measure of volatility, and El is a random error.In this model, a statistically significant negative coefficient for a suggests that there is a negative association between volatility and trading.
Koray and Lastrapes (1998) employ the vector auto-regression (VAR) model, while Kroner and Lastrapes (1991) utilise the generalised autoregressive conditional heteroskedasticity (GARCH) in mean model.
There are three flaws with the model. The first is how to assess currency volatility, and the second is whether to use nominal or real exchange rates in modelling. The third problem concerns the effects of aggregate or bilateral trade statistics on the study.
1.1 0 Organisation of Study
The project has been broken into four portions for simple understanding. The first chapter includes an introduction, a statement of problems, study objectives, methodology, hypothesis, the relevance of the study, and scope and limitations.
Chapter two is a literature review in which previous writers’ works are analysed and compared to existing states of knowledge using empirical findings and a theoretical framework.
It addresses the impact of exchange rate fluctuations on Nigeria’s agricultural exports in terms of economic development and macroeconomic adjustment.
The agricultural sector’s importance and significance to national development, as well as the role of agricultural export exchange. After reviewing the industrialization process, the prospects and constraints of Nigerian agricultural product exports will be examined.
The third chapter discusses research technique, including model formulation, problem estimates, and empirical data interpretation. The fifth chapter contains an overview of the work, as well as conclusions and recommendations.
1.11 Definition of Term
The balance of trade is the difference between the total worth of a country’s exports and imports in observable terms. It is an important aspect of the balance of payments that accounts for visible capital transfers.
Currency devaluation is the fall in the value of a currency in terms of the supporting monetary mechanism or another country’s currency. i.e. a drop in the value of the fixed exchange rate. This occurs when other countries lose faith in the worth of the country’s currency.
Export / Import: Exports are the sales of goods and services from other countries. While items are regarded as visible exports, services such as banking, insurance, and tourism are considered invisible exports.Any economy’s foreign sector can export and import goods.Imports are goods and services purchased from other countries in order to control a country’s balance of payments.
Economic growth and development refer to the expansion or increase of an economy’s national output.It may be the outcome of an increase in quantity rather than quality. i.e., while an increase in population may increase output, it does not imply an improvement in citizen welfare, such as pollution and the index of poverty.
When considering economic development, we look at how stable the growth is and the standard of living as measured by per capita income.
Industrialization is a government-adopted policy that promotes exports and economic growth.
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