IMPACT OF EXCHANGE RATE VOLATILITY AND EXPORT IN NIGERIA (1986 -2016).
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IMPACT OF EXCHANGE RATE VOLATILITY AND EXPORT IN NIGERIA (1986 -2016).
Chapter one
INTRODUCTION
1.1. Background to the Study
It is critical to note that exchange rates, whether fixed or floating, influence macroeconomic performance such as import, export, national price level, agricultural output, interest rate, and so on, as well as economic units such as individuals’ purchasing power, firm performance, and so on, which may have an impact on economic growth in the long run (Chong and Tan, 2008).
Chong and Tan’s (2008) empirical investigation demonstrated that exchange rate volatility is responsible for changes in macroeconomic fundamentals in emerging countries.
The volatility and unpredictability of currency rates are attributable to the convergence of the forces that influence them (Hanias and Curtis, 2008).
As a result, the issue of exchange rate sensitivity and determinacy is contentious and has been the subject of much debate. A huge number of research and papers addressed the problem both theoretically and practically, yielding disparate results that have fueled the controversy.
The classic assumption is that exchange rate variations affect relative local pricing, prompting spending to move between domestic and foreign items (Khan et al, 2010; Betts and Kehoe, 2005). According to the new approach, exchange rate swings have little effect on relative prices in the near run.
Exchange rate variations affect local prices by influencing aggregate supply and demand for goods. In general, when a currency depreciates, import prices rise if the country is an international price taker, whereas appreciation lowers import prices (Benita and Lauterbach, 2007).
The possibly greater cost of imported inputs linked with an exchange rate depreciation raises marginal costs and drives up the price of domestically produced items (Kandil, 2004).
Furthermore, import-competing enterprises may raise prices in reaction to foreign competitor price hikes in order to improve profit margins.
The level of such price adjustment is determined by a number of factors, including market structure, the proportion of domestic and foreign enterprises in the market, the nature of government exchange rate policy, and product substitutability (Fouquin et al, 2001; Sekkat and Mansour, 2000).
Most Nigerian real sectors and companies depend on imported inputs in the form of equipment, plant and machinery, and other materials, and given the fact that the bulk of the country’s foreign earnings is from oil earnings, which accounts for over 80.0% of the foreign exchange earnings (CBN, 2008a)
thus revealing the extent of the vulnerability of these companies to swings in the exchange rate, which is greatly affected by fluctuations in the oil price in the intern.
According to Mohammad (2010), the risks associated with variable currency rates are significant hurdles for nations like Nigeria that seek to develop through an export expansion strategy and financial liberalisation.
The depreciation of the naira against the dollar will make importation of goods more expensive, encouraging people to buy locally made goods while foreign made goods become more expensive.
As a result, if exports grow faster than imports, net exports will increase, promoting a favourable balance of trade and balance of payment. Net export is the difference between export and import;
if export exceeds import, the net export is positive and favourable, however if import exceeds export, the next export is negative and unfavourable. Therefore, exchange rate depreciation can affect the volume of a country’s net exports.
Furthermore, Chong and Tan (2008) suggested that the impact of exchange rate volatility on economic fundamentals is significantly greater if an economy does not have mechanisms for hedging currency risk in its market, which is sadly the case in Nigeria.
Furthermore, Chong and Tan (2008) stated that exchange rate volatility has a catalytic effect on numerous sectors of the economy, particularly in emerging nations where it threatens local commerce.
Exchange rate management can foresee how the real sectors of the economy will contribute to the expansion of the economy’s net exports. This is because there is a link between exchange rates and the capital market because most corporations are listed on the floor of the Nigerian Stock Exchange, and anything that affects the trading of the Nigerian Stock Exchange will also affect the productivity of the real sectors of the economy, resulting in a reduction in locally made goods and thus a decrease in export, resulting in a decrease in unfavourable net exports.
It is critical to note that a depreciation of the local currency makes exporting goods more appealing, resulting in an increase in overseas demand and revenue for the firm, as well as an appreciation in its value and stock prices.
On the other side, an appreciation of the local currency reduces revenues for an exporting firm by reducing overseas demand for its products. However, the sensitivity of an importing firm’s value to exchange rate changes is exactly the reverse of that of an exporting firm.
Furthermore, changes in currency rates increase a company’s transaction exposure. As a result, this study looks at how exchange rate fluctuation affects Nigerian exports.
1.2. Statement of Problem
The worldwide financial and economic crisis, which began in August 2007 with the collapse of the US subprime lending market, threw a pall over 2009.
The crisis caused the collapse of most other sectors and markets in Europe, which had a negative impact on developing economies, particularly oil-exporting countries such as Nigeria. The damage was exacerbated by a drop in crude oil production due to ongoing unrest in the Niger Delta region.
The cascading effect of the global economic crisis on Nigeria’s economy continued in 2009, with excessive loan rates putting pressure on the stock market as a result of enormous borrowing.
The Nigerian stock market crashed as stock investors rushed to liquidate their investments in order to repay their debts and escape the high lending rate.
This slump was also fueled by concerns about unnecessarily high valuations in nearly every sector. Regulatory involvement in the equities market simply eroded investor trust further, particularly among institutional investors, because the measures failed to address the underlying concerns.
The effect of the global economic meltdown on the Nigerian exchange rate was phenomenon, as the Naira exchange rate vis-a-vis the Dollar rose astronomically from about N120/$ to more than N 150/$ (about 50% increase) between 2008 and 2011, and then to more than N 380/$ between January and September 2016. This is due to Nigeria’s dramatic loss in foreign profits as a result of the continued decline in crude oil prices.
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