CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

For clarity it is pertinent that we start by defining the subject of this

work. Exchange rate is the price of one currency in terms of another

currency. It is the price of one foreign currency in terms of the domestic

currency. It sends signals that affect consumption and investment decisions

and therefore influences both the composition and value of aggregate

demand and supply (CBN: Contemporary Economic Policy issues 2003).

Exchange rate stability is therefore commitment of the government to

allow the macro-economic policies to control the balance of payment. The

government may fix the exchange rate policies either by legislation or by

intervention in the Nigerian currency market.

According to Johnson (1984) the case for exchange rate stability is

part of a more general argument for National Economic Policies conducive

to international economic integration.

From a broader perspective for exchange rate to be stable is to

encourage international trade by making price of goods involved in trade

more predicable and to promote economic integration. At the

individual level such decisions are usually taken in order to improve

future consumption prospects investment and because exchange rate

involves an increase in wealth of a nation which is desirable it then

influences the society. The Agricultural sector in the Nigeria context

embraces all the sub-sector of primary industry they include; farming

(which include livestock application of modern implements such as tractors

and chemical) Anyanwu (1997). Before independence the reliance of this

economy on agricultural income led to the establishment of marketing

boards with monopolist powers to buy these crops from farmers and sell

them overseas. The role of marketing board was very important especially in

stabilizing farm incomes and generating funds for executions of

development projects in the country.

The exchange rate stability has a lot of contributions to the volume of

export and the level of the domestic production. Although given that

agricultural output is influenced by prices among other factors the

depreciation of the naira and the abolition of the commodity boards were

expected to result in an overall increase in production of exports. According

to Kwanashie et al (1994) the degree of fluctuation in prices is a major

determinant of the changes in earnings given the trend in output over the

years. But the exchange rate when applied in conjunction with other macro-

economic policies

was expended to lead to the achievement of the goals of price stability

improved and sustained economic growth reduced unemployment balance

of payment stability and increased agricultural exports. A stable exchange

rate system would help

in meeting these goals but in case when it is unstable these achievements

become difficult and often impossible.

According to economic indicators the monetary Approach of

Exchange rate determination confirmed exchange rate as a function of

relative shifts in money inflation rate or its proxy and domestic output

between an economy and the trading partner. More so the exchange rate of

any counting is determined by the number of factors which include the state

of the economy the competitiveness and the volume of export the level of

domestic production of foreign reserve which is the nation worth because of

its role as the determinant of the relative price of tradable to non-tradable it

is a major instrument affecting the structural change in an economy.

Exchange rate policies in Nigeria as in other countries are often

sensitive and controversial mainly because the kind of structural

transformation required such as reducing imports or expanding agricultural

exports invariably imply a depreciation of the nominal exchange rate.

In the quest for stability of exchange rate the Nigeria Monetary authorities

tried several bidding system including the Dutch

Auction system (DAS) and the Marginal Rate System. An attempt to ensure

viability in the market led to many amendments of the rules intervention by

Central Bank of Nigeria (CBN) and opening of different exchange windows

for operation during this period. Despite all these fluctuations rate of

exchange

continued to be an issue of concern to the authorities. This is as a result of

causes of changes in the exchange rate which are as follows;

 Changes in prices

 Capital flows

 Changes in exports and imports

 Political conditions

 Influence of Banks

This formed the basis of this study “Exchange Rate Stability and Export

performance. The case of Agricultural produce in Nigeria (1978-2010)”.

1.2 STATEMENT OF THE PROBLEM

in the most developing country in general and Nigeria in particular some of

the economic tools used for both planning and implementation of the

economic programme are normally based on educated guesses or on models

which have been designed for other countries. The direction of this work

will be to understand the cardinal reasons for the inability of Nigeria to

maintain a favourable external reserve.

What factors capture most the exchange rate instability on export

performance in Nigeria? This will show succinctly the conformity of

exchange rate in Nigeria to a priori economic expectations.

Economic theory informs that decision to exchange rates depend demand

and supply of foreign exchange that is change in income earnings of export

crop producers which come as a result of either increase or decrease in

International World price of exports or devaluation of currency and

subsequent prices. Such exchange rate change may lead to a major decision

in the future output if they are unpredictable and erratic.

How true these economic assertions in Nigeria exchange rate profile are

becomes the question.

1.3 OBJECTIVE OF THE STUDY

the overall objective of this study is to determine empirically the dynamic

effect of exchange rate stability and export performance of agricultural

produce in Nigeria from (1978-2010).

The trust of the research will be to

 Evaluate the nature and extent of the impact of exchange rate stability

on agricultural exports in Nigeria.

1.4 STATEMENT OF HYPOTHESIS

To test for the statistically significance or non-significance of data

Ho represents the Null Hypothesis

H1 represents the Alternative Hypothesis

Ho = H1

there is no relationship between exchange rate stability and export

performance of agriculture produce in Nigeria.

Results; If Ho > H

1

then we accept the alternative hypothesis and reject the

null hypothesis that exchange rate stability does not affect the export

performance of agriculture produce in Nigeria.

1.5 SIGNIFICANCE OF THE STUDY

One of the most dramatic events in Nigeria over the past decade was the

devaluation of the Nigerian naira with the adoption of a structural

Adjustment programme (SAP) in 1986. significantly this depreciation

resulted in changes in the structure and volume in Nigeria‟s agricultural

export as empirically determined by many research (Oyejide 1986; Ihimodu

1995; Osuntogun et al 1993; World Bank 1994). The depreciation also

increased the prices of agricultural exports and studies have shown a marked

increased in volume of agricultural exports over the years. Appreciation of a

country‟s real exchange rate caused by the sharp rise in export of a booming

resources sector like oil draws capital and labour away from a country‟s

manufacturing and agricultural sectors which can lead to a decline in export

of agricultural goods and inflate the price of non-tradable goods

(Corden 1982) and Corden and Nearly (1984) however the volatility

frequency and

instability of the exchange rate movements since the beginning of the

floating exchange rate raise a concern about the impact of such movements

on agricultural trade flows.

1.6 LIMITATIONS OF THE STUDY

The concept of exchange rate stability has been generally acknowledged to

have a strong relationship with economic development in Nigeria.

The scope of this work will be limited to the rate of exchange in the

geographical area Nigeria using its changes in the world prices or

fluctuation in exchange rate (1978-2010) that is thirty (32) years.

 The study takes the United States Dollar ($) as widely most used

currency in international trade by pitching it against the Nigeria naira

(N).