ABSTRACT
This
research work investigates the impact of exchange rate on export of
agricultural products by the monetary authorities of Nigeria, using the least
squares Statistical package .The data utilized for least square spanned between
1998-2008.
From
the finding of this research work, it was observed that the success of export
of agricultural products critically depends on the exchange rate elasticity of
foreign demand for the country's export. In Nigeria's case, exports are
basically primary in nature i.e. either mineral or agricultural products which
at reduced external prices (due to currency devaluation) do not significantly
increase export earnings. Since the end result of Nigeria's flexible exchange
rate regime is currency denominated assets in the foreign exchange market in
the policy is not ideal for Nigeria's situation. Thus, the paper concludes by
recommending among others currency appreciation combined with economic stability
and liberalized export orientation regime.
TABLE OF CONTENT
Title Page
Certification
Dedication
Acknowledgment
Abstract
Table of Content
CHAPTER
ONE: Introduction
1.1
Background of the Study
1.2
Statement of the Problem
1.3
Research Question
1.4
Objective of the Study
1.5
Statement of Hypothesis
1.6
Significance of the Study
1.7
Methodology
1.8
Model Specification
1.9
Organization of Study
1.10
Definition of Term
CHAPTER
TWO: Literature Review
2.1 Concept and definition of Exchange Rate
2.2 Types of Exchange rate
2.3 Need for Exchange rate
2.4 Causes of Exchange Rate Fluctuation
2.5 Importance of Agriculture in the Economy
2.6 Relationship between Exchange Rate and
Agricultural Exports
2.7 Effect of Agricultural Export on Economic
Growth
CHAPTER
THREE: Chapter Three Methodology and Mode Specification
3.1 Introduction
3.2 Regression Analysis Model
3.3 Data Source and Limitation
3.4 Data Definition and Notation
3.5 Introduction to Model
3.6 Model Specification and Restatement of
Research Hypothesis
CHAPTER
FOUR:
Data Analysis and Interpretation of Results
4.1 Introduction
4.2 Data Analysis
4.3 Empirical Result and interpretation
4.4 F-Ratio Test
4.5 Co-efficient of Determination
CHAPTER
FIVE: Summary, Conclusion and Recommendation
5.1 Summary
5.2 Conclusion
5.3 Recommendation
Bibliography
Appendix
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND
OF STUDY
One
of the most dramatic events in Nigeria over the past decade was the devaluation
of the Nigeria naira with the adoption of structural adjustment programme (SAP)
in 1986.
Significantly
,this devaluation resulted in changes in the structure and volume of Nigeria's
agricultural export as empirically determined by many researchers (Oyejide, 1986,Ihlmodu,1993;
Osuntogun et al,1994; World Bank 1994 the depreciation also increased the
prices of agricultural exports and studies have shown a marked increase in volume
of agricultural exports over the years .However ,the volatility ,frequency and
instability of the exchange rate movement since the beginning of the floating
exchange rate raise a concern about the impact of such movements on
agricultural trade flows.
Among
other measures, the structural adjustment programme (SAP),which started in 1986
abolished the commodity Board, the body that since 1960 had been responsible
for organization and purchase of agricultural exports .As a result farmers
could sell their products directly to foreign and local processors without any
intermediary ,thus obtaining higher prices for their products .This was
expected to remove the excessive taxation on farmers products by the erstwhile
marketing board and leave producer prices to be determined by market forces.
Given that agricultural output is influenced by prices among other factors, the
depreciation of the naira and abolish of the commodity boards were expected to
result in an overall increase in production of exports.
1.2
STATEMENT OF THE PROBLEM
Change
in income earning of exports crop producers come as a result of either increase
or decrease in international world price of exports or devaluation of the
currency and the subsequent increase in product prices. Such price/exchange
rate changes, however, may lead to a major decline in future output if they are
unpredicted and erratic. Fluctuation -whether positive or negative is not
desirable as it increase risk and uncertainty in international transactions
costs. An IMF (1984) study cites arguments that exchange rate variability would
also tend to induce macroeconomic phenomena that are undesired, for example
inflation and protectionism. Despite this assertion and that of other studies
more recent research explains why a positive effect could also be possible (de
Grauwe, 1988); Caballero and Corbo, 1989).
If
firms hedge against exchange rate risk, one could not expect to find a strong
negative effect on trade .Hedging against risk can be done via future or
forward market Where forward markets exist, the nature of the uncertainty faced
by traders is transformed .Forward market represents, in effect, a guaranteed
forecast of the exchange rate that will prevail at the end of the contract
period, which a trader can take advantage of by payment of a small margin
around the forward rates .Since currency uncertainty can be removed from short
run trading transaction by payment of this margin ,the cost of such uncertainty
cannot be higher than the cost of purchasing insurance against it.
1.3
REASEARCH QUESTION
From
the above research problems, the following research question was formulated to
provide solution to the problem under investigation. These are thus:
i. Does
exchange rate contributed to export of agricultural product in Nigeria?
ii. To what extent export
of agricultural product contribute to economic growth of Nigeria?
iii. What
are challenges of agricultural development in Nigeria?
1.4 OBJECTIVES OF THE STUDY
The
general objective of this study is to determine the impact of exchange rate on
export of agricultural product in Nigeria.
The
specific objectives are as thus:
i. To
examine the contribution of exchange rate on export of agricultural product in
Nigeria.
ii. To
determine the extent which export of agricultural product contributed to
Nigeria economy
iii. To examine the challenges of agricultural
development in Nigeria.
1.5 STATEMENT OF HYPOTHESIS
The
research study empirically tested hope to achieve the following
Hi:
There is positive significant
contribution of export agricultural Output to economic development in Nigeria.
Ho: There is no positive
significant contribution of export of Agricultural output to economic
development in Nigeria.
1.6
SIGNIFICANCE OF THE STUDY
The
inefficient and ineffectiveness on the export of agricultural products in the
provision of competitive goods in the foreign market has been ascribed to a
combination of factors including low level of industrialization, inadequate
financing of export industries, inefficient performance of export promotion
agencies, inadequacy of incentive schemes, inappropriate export promotion
strategies, inadequate infrastructural facilities ,high cost of production.
Series of efforts have been made to arrest this problems but with little or no
effect in the sector.
i. Enhancing
export supply capacity
ii. Formulate and implement
effective strategies to strengthen productivity and growth in output
iii.
Ensuring that agricultural export
business remains profitable.
iv.
Ensuring that exporter attains
international competitiveness.
1.7
SCOPE AND LIMITATION
The
bases of our research on the impact of exchange rate fluctuation on the export
of agricultural products in Nigeria will be limited to the agricultural export
because of the non-feasibility of caring out a research on the agricultural
sector as a whole.
Despite
the fact that the research is limited to the scope of the agricultural export
of the sector, we are still going to be faced with difficulties like the
variation in the data obtained from different official i.e. political data,
conversion of such data into a whole since the data were complied with
different base years and irregularities in the process of data collection in
the society pose a big problem, for the researcher.
1.8
METHODOLOGY
Volatility
or risk in international commodity trade usually emanates from two main sources
changes in world prices or in fluctuations in exchanges rates. These may affect
trade by increasing the uncertainties of trade or effecting a change in the cost
of transaction, processing etc. The state of the two major sources determines
the eventual domestic trade price of a commodity over a period of time.
Thus,
a decision to produce for export involves uncertainties about the prices
foreign exchange that such sales will realize as well as the exchange rate at
which foreign exchange receipts can be converted into domestic currency .In a
period of fixed exchange rates, the major source of concern in international
trade for a developing country (Nigeria) is the fluctuation that may arise from
the world price of primary commodities.
There
has been substantial literature on the effects of exchange rate volatility on
the volume of trade .Most of these studies focus on the argument that exchange
rate volatility increases risk and uncertainty in international transaction and
thus discourages trade. If traders are risk averse, they will be willing to
incur an added cost to avoid the risk associated with the exchange rate
volatility .Thus, a firm's export supply (import demand) curve will shift to
the left (right) in the presence of exchange rate volatility; for any quantity
of export or imports, the corresponding price will be higher under exchange
rate volatility (risk) than without it (Quran and Varangis 1992) .Some studies
(e.g. Grauwe,1988,Caballero and Corbo 1989; Kumar and Dhawan 1991 ) have in
fact concluded that due to the political economy effects of exchange rate
volatility, its increase was responsible for the slowdown in trade in the
1970s.
1.9 MODEL OF SPECIFICATION
It has been shown that the analytical
framework and testing procedure used to measure the effect of exchange rate
volatility determine the conclusion thereof.
The
model used in the majority of studies based on the a linear regression form;
Where
Q1 is the quantity of exports or imports Y1 is a measure
of real economic activity (GNP, or index of industries production), RPJ is a
measure of relative prices relevant to the analysis ,V1 is a measure
of volatility ,and El is a
random error .In this model ,a statistically significance and negative
coefficient for a, indicates the
existence of a negative relationship between volatility and trade .The most
notable variations of this methodology are by Koray and Lastrapes{l989),who use
the vectors auto-regression (VAR) model, and Kroner and Lastrapes ( 1991) .who
use the generalized autoregressive conditional heteroskedasticity (GARCH) in
mean model.
There
are three issues regarding the model.
The first is how to measure exchange volatility, the second is which
measure of volatility, nominal or real exchange rates, is proffered in modeling. Third issue is the effects of aggregate or
bilateral trade data on the study.
1.1
0 ORGANISATION OF STUDY
The
project has been divided into four chapters' easy understanding. Chapter one
consists of introduction, statement of problems, objectives of study,
methodology, hypothesis, significance of study and scope and limitation.
Chapter two deals with literature review in which the works of previous authors
will be analyzed and this would be compared with existing states of knowledge
with empirical finding and the theoretical framework. lt discusses the impact
of exchange rate fluctuation on the export of agricultural products in Nigeria
towards economic development and macro-economic adjustment . The importance and
significance of agricultural sector to national development and the role of
exchange of export agricultural products. After look at the industrialization
process, the opportunities and challenges of export of agricultural products in
Nigeria will be discussed. Chapter three is the research methodology; the
methodology will be viewed and model specification and estimation of problems
and interpretation of empirical results. Chapter five is summary of the work,
conclusion and recommendations.
1.11
DEFINITION OF TERM
Balance
of Trade: This is the difference between the total value of
the country exports and imports of visible term. It is an important part of
balance of payment which takes account of visible items of capital transfer.
Currency
Devaluation: This is the reduction in the value of
currency in terms of the supporting monetary method or in terms of another
country currency. i.e. a decrease in the value of fixed exchange rate .This is
done sometimes when other countries lose confidence in the value of the country
currency.
Export
/ Import : Export are the sales of goods and services of
foreign countries . While goods are classified as visible exports services that
include banking, insurance and tourism are invisible export .Export and import
from foreign sector of any economy .Import refers to the goods and services
purchased from a foreign in other to control her balance of payment.
Economic
growth and development: This is an expansion or increase of
the national output if an economy .It may result from quantity increase and not
quality .i.e. an increase in population may increase the output bit this does
not necessitate improvement in welfare of the citizen e.g. pollution and index
of poverty, when considering economic development we are looking at how stable
the growth is and the standard of living measured by the per capital income.
Industrialization:
This
is a policy adopted by the government to promote export and growth in an
economy.
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