Exchange Rate Fluctuation And Export Performance
Exchange rate fluctuation plays a crucial role in shaping export performance, influencing the competitiveness and profitability of international trade. The dynamic nature of exchange rates introduces uncertainty and risk, impacting the pricing of exports, production costs, and market demand. Managing this volatility requires adaptive strategies such as hedging, diversification, and flexible pricing mechanisms to mitigate risks and capitalize on opportunities. Understanding the relationship between exchange rate fluctuations and export performance is essential for businesses and policymakers to formulate effective strategies that enhance competitiveness and sustainable growth in global markets.
This paper “exchange rate fluctuation and export performances in Nigeria” aim to determine the effect of foreign exchange dynamism on the country’s export performance from 1961-2011. Research results from the economic tool of regression analysis obtained shows that fluctuations in the naira exchange rate affect manufacturing and agricultural exports more than it affects oil export. To reduce the impact of this fluctuations on these export, monetary authorities in Nigeria should stabilize the naira exchange rate through monetary and fiscal policies, exporters should take advantage of the futures worked to eliminate the negative effects of this fluctuations on export income and performance, and fiscal and monetary policies should be initiated by the government to increase local production to meet local consumption, reducing foreign exchange demand for import consumption and reduce pressure on the naira exchange rate.
Title Page
Certification
Dedication
Acknowledgment
Abstract
Table of Contents
CHAPTER ONE
1.0 BACKGROUND OF STUDY
1.1 Statement of the Problem
1.2 Objectives of the Study
1.3 Significance of the Study
1.4 Scope of Delimitation of the Study
CHAPTER TWO
2.0 EXCHANGE RATE FLUCTUATION IN THE CONTEXT OF NIGERIA ECONOMY
2.1Introduction
2.2 Nigeria’s Foreign Exchange Regimes And its Volatility (1961-2011)
2.3 Foreign Exchange Rate Volatility Export Performance and Economic Growth
2.4 Nigeria’s Export Performance
2.5 Literature Review
2.5.1 Theoretical Literature
2.6 Alternatives
2.7 Conceptual Issues In Exchange Rate Fluctuations
2.8 Empirical Literature
2.9 Theoretical Framework
2.9.1 Policy in the Mundell-Fleming Model
2.10 The Real Exchange Rate and Trade Balance
2.11 Determinants of the Real Exchange Rate
2.12 Limitations of the Previous Studies
CHAPTER THREE
3.0 RESEARCH METHODOLOGY
3.1 Analytical Framework of the Models Used
3.2 Data Transformation
3.3 Model Specification
3.4 Sources of Data and Variables Used
3.5 Estimation Technique
CHAPTER FOUR
4.0 PRESENTATION AND INTERPRETATION OF RESEARCH FINDINGS
4.1 Impulse Response Function Analysis
4.2 Dynamic Responses to One S.D Innovation to Exchange Rate
4.3 Variance Decomposition of Real Outputs Growth rates
CHAPTER FIVE
5.0 SUMMARY OF FINDINGS, RECOMMENDATION AND CONCLUSION
5.1 Summary of Findings
5.2 Recommendations
5.3 Conclusion
Bibliography
Appendix
1.0 BACKGROUND OF THE STUDY
Exchange rate is a prominent determinant of world trade, receiving much attention in the context of global imbalances. The subject of exchange rate fluctuation came to be a topical issue in Nigeria because it is the goal of every economy to have a stable rate of exchange with its trading partners. In Nigeria, this goal was not realized in spite of the fact that they embarked on the devaluation of the naira and adopted the Structural Adjustment Program (SAP) in 1986. The failure to realize this goal subjected the Nigerian manufacturing sector to the challenge of a constantly fluctuating exchange rate.
One objective of the SAP was the restructuring of the production base of the economy with a positive bias for the production of agricultural export. The foreign exchange reforms that facilitated a cumulative depreciation of the effective exchange rate were expected to increase the domestic prices of agricultural exports and hence boost domestic production.
Empirically many researchers like Oyejide (1986), Ihimodu (1993) and World Bank (1994) analyzed the effects of cumulative depreciation of the effective exchange rate, as it resulted in the change in the structure and value of Nigeria’s exports. The depreciation increased the prices of agricultural exports and the result indicated a worked increase in the volume of agricultural exports over the years. However, very little achievements were made in stabilizing the rate exchange. As a consequence, the problem of exchange rate fluctuations in Nigeria persists up till date.
Fluctuation is a major constraint on development of an economy, making planning more problematic and investment more risky. For instance, fluctuation in exchange rate may reduce the activities of potential investors in Nigeria because it increases uncertainty over the returns of a given investment. Potential investors will invest in a foreign location only if the expected returns are high enough to cover for the currency risk (Gerado, 2002). Risk in international commodity trade usually arises from two main sources; changes in world prices or fluctuation in exchange rate. Therefore, understanding the behavior of the exchange rate is very important for many reasons. First, the
relationship between a country’s exchange rate and economic growth via trade is a crucial issue from both the descriptive and policy prescription perspective. As Edwards (1994; 61) asserts; “it is not an overstatement to say that the issue of real exchange rate behavior now occupies a central rate in policy evaluation and design”. A country’s exchange rate behavior is an important determinant of the growth rate of its exports and it serves as a measure of its international competitiveness (Bath and Amusa, 2003), Chukwu (2007)observed the instability exchange rate as a determinant of trade in Nigeria; having a positive influence on export trade and at other times a negative influence. This suggests an erratic change in its value having a long-run effect on export and economic growth. This research aims to determine the impact of fluctuations in the naira exchange rate on Nigerian’s export performance.
1.1 STATEMENT OF THE PROBLEM
Despite the existence of literature on the influence of exchange rate fluctuations on exports in Nigeria, theoretical and empirical works on the subject are yet to produce a consensus. The two major trends in the literature review indicate thus; the first argues that exchange rate
fluctuations represent uncertainty and will impose costs on risk- adverse economic agents which as a result respond by favoring domestic- foreign trade just at the margin. In other words, it might hamper the growth of international trade (Chowdhury, 1993, Cushiman, 1983, 1988 Kenen and Rodrik, 1986). The second strand of literature argues that if the economic agents are sufficiently risk lovers, an increase in exchange rate raises the expected marginal utility of export revenue and thus induces them to increase their exports in order to maximize their revenue. Therefore, exchange rate fluctuations may actually catalyze trade flows (De Grauwe: 1988, IMF: 1984, Klein: 1990 and Chambers, R. G. and Just, R. E. (1991). Only few attempts have been made to examine them for developing countries, Nigeria inclusive because of the lack of reliable time –series data. The available instances include Vergil (2002) for turkey and Bah and AMUSA (2003) and Takendesa, (2005) for South Africa, Ajayi (1988), Adubi, A. A. and Okunmadewa, F. (1999), Osagie (1985) for Nigeria.
The research will differ from the existing ones as it will carefully examine exchange rate fluctuations and export for both the oil sector and non-oil sectors. Previous studies assessed only the influence of exchange rate fluctuation on either oil export, neglecting the non-oil
export or on non-oil export alone excluding the oil export. They failed to ascertain its effect on both the oil and non-oil (like agricultural and manufacturing) sectors export. Analyzing only oil exports or non-oil exports exclusively may not really give a value judgment and conclusion on the effect of exchange rate fluctuations and export performances in Nigeria. Furthermore, the study will provide deep insight into the relationship existing between exchange rate fluctuations and exports by adopting a popular econometric methodology for a measure of fluctuations which is Generalized Autoregressive Conditional Heteroscedasticity (GARCH) modeling technique, which was not used by some of the previous studies.
In view of the above problem, the following research questions are raised:
1. How does oil export respond to exchange rate fluctuation?
2. How does manufacturing export respond to exchange rate fluctuation?
3. How does agricultural export respond to exchange rate fluctuation?
1.2 OBJECTIVES OF THE STUDY
The broad objective of the study is to determine impact of exchange rate fluctuations on export performance in Nigeria. Specifically, the study addresses the following objectives:
1. To trace how oil export respond to exchange rate fluctuation.
2. To trace how manufacturing export respond to exchange rate fluctuations.
3. To trace how agricultural export respond to exchange rate fluctuation.
1.3 SIGNIFICANCE OF THE STUDY
This research will serve as a future guide to the policy makers in the formulation of better and efficient policy options for managing exchange rate fluctuations in Nigeria. Also, the research will be of immense help to the general economy, as it will provide possible measures the monetary authority could adopt in order to maintain exchange rate stability so that exchange rate can influence importantly
export growth, consumption, resource allocation, employment and private and foreign investments as research has shown. Above all, it will add to the existing literature thus, providing relevant information that could guide further researchers on this subject.
1.4 SCOPE OR DELIMITATION OF THE STUDY
This study intends to look at the export performances and exchange rate fluctuations in Nigeria. Thus, it is restricted to tracing the responses of some export components to shock to the exchange rate over some periods; hence it omitted the test of hypothesis. The study covers a period of 51 years that is 1961-2011. This range is chosen to give room for enough degree of freedom that will ensure reliable estimates.
Exchange rate fluctuations can have a significant impact on a country’s export performance. The relationship between exchange rates and exports is complex and multifaceted, and it can affect a country’s trade balance, competitiveness, and overall economic health. Here are some key ways in which exchange rate fluctuations can influence export performance:
- Price Competitiveness: Exchange rate movements can directly affect the price of a country’s exports in international markets. When a country’s currency depreciates (i.e., becomes weaker) relative to other currencies, its exports become cheaper for foreign buyers. This can lead to an increase in export volumes as foreign buyers find the country’s goods more affordable. Conversely, when a currency appreciates (i.e., becomes stronger), exports may become more expensive for foreign buyers, potentially leading to a decrease in export volumes.
- Trade Balance: Exchange rate fluctuations can impact a country’s trade balance, which is the difference between the value of its exports and imports. A depreciation of the domestic currency can improve the trade balance by making exports more competitive and imports more expensive, potentially leading to a trade surplus. Conversely, an appreciation can worsen the trade balance by making exports more expensive and imports cheaper.
- Profit Margins: Exchange rate movements can affect the profit margins of exporting companies. A depreciating currency may increase the profitability of exports by allowing companies to earn more in their home currency for each unit sold abroad. Conversely, an appreciating currency may squeeze profit margins as exporters earn less in their home currency for each unit sold abroad.
- Market Diversification: Exchange rate fluctuations can influence a country’s export destinations. When a country’s currency weakens, it may become more attractive to export to a wider range of markets, as previously uncompetitive products become affordable. Conversely, a stronger currency may encourage exporters to focus on higher-value markets where price sensitivity is lower.
- Hedging and Risk Management: Exporters often use financial instruments like forward contracts and options to hedge against adverse exchange rate movements. Effective risk management can help exporters mitigate the negative effects of currency volatility on their export performance.
- Investment Decisions: Exchange rate stability or predictability can influence foreign direct investment (FDI) decisions. Investors may be more willing to invest in a country with a stable exchange rate, as this reduces the risk associated with currency fluctuations. FDI can, in turn, impact export capacity and performance.
- Economic Conditions: Exchange rate fluctuations are often linked to broader economic conditions, including inflation, interest rates, and economic growth. These factors can indirectly affect export performance by influencing overall demand for goods and services.
It’s important to note that the impact of exchange rate fluctuations on export performance can vary depending on several factors, including the flexibility of exchange rate regimes, the degree of integration into global markets, the composition of exports, and the responsiveness of demand to price changes. Additionally, government policies, such as currency intervention or trade promotion measures, can also influence the relationship between exchange rates and export performance. Therefore, a nuanced and holistic approach to analyzing this relationship is essential.