IMPACT OF EXCHANGE RATE FLUCTUATIONS ON AGRICULTURAL EXPORTS IN NIGERIA
This paper analyses short and long-run impacts of exchange rate fluctuations on agricultural exports volume in Nigeria. Annual time series secondary data covering a period of 34 years (1981-2014). Autoregressive Distributed lag (ARDL) Model was used as the tool of analysis; the independent variables include official exchange rate, agricultural loans and relative prices of agricultural exports while the dependent variable is agricultural export volume. Generalized Autoregressive Conditional Heteroskedasticity (GARCH) was used to estimate the volatility of exchange rates, and other diagnostic tests. The short-run results revealed that official exchange rate and agricultural loans have significant positive impact on agricultural export volumes which has the effect of expanding the dependent variable while, relative prices of agricultural exports has significant negative impact on agricultural exports volume which also has the effect of contracting the dependent variable. The long-run results revealed similar findings with the exception of official exchange rate which has statistically significant negative impact on agricultural exports volume. i.e. contrary to normal expectations. The paper recommends the relevance of stabilizing exchange rate from the present downward trend and providing farm equipment and input on credit basis by the government and private sector institutions rather than loanable fund that can be redirected to other activities other than agriculture.
Keywords: Exchange rate, Agricultural Exports, Autoregressive Distribution Lag Model
Prior to independence in 1960 up to early 1960s, the economy was characterized by the dominance of exports (mostly agriculture) and commercial activities. In spite of the fluctuations in world commodity prices, agriculture contributed about 65 per cent to GDP and represented almost 70 per cent of total exports. Agriculture provided the foreign exchange that was utilized in importing raw materials and capital goods as the peasant farmers produced enough to feed the entire population, the various Marketing Boards generated much revenue, the surplus of which was used by government to develop the basic infrastructure needed for long term development(Tule, 2015).
Since the emergence of the oil industry in the late 1960s, the role of agriculture in the economy has been on the downward trend especially its contribution to GDP, where its share to GDP fell from 48.23 per cent in 1971 to almost 21 per cent 1n 1977 (Anyanwu et al 1997).However, according to Mbutor and Al-Hassan (2013) agricultural sector contribution to growth in GDP grew only at 6.9 per cent in 2003. On the average, the sector grew at 7.2 per cent between 2005 and 2007. From 2008 to 2011, growth of the agricultural sector began to decline. It grew by 6.3 per cent, 5.9 per cent, 5.8 per cent and 5.7 per cent in 2008, 2009, 2010 and 2011, respectively. By 2012, the growth in the agricultural sector declined to 3.9 per cent. In 2013 agricultural production grew by 4.5 per cent, favorable weather conditions and sustained implementations of the initiatives under the Agricultural Programme (ATAP) were largely responsible for the growth in the sector (CBN, 2014).
Despite its weakness, agriculture is still the dominant sector of the Nigerian economy, contributing about 42.00 per cent from 2000-2007 of the Gross Domestic Products (GDP) which fell to 32.85 per cent in 2008 consequent upon Global Financial Crisis and the upward trend continued in 2009 to 37.05 per cent and again the share fell to 30.33 per cent in 2010 but later to pick up slowly in 2011 and 2012 as 30.99 per cent and 33.08 per cent respectively (CBN, 2012).
Countries in the world attempted to accelerate economic growth by designing export-led growth strategy. For example, Mehra (1991) affirmed that the adoption of Structural Adjustment Programme in many African countries has been to encourage the shift to exportable cash crops. Fanta and Teshale (2014) asserted that a robust economic performance of the “Four Asian Tigers” in the second half of the 20th century has been largely attributed to the performance of the external sector where the export sector was given a greater emphasis. This indicates the importance of exchange market to economic growth.
The Nigerian foreign exchange market is of recent origin. In fact, prior to 1962, there was no formal foreign exchange market in the country.Linked with a long tie with former colonial master,Britain, the Nigerian pound was tied to the British Pound Sterling with easy convertibility. This scenario contributed largely to late development of an active foreign exchange market in Nigeria. During this period, foreign exchange earned by the private sector (mainly from agriculture) was held in balances abroad by commercial banks which acted as agents for local exporters. Sequel to the establishment of the Central Bank of Nigeria (CBN) in 1958, and the subsequent centralization of foreign exchange market became imperative. This ultimately led to the enactment of the first exchange control law in Nigeria- the Exchange Control Act 1962 (Okororie, 2008).
Owing to the strong link between exchange rate and agricultural export especially during flexible exchange rate regime, a period of decrease in agricultural exports volume in associated with increase in earnings. According to Essien (1990) cocoa products of 116.2 million kg earned ₦239.1 million in 1985 but in 1987 cocoa products of 92.4 million kg earned ₦419.5 million and since then the receipt has continued to increase with the exception of 1984 despite lower export volume. The monetary value of agricultural exports which stood at an average of ₦725.8 million in 1981-1989 increased to ₦802.7 million in 1990-1999. On the other hand, the rate of agricultural exports to total exports ratio during the same period stood at 0.038, but declined to 0.014. Although the export baskets also expanded with non- traditional export commodities such as tubers, fruits and spices coming on board (Anyanwu, et al 2010).
From the foregoing this paper intends to analyses the impact of foreign exchange on agricultural exports in Nigeria and is presented in five sections, following the introduction, section two is theoretical framework and empirical literature review while section three cover themethodology and sections four and five are devoted to results and conclusions and policy implications respectively.
1.2 Statement of the problem
When the economy depended on agricultural exports, exchange rate volatility was less pronounced. Ogunleye 2010 (as cited in Umaru et al 2013) noted that the real exchange rate in Nigeria has been principally influenced by external shocks resulting from the vagaries of world price of agricultural commodities and oil price; both are main sources of Nigerian export and foreign exchange earnings. And according to Imimole and Enoma, 2011 (as cited in Oyinbo et al 2014) the exchange rate over-valuation prior to deregulation helped to cheapen imports of competing food items as well as agro-based and industrial raw-materials and the result was rapid expansion in the importation of these goods to the detriment of local production of similar goods thereby reduces agricultural exports.
During the period of fixed exchange rate, Nigerian currency was perceived to have been over-valued, in order to find a realistic value of the naira;a Second-tier Foreign Exchange Market (SFEM) emerged in September, 1986 under the Structural Adjustment Programme which marked the beginning of flexible or floating exchange rate regimes. Various related market-based exchange rate policies have been experienced and different downward exchange rates as; Dual exchange rate system (introduction of SFEM with the initial First-tier Foreign Exchange Market) in September, 1986 the value of naira stood at 2.0206/$, Dutch Auction System (DAS) of bidding in April, 1987 made naira to depreciate to 4.0179/$, single enlarged Foreign Exchange Market with various pricing methods. In July 1987 naira depreciated to 4.2723/$, creation of Inter-Bank Foreign Exchange Market (IFEM) in January, 1989 naira depreciated to 12.9377/$, pegged exchange rate system in 1994 naira stood at 21.8861/$, Autonomous Foreign Exchange Market (AFEM) in 1995 naira remained unchanged at 21.8861/$, re-introduction of IFEM in October, 1999 naira continued depreciating to 108.000/$, Retail Dutch Auction System (rDAS) of foreign exchange management in July, 2002 naira depreciated to 130.8500/$, Wholesale Dutch Auction System (wDAS) in February, 2006 to October, 2013 naira depreciated to 141.7600 and again rDAS in 2013 to date (Omotosho, 2015).
Despite the adoption of these policies at various stages to maintain a stable exchange rates, the situation remained abortive, exchange rate fluctuation continued especially after the Structural Adjustment Programme (post-SAP era). Therefore, the downward trend of the country’s currency impacted greatly on agricultural export product.
Previous studies conducted on the relationship between exchange rate and agricultural exports mostly employed OLS, VECM or VAR model to measure either short-run or long-run impact such as Okputu et al (2012), Umaru et al (2013), Oyinbo et al (2014) and Fidan (2008). While studies like that of Essien et al (2011) used single crop-cocoa as the proxy of agricultural exports. This study on the other hand used fourteen (14) cash crops (cocoa inclusive) as the dependent variable and also employed Autoregressive Distributed Lag (ARDL) model as an analytical tool in the study. This technique has the advantage over VECM or VAR as it is suitable and applicable for small sample size and it can also estimate both short-run and long-run relationships simultaneously.
Consequently, exchange rate fluctuations discourage firms from undertaking investment, innovation and trade, it may also deter firms from entering into export markets, thereby weakening investors’ confidence in the sector, and also raises the price of imported inputs such as seeds, fertilizers, pesticides, and capital equipment thereby reducing the agricultural commodities and income of farmers, and exchange rate risk which leads to capital reversal considered unfavorable for the economy at this trying times. There is therefore, the need to conduct study which will investigate the impact of exchange rate fluctuations on agricultural export in Nigeria from 1981 to 2014 on four variables namely; agricultural export volume, exchange rates, relative price of agricultural export and agricultural loan.
In view of the foregoing this study intends to answer the following research questions:
(1) To what extent do exchange rate fluctuations have impact on agricultural exports volume?
(2) To what extent do relative export price have impact on agricultural exports volume?
(3) To what extent do agricultural loans have impact on agricultural exports volume?
1.3Objectives of the Study
The general objective of the study is to empirically analyze the impact of exchange rate fluctuations on agricultural export volumes in Nigeria.
Specific objectives include:
(i) To investigate impact of relative exports price on the agricultural exports volumes.(ii) To evaluate the effect ofagricultural loan on agricultural exports volume.
1.4 Research Hypotheses
The following hypotheses are stated for this study.
HO1: Exchange rate fluctuations have no significant Impact on agricultural exports volume.
HO2: Agricultural exports prices have no significant impact on agricultural exports volume.
HO3: agricultural loans have no significant impact on agricultural exports volume..