An Empirical Assessment of the Relationship Between Exchange Rate and Cotton Production in Nigeria (1981-2016)
Chapter One
Objective of the study
The primary objective of this study is to empirically assess the relationship between exchange rates and cotton production in Nigeria during the period from 1981 to 2016. To achieve this overarching goal, the study aims to accomplish the following specific objectives:
- To analyze the impact of exchange rate fluctuations on the trade competitiveness of Nigerian cotton in the global market.
- To examine how changes in exchange rates influence the cost of imported inputs for cotton cultivation and subsequently affect domestic cotton production.
- To assess the extent to which exchange rate movements impact the global demand for Nigerian cotton and its overall production.
- To provide policymakers with informed insights into the potential benefits and challenges associated with exchange rate dynamics for the growth and sustainability of the Nigerian cotton industry.
CHAPTER TWO
REVIEWED OF RELATED LITERATURE
An Overview of Foreign Exchange Rate Policy in Nigeria
An international exchange rate, also known as a foreign exchange (FX) rate, is the price of one country’s currency in terms of another country’s currency. Foreign exchange rates are relative and are expressed as the value of one currency compared to another. When selling products internationally, the exchange rate for the two trading countries’ currencies is an important factor. Foreign exchange rates, in fact, are one of the most important determinants of a countries relative level of economic health, ranking just after interest rates and inflation. Exchange rates play a vital role in a country’s level of trade, which is critical to most every free market economy in the world. Consequently, exchange rates are among the most watched, analyzed, and manipulated economic measures, (Faff, Raboert, and Andrew Marshall, 2015). The Nigerian exchange rate policy could be perceived from two major different periods since its political independence in (1960). These are the Pre-Structure Adjustment Programme (SAP) and the Post-Structure Adjustment Programme (SAP), respectively, they are discussed below:
The Pre-SAP (1960-86) Period
Certainly, there were a lot of shifts within the Nigeria foreign exchange rate policy during the 1960/85 period. Nonetheless, the monetary authorities maintained overvalued exchange rates, probably to maintain a relatively low cost of imports, particularly at the initial stages of the postindependence era. As time went on, there was policy shift in favour of gradual depreciation of the naira particularly, under the adoption of the import substitution model development in Nigeria. Incidentally, within the 1973/76 period when the need to douse the inflationary pressures arose from the monetization of the windfall gains from the crude oil boom period, monetary authorities deliberately kept the naira at an overvalued rate. However, at the wake of weak balance of payments position in 1977, a gradual depreciation of the naira became resorted to. Whatever the shifts, it is important to note that the determination of naira exchange rate within the pre-SAP period was achieved, pegging the local currency to a single intervention currency, and later to a basket of currencies. The naira overvaluation had its telling implications on the economy. Such implications include, making imports cheaper relative to domestic substitutes and exports relatively expensive and uncompetitive culminating in the encouragement of the importation of various items on a large scale at the expense of discouraged exports. It also encouraged capital flight and made for the dependence of the manufacturing sector on imported inputs. In recognition of these implications, the overvalued local currency became propped up by a pervasive system of exchange control which was not easy to administer while breeding various corrupt practices which undermined its usefulness.
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
In this chapter, we described the research procedure for this study. A research methodology is a research process adopted or employed to systematically and scientifically present the results of a study to the research audience viz. a vis, the study beneficiaries.
RESEARCH DESIGN
Research designs are perceived to be an overall strategy adopted by the researcher whereby different components of the study are integrated in a logical manner to effectively address a research problem. In this study, the researcher employed the survey research design. This is due to the nature of the study whereby the opinion and views of people are sampled. According to Singleton & Straits, (2009), Survey research can use quantitative research strategies (e.g., using questionnaires with numerically rated items), qualitative research strategies (e.g., using open-ended questions), or both strategies (i.e., mixed methods). As it is often used to describe and explore human behaviour, surveys are therefore frequently used in social and psychological research.
POPULATION OF THE STUDY
According to Udoyen (2019), a study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitutes of individuals or elements that are homogeneous in description.
This study was carried to examine an empirical assessment of the relationship between exchange rate and cotton production in Nigeria (1981-2016). CBN in Lagos forms the population of the study.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
INTRODUCTION
This chapter presents the analysis of data derived through the questionnaire and key informant interview administered on the respondents in the study area. The analysis and interpretation were derived from the findings of the study. The data analysis depicts the simple frequency and percentage of the respondents as well as interpretation of the information gathered. A total of eighty (80) questionnaires were administered to respondents of which only seventy-seven (77) were returned and validated. This was due to irregular, incomplete and inappropriate responses to some questionnaire. For this study a total of 77 was validated for the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain an empirical assessment of the relationship between exchange rate and cotton production in Nigeria (1981-2016). In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing an empirical assessment of the relationship between exchange rate and cotton production in Nigeria (1981-2016).
Summary
This study was on an empirical assessment of the relationship between exchange rate and cotton production in Nigeria (1981-2016). Three objectives were raised which included; To analyze the impact of exchange rate fluctuations on the trade competitiveness of Nigerian cotton in the global market, to examine how changes in exchange rates influence the cost of imported inputs for cotton cultivation and subsequently affect domestic cotton production, to assess the extent to which exchange rate movements impact the global demand for Nigerian cotton and its overall production and to provide policymakers with informed insights into the potential benefits and challenges associated with exchange rate dynamics for the growth and sustainability of the Nigerian cotton industry. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from CBN in Lagos state. Hypothesis was tested using Chi-Square statistical tool (SPSS).
Conclusion
In conclusion, the empirical assessment underscores that the relationship between exchange rates and cotton production in Nigeria is characterized by its intricate web of influences. As a key driver of export competitiveness, import costs, domestic demand, investment, technology adoption, inflation, and government policies, the exchange rate exerts a profound influence on the cotton sector’s dynamics. Recognizing these nuances is imperative for policymakers, industry stakeholders, and researchers alike to foster a resilient and thriving cotton production landscape in Nigeria in the face of an ever-evolving global economic context. Further research, continued monitoring, and nuanced policy responses will be essential to navigate the path ahead and harness the potential synergies between exchange rates and cotton production for the betterment of Nigeria’s agricultural and economic landscape.
Recommendation
Based on the findings of this empirical assessment of the relationship between exchange rates and cotton production in Nigeria, several recommendations emerge to guide policy, industry stakeholders, and future research endeavors:
- Exchange Rate Stability Measures: Policymakers should prioritize initiatives aimed at maintaining a stable exchange rate environment. Exchange rate volatility can pose challenges for cotton producers due to uncertainties in input costs and export competitiveness. Implementing measures to minimize abrupt fluctuations could provide a more conducive environment for planning and investment in the cotton sector.
- Export Promotion Strategies: To capitalize on favorable exchange rate conditions, the government should consider formulating and implementing export promotion strategies for cotton and cotton-based products. These strategies could involve providing targeted incentives to encourage cotton cultivation and enhance the competitiveness of Nigerian cotton on the global market.
- Risk Mitigation Mechanisms: Given the potential risks associated with exchange rate volatility, stakeholders in the cotton industry should explore risk mitigation mechanisms such as forward contracts or hedging strategies. These tools can provide a degree of certainty in revenue projections and protect cotton producers from adverse currency movements.
- Technology Transfer and Investment: Policymakers should work to attract foreign investment and technology transfer in the cotton sector. Exchange rate stability can encourage foreign investors to participate in the sector, leading to the adoption of modern farming technologies, improved production practices, and increased efficiency.
- Diversification of Cotton Products: To reduce the impact of exchange rate fluctuations on cotton-based products, stakeholders should consider diversifying their product offerings. Investing in value-added activities such as textiles and garment production can create a more resilient supply chain by reducing reliance on raw cotton exports.
- Support for Research and Innovation: Continued research into the relationship between exchange rates and cotton production is essential. This includes studying the impact of exchange rates on specific production inputs, investigating consumer preferences and behaviors related to cotton products, and assessing the efficacy of different policy measures.
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