An Evaluation of Impact of Foreign Exchange on Importation and Exportation of Goods in Nigeria From 1980-2018
CHAPTER ONE
Objectives of the Study
The study intends to investigate the extent to which exchange rate impacts on the volume of international trading activities in Nigeria. The study will examine the seeming mismatch between fluctuating exchange rates and enhanced international trading transactions between Nigeria and her trading partners. The study will also accomplish the following:
- Examine the effects of exchange rate on exports out of Nigeria.
- Determine the influence of exchange rate on imports into Nigeria.
CHAPTER TWO
LITERATURE REVIEW
The relevant literature associated with this study will be reviewed from the standpoint of a conceptual, theoretical and empirical framework.
Conceptual Framework
The conceptual framework of this study was based on the variables identified in the study.
The Meaning of International Trade
International trade (foreign trade) could be defined as the exchange of goods and services across international borders. In its purest form, it is the exchange of capital goods and services between countries or trade across international borders or territories (Wikipedia, 2015). Esezobor (2009) defined international trade as “trading between sovereign states”. According to the Encyclopedia Britannica, “International trade is the sale and purchase of consumer or capital goods and services, raw materials, securities or gold across national borders. Such transactions may be accomplished by barter or more typically through the exchange of national currencies”. The Encyclopedia Americana defined international trade as ‘’commercial exchanges between residents of different sovereign political units. It becomes clearly distinguished from local or domestic trade only as nations emerge and begin to formulate national commercial policies, and then it becomes international trade”.
The Grolier Family Encyclopedia described international trade as “the exchange of goods and services among countries”. This definition implies that countries tend to specialize in the production and export of those goods and services which they can produce relatively cheaply and import things that are produced more efficiently elsewhere. Thus, the main bases of international trade are exports and imports. These are briefly reviewed below:
Exports
One major function of international trade is to see that goods produced in one country are shipped to another state for future sale or trade. The sale of each good adds to the producing nations gross output. Exports are therefore goods and services one country sells to others.
Exports are one of the oldest forms of economic transfer and occur on a large scale between nations that have fewer restrictions on international trade, such as tariffs or subside. According to Lequiller and Blades (2006) “the term export derives from the goods and services out of the port of a country. The seller of such goods and services is referred to as an exporter, whereas the overseas based buyer is referred to as an importer”. According to national accounts, exports consist of transactions in goods and services (sales, barter, gifts or grants) from residents to non-residents. Smuggled goods must be included in the export measurement”. In national accounts any direct purchases by non-residents in the country’s economic territory are recorded as service exports; therefore all expenditures by foreign tourists in the country’s economic region are considered part of the exports services of that country. Also, international flows of illegal services must be included. Exports also include the distribution of information that can be sent in the form of an e-mail, fax or can be shared during a telephone conversation (Ojukwu, 2011). Thus, in economics, an export refers to any good or commodity transported from one country to another in a legitimate fashion, typically for use in trade. Many countries engage in export trade.
CHAPTER THREE
RESEARCH METHODOLOGY
Estimation Technique
To ascertain the impact of exchange rate on Importation and exportation of goods in Nigeria, an ex-post facto research design was employed using data set culled from the CBN statistical bulletin.
Techniques of Data Analysis
The statistical tools employed in analyzing the data of this study were; The Ordinary Least Square (OLS), co-integration/ECM and the Granger Causality test methods. The choice of these econometric approaches was premised on the fact that time series data are sometimes pronged to fluctuation that may cumulate into spurious regression result. The econometric software of E- view 8.0 was used in running the model.
While the Augmented Dickey-Fuller unit root is used for preliminary analysis; ordinary least square (OLS) regression analysis was used for short-run estimates. A combination of Johansen Co-integration test, Vector Auto Regression analysis, and Granger causality test, Variance Decomposition, Impulse Response tests and the ARCH / GARCH modelling techniques are used for long run estimation. All the tests helped to confirm the integrity of our model, i.e. if exchange rate volatility has a clustering effect on the proxies of international trade.
CHAPTER FOUR
PRESENTATION AND ANALYSIS OF RESULTS
PRESENTATION OF RESULTS
Two models were estimated in this research work based on the topic the researcher is discussing. The models were estimated using the ordinary least square (OLS) method. The result of the models are presented below as thus:
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
Summary
The main findings of this study are itemized underneath:
- The three variables under review, namely real exchange rate (REER), Export (EXPT) and Import (IMPT) became stationary at the second difference.
- While real effective exchange rate averages N83.32 billion, it ranged from N19.07 to N155.75 with a standard deviation of 37.15. Imports averages N7877.15billion. It ranges from N751.86 to N19280 billion with a standard deviation of 5667.09. Export trades average N5462.5 billion. It ranges from N562.63 billion to N13445.11 with a standard deviation of 4353.05.
- The correlation coefficient between the real effective exchange rate (REER) and import trades stood at 0.11. It also maintained a positive relationship of 0.28 with export trades for the period under review.
- The shape and pattern of the normality test above suggest that the series are normally distributed.
- The VAR model estimates imply that there is an inverse relationship between Export, Import and REER in current periods. A unit increase in export and import in a particular year leads to about 0.9% and 0.4% decrease in REER respectively. Real effective exchange rate (REER) impacted on itself in the first and second lags
- The causality effect of real exchange rates on the variables of international trade in Nigeria reveals that import causes exports but that exports do not granger cause imports.
- Variance decomposition reveals that at one-year horizon, 100% of the variance in REER is explained by their shocks. Again, at a ten-year horizon, 86.56 % of the variance in REER is explained by their shocks while the prices of EXPORT and IMPORT jointly explain the outstanding value of 13.44%. These results suggest that at the end of 10 years, fluctuations in the real effective exchange rate are partly explained by their shocks as well as that of exports and imports.
- Impulse response analysis indicates that export to the real effective exchange rate was negative throughout the ten periods. It was majorly positive for imports during the period under review.
- Since the observed L M Statistics (6.9 ) is significant; we reject the null hypothesis that there are no first-order Arch effects. Again the T and F-statistics (6.9, 3.05) are quite significant. This corroborates our earlier claim that there is a first-order Arch effect.
- ARCH Model of order 1 has an average return of 97.6. The time-varying volatility includes a constant component of 2.18 plus a component which depends on past error of 1.33.
- The ARCH effect is significant.
- The GARCH term was also observed to be significant
- Though the Coefficient of GARCH in the mean term is negative, it produced a singular covariance which in itself is not unique.
Conclusion
The above results indicate that there is evidence of volatility clustering of real effective exchange rate (REER) on import and export trading activities in Nigeria. This could have severe implications for growth prospects for Nigeria. A reduction in the growth of exports could reduce the foreign exchange earnings available for the financing of developmental projects. At the same time, a decline in imports could affect domestic production and consumption. It could also impinge negatively on the balance of payment positions for Nigeria.
Recommendations
The effect of exchange rate volatilities on exports and imports in Nigeria require strategy mediations. There is a need to consider monetary and fiscal interventions to help mitigate its impact. This is based on the fact that financial shocks often exacerbate exchange rate volatilities.
There is need for diversification of the Nigerian economy to avoid overreliance on one product and reduce importation.
The study also recommends the exchange rate and trade policies that will promote greater exchange rate stability and trade conditions that will promote domestic production in the economy.
This the study believe will enhance non-oil exports and reduce importation. To achieve this, government should deliver efficient infrastructural services especially power supply and other energy resources.
Policy Implication
The policy implication of the study hinged on the need to steadily control and regulate exchange rate which if not checked will affect the level of export and import.
References
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