THE EFFECTS OF FOREIGN EXCHANGE – MARKET DEREGULATION ON AGRICULTURAL PRODUCE IN NIGERIA

 ABSTRACT

The agricultural sector is one of the leading sectors in the Nigerian economy in terms of its contributions to income, employment, and domestic food supply. The problem of the effect of deregulation in the Foreign exchange market which in advertently have impacts on the performance of agricultural produce is an issue of concern in the agricultural sector in Nigeria. The main objective of this study is to evaluate the effect of exchange rate deregulation on the Nigerian agricultural produce while the specific objectives includes: (i) to examine the relationship between real exchange rate and agricultural produce in Nigeria; (ii) is there a relationship between exchange rate and agriculture produce; and The data were obtained from Central Bank of Nigeria statistical bulletin other secondary sources for the period in view. The regression analysis techniques was employed in analyzing the relevant data. This study revealed that: (i) the foreign exchange market has a significant effect level of significant on agricultural produce in Nigeria  Based on the findings, the study concludes that foreign exchange market deregulation has significant effects on the agricultural produce in Nigeria and that there exist a relationship between the foreign exchange rate and agricultural produce in Nigeria. Thus the study recommendations among others includes; (i) Nigerian government should ensure the stability of level of the real exchange rate especially in the short run, trade policy actions should be aimed at stabilizing the export market in agriculture in order to yield deserve results; and (ii) federal government should embark on improving basic amenities like electricity, transportation, water supply, and telecommunication, human resource development, instead of implementing policies in an unhealthy economic and social structure.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The agricultural sector is one of the leading sectors in the Nigerian economy in terms of its contributions to income, employment, and domestic food supply (Omojimite, 2012). At Nigeria independence in 1960, agriculture was the mainstay of the Nigerian economy. Akiri and Adofu (2017) are of the opinion that peasant agricultural production for export provided the stimulus to Nigeria’s overall economic growth. Agriculture provided employment to over 30% of the population and accounted for over 70% of total food consumption. (UNDP, 2009)  It also provided raw materials for industry, export earnings to finance imports and foreign exchange. Despite the immense potentials of agriculture in Nigeria, food production to meet local demand has been a challenge over the years and as noted by Oparaeke (2009). if the current food production trend of 1.35 per cent is not increased to tally with or surpass the population growth rate, then the country will be in for a turbulent future. In a bid to increase food production in Nigeria over the years, several policy reforms have been put in place by successive governments and one of such policy reforms in time past is the Structural Adjustment Programme (SAP) introduced in July 1986 (Oyinbo and Emmanuel, 2012). The Structural adjustment programme  aimed at facilitating economic growth as a means of jump-starting the economy towards sustainable economic growth and development. The emergence of Structural adjustment programme in Nigeria embraced exchange rate deregulation and thus, deregulation placed much emphasis on the market forces in determining the prices of goods and services and allocating the resources within the economy (Idowu,  Et al, 2007).

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 (2011) 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 20^th 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). Agricultural sector was the main stay of the Nigeria economy before independence and immediately after it. The Evidence reveals that agriculture provided the needed food for the population as well as serving as major foreign exchange earnings for the country. It provides the means of livelihood for over 70 percent of the population, andmajor sources of raw-materials for the agro-allied industries (Alabi, 2014). The agricultural sector in periods immediately after independence (1965-1969) performed creditably, the roles highlighted above, to such an extent that the regional development witnessed during the period were linked directly to agricultural development (Olalokuet al 2010, Abolagba,2010).

1.2 STATEMENT OF THE PROBLEM

There has not been a consensus among academic economists regarding the impact of exchange rate variations on economic variables. However, the traditional view is that fluctuations in exchange rates affect relative domestic and foreign prices, causing expenditures to shift between domestic and foreign goods (Obstfeld, 2002). Several economists and policy analysts to mention a few had focused considerable research attention on Nigeria’s non-oil trade behaviours; a prominent feature of these studies has been a lack of consensus on the suitability of trade and exchange rate deregulation in the Nigerian case. Since the inception of exchange rate deregulation in Nigeria, there have been fluctuations in the value of the naira. However, exchange rate of the naira to the US dollars was relatively stable in 2010 (CBN, 2010). The average exchange rate of the naira at the Whole Sale Dutch Auction System (WDAS) segment of the foreign exchange market in 2010 was 150.30 per US dollars; a depreciation of 0.9 per cent compared to the level in 2009. A market driven exchange rate policy is expected to be important in determining the importation of inputs for agricultural production and, the export of agricultural produce through its influence on prices but it is worth noting that there exists a scarcity of empirical information on the relationship between exchange rate deregulation and agricultural gross domestic product in Nigeria which is in line with Petreski (2009), who posited that the relationship between exchange rate and agricultural produce remains blurred and requires in-depth empirical investigation. This study was therefore, designed with a specific objective to fill the gap in research by providing empirical information on the causal relationship between exchange rate deregulation and agricultural produce in Nigeria. This study focused on the issue of deregulation of exchange rate on the agricultural produce in Nigeria. Recently, there is much debate regarding the policies needed to sustain rapid growth and promote productivity in the agricultural sector in Nigeria. Questions about external competitiveness, exchange rate fluctuations, and the appropriate exchange rate policy have featured prominently in this debate.  Taking a somewhat broader perspective, exchange rate fluctuations can have significant effects, for at least two reasons; first, even short-term real exchange rate volatility can impose large welfare costs. Especially in a context of underdeveloped financial markets, where firms and households face cash-flow constraints, such volatility reduces the level of international trade, affects investment decision, and hinders growth possibilities.

Second, such welfare costs are magnified in the case of prolonged and sustained exchange rate fluctuation, which can badly distort resource allocation. Macroeconomic policies can then be used to smooth “excessive” short-term changes and to correct any emerging misalignment.

1.3 Research Questions

The following research questions were formulated by the researcher to aid the successful completion of the study;

1. Is there effect of foreign exchange market deregulation on agricultural produce in Nigeria?
2. Is there any significant relationship between real exchange rate and agricultural produce in Nigeria?

iii.        Are they factors that determines real exchange rate in Nigeria?

1.4 Objectives of the Study

The study has one main objective, which is further broken down into general and specific objective, the general objective is to examine the effects of foreign exchange market deregulation on agricultural produce in Nigeria

1. i) To examine the effect of foreign exchange market deregulation on agricultural produce in Nigeria.
2. ii) To examine the relationship between real exchange rate and agricultural produce in Nigeria.

iii)  To ascertain the determinants of real exchange rate in Nigeria.

1.5 Justification for the Study

There are various studies that have investigated the influence of exchange rate fluctuations on agricultural exports. For instance (Batten and Belongia 2014); Kandilov (2013); Smith (2003); Mustapha and Nishat (2004); Omojimite and Akpokodje (2010); Nessabian and Naghizadeh (2012) and Yanikkaya et al (2013) all assert that there is a negative relationship between real exchange rate and agricultural exports from the demand side

Essien et al (2011) stated that export price is a function of agricultural exports. Therefore, export price has a positive relationship with the agricultural exports. This study adopts the study of Aliyu (2010), but using different variables such as total output of all agricultural produce in Nigeria measured in tonnes, and the analysis concentrated on the effect of deregulation of exchange rate on the agricultural output.

The expected outcome(s) of this study will be of benefit to various stakeholders’ i.e. relevant government policy makers, investors in the agricultural sector and those in the academic sector, to serve as a reference for further studies on this subject matter.

1.6 Formulation of Hypotheses

The hypotheses for this study are stated in null form. These include:

H0₁:     The real exchange rate of Naira has no significant effect on agricultural produce.

H0₂:     There is no significant relationship between real exchange rate and agricultural produce in Nigeria.

1.7 Scope and Limitations of the Study

The study is structured to evaluate the effect of foreign exchange  market deregulation in relation to agricultural produce in Nigeria. Thus, the study covers various foreign exchange regimes in relation to agricultural produce

1.8 Definition of Terms

1. Exchange rate: This is the price of one country’s currency in terms of another.
2. Devaluation: Devaluation is a fall in the external value of one currency against another.

iii.        Foreign exchange: Foreign exchange is a means of payment for international transaction; it is made up of currencies of other countries that are freely acceptable in settling international transactions.

1. Dutch auction System (DAS): This is a method of exchange rate determination through auctions where the bidders pay per their bid rates.
2. Exchange control: This is a foreign exchange arrangement in which the government purchase all coming foreign exchange and is the only source from which foreign.
3. Agriculture: Agriculture may be defined as the production, processing, marketing and distribution of crops and livestock products.

Related Project Topics :