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IMPACT OF EXCHANGE RATE VOLATILITY ON IMPORTS IN NIGERIA 1980 TO 2011

  • Type:Project
  • Chapters:5
  • Pages:86
  • Methodology:Ordinary Least Square
  • Reference:YES
  • Format:Microsoft Word
(Banking and Finance Project Topics & Materials)
IMPACT OF EXCHANGE RATE VOLATILITY ON IMPORTS IN NIGERIA 1980 to 2011
ABSTRACT

    The Study investigates the impact of exchange rate volatility on import demand in Nigeria. Apparently, the existence of such effect entails a level of external sector or external price impact on importation in the country. Econometric tools were employed in the analysis using data obtained from the Central Bank of Nigeria for the period 1980 to 2011. The GARCH estimation model was used to determine the exchange rate volatility data in the study while Ordinary Least squares estimations was employed in the estimation of the model. Results from the empirical analysis generally show a weak exchange rate volatility effect on importation in Nigeria.
    Specifically, the results show that exchange rate volatility does not have a significant effect on import demand in Nigeria; a leverage effect in future exchange rates exists in the Nigerian context; exchange rate volatility seems to be persistent in Nigeria. The path to adjustment is oscillatory in nature rather than asymptotic; real income, general prices and investment expenditure exert positive and significant effects on import demand in Nigeria. As these factors rise, the demand for import also rises; price level is the most elastic factor in import demand in Nigeria.  
    The study recommends among others that authorities in charge of exchange rate management must consider less of import demand and more of export regimes in the management of the exchange rate. In the country, export performance seems to be the stronger factor in pushing exchange rate behaviour over time. Also, Policy of subsidization must be reduced in the country. The elimination of government subsidies on consumables will provide enough leverage to reduce the import bill.  
TABLE OF CONTENT
CHAPTER ONE: INTRODUCTION
1.1    Background of the Study                
1.2    Statement of Research Problem            
1.3    Objective of the Study                
1.4    Significance of the Study            
1.5    Hypothesis of the Study            
1.6    Limitation of the Study                
CHAPTER TWO: LITERATURE REVIEW
2.1    Introduction                    
2.2    Trend of Import                    
2.3    Evolution of Foreign Exchange Market in Nigeria    
2.4    Exchange Rate Volatility in Nigeria    
2.5    Nigeria Trade and Import        
2.6      Nigeria Import                        
2.7    Exchange Rate Volatility and Nigeria’s Import    
2.8    Effects of Exchange Rate Volatility on Nigeria
Economy                            
2.9    Relationship between Oil Trade and Exchange
Rate                            
2.10    Measuring Exchange Rate Volatility            
CHAPTER THREE: METHODOLOGY OF THE STUDY
3.1     Estimation Framework                
3.2     Estimation and Data Issues            
CHAPTER FOUR: EMPIRICAL ANALYSIS
4.1    Introduction                     
4.2    Exchange Rate Volatility                
4.3     Exchange Rate Volatility and Import Demand        
CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1     Summary of Findings                
5.2     Recommendations                    
5.3     Conclusion                            
    Bibliography                        
    Appendix                         
CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND OF THE STUDY
    Foreign exchange rate is the rate at which one country’s currency is exchanged for another. It is the price of one currency in terms of another currency, (Jhongon, 2002). The debate on exchange rate variability. At one end, the argument supports the fix exchange rate while the other supports the floating system (floating exchange rate). These arguments stem from dissatisfaction with either regime. In a fixed exchange rate regime, the government ( central bank acting on behalf of government )interviews in the currency market so that the exchange  rate stays close too an exchange rate target. In other words, the exchange is fixed administratively. In a flexible exchange rate regime, the exchange rate is determined directly by market forces and is liable to fluctuate continually as dictated by changing market condition (Isard, 1999; Kenen, 1995).
Exchange rate is the prominent determinant of word trade. Receiving much attention in the context of global imbalances.  Past decades witnessed disputes on trade and exchange rates issues. Recent disputes on trade surplus and deficit between the united state of America (U S A) and China is believed to be resolvable through the adjustments to exchange rate by China. Disparity in China’s Yuam exchange rate to the united state dollar (U.S Dollar favours China trade surplus with United States (USA). The sum of the absolute value of price elastricities of import to exceed one for an appreciation of the result in a deterioration of a country’s balance of trade.
    Like in China, the central bank of Nigeria (CBN) allows a market determination of her naira to other foreign currencies: intervening intermittently   to redirect and stabilize it, as in other economic, such action are to achieve overall economic growth.
In Nigeria, exchange rate management has undergone significant changes over the past four decades. In the 1960s, Nigeria operated a fixed exchange ate regime. The currency was fixed at per  with the British Pounds and it lasted  Fril  1967, when the British pounds as devalued owing to the civil war in 1967,  the monetary authority  did not consider is experience to devalued the Nigerian pounds along side the British pound when the British authority devalued the pound following the international financial crisis  of the early 1970, which led to the devaluation of the united state of  America dollar, Nigerian currency was once again pegged to the united state of America Dollar.
With this development, the sever drawback in pegging the Nigerian currency to a single currency became obvious. A clear case was that of Naira had to undergo a de-facto devaluation in sympathy w with the dollar when economic fundamental dictated otherwise leg external reserve rose rapidly by over 1000% from N10m in 1973 to 3.4 Billion on 1975). It was against this backdrop that the need to independently manage the exchange rate of Naira was firmly established. Hence, in 1978, the monetary authorities pegged the naira to a basket of 12 currencies of her major trading partners. However, the sharp fall in international oil price and consequent decline in foreign exchange receipts were such that the economy could not meet it’s international financial commitments, persistent increase in import coupled with feeling external reserve position severely compromised credit worthiness of the country abroad.
    The flexible exchange rate regime produced a significant volatility and uncertainty on the exchange rate of the naira which accounts for fluctuations in import bills. This aroused a great concern a exchange rate volatility, which stems, from shock in the financial market, level of output income amongst others, yield conflicting results about it’s impact on trade Arize 1998). The international monetary fund 9IMF) 1984 study argued that exchange rate variability tends to induce macro economic phenomena that are undesirables like inflation and balance of payment problems. For instances, if exchange rate volatility leads to increase imports, trade adjustment programmes that discourages import expansion of trade liberalization policy pay be doomed by a variable exchange rate and could precipitate a balance of payment crisis (Arize 1998)
    Most African countries adopted economic reforms programmes in the 1980s, with exchange rte liberalization as a major component. Exchange rates in Nigeria have been highly volatility since the adoption of the flexible exchange rates. Exchange rate volatility ranged between 0.04 and 140% in 1973 and 2006, respectively and am average of 75% in 1973-2006. Correspondingly, imports growth fell from 6.7% in the 1970s to 2.7% in the 1980. The perceived correspondence between exchange rate volatility and imports raise some pertinent questions.
    The volatile nature of exchange rate especially since the demise of the Bretton woods system of exchange rates and the consequent adoption of a flexible one (flexible exchange rate) was a major source of concern to developing countries like Nigeria. The anxiety principally as that exchange rate are more volatile in a floating regime, thereby constituting a source of risk to trade and can therefore, negatively affect import which are critical to the growth of developing countries (Hasan and Wallace, 2005).
    The problem of volatility are not unknown to government and to this policies like the monetary, fiscal, trade policy have  also been carried out like Aliyu (2009) Akpan (2008 Ogunceye (2008)  Obiora and Igue (2006)
    Exchange rate volatility was substantially much higher than early advocates of floating had expected. This is the reason for the high exchange rate volatility in Africa especially in Nigeria. Since the flexible exchange rate system was adopted, the exchange rate volatility ranged between 0.04 and 140% in 1973 and 2006 and the average of 75% in 1973 -2006
1.2    STATEMENT OF RESEARCH PROBLEM
    Exchange rate volatility some level of impacts on imports in Nigeria, which may be positries or negative. It also stipulates that developing countries like Nigeria have experience a very high level of volatility in exchange rate since the demise of the Bretton wood system o exchange rates.
The study also indicates that there is need for proper evaluation of this impact which the exchange rate volatility may have on import in developing countries especially in Nigeria being the case study. This is why, it is very important to determine government position regarding the exchange rate with respect to import.
    Despite the roles of exchange rate in the development of any country’s economy, yet it concern authority ie proper attention from the concern authority ie proper attention have not that is a prominent determinant  of world trade
    In specific terms, this research work seeks to provide answers to the following questions
i.    Is there ay relationship between exchange rate volatility and imports in Nigeria?
ii.    What is the magnitude of the effect of this relationship?
1.3    OBJECTIVE OF THE STUDY
        The main objective of the study are to;
I    Determine the effect of exchange rate volatility on imports in Nigeria.
II    Determine the magnitude of the effect of the relationship between exchange rate volatility and imports in Nigeria.
1.4    SIGNIFICANCE OF THE STUDY
The exchange rate volatility on imports in Nigeria being the subject matter
have it’s significance in the Nigerian trade and economy. It has been recognized in previous studies that maintaining a relatively stable exchange rate is important in boosting economic growth. Is important in boosting economic growth. Volatility of exchange rate induce uncertainty and risk in investment decision with destabilizing impact on the macroeconomic performance of the economy
Operators in the private concerned about volatility of exchange rate because of it’s effects on their investment which may be capital losses or gain. Exchange rate volatility has asymmetric effect on macro economic variables.
With the knowledge that appreciation of exchange rate result in increase import and reduced export while depreciation would expand export and discourage import. Also cause a shift from foreign goods to domestic goods, Hence, leading to diversion of income  from importing countries to countries  exporting through shift in terms  of trade and this tends to have impact on the exporting and importing countries economic growth. It is also important to note that  exchange rate depreciation has a negative effects on the developing countries and the appreciation of exchange rate has a positive effects on the developing countries as well.
1.5    HYOTHESIS OF THE STUDY
    The main hypothesis of the study is;
Exchange rate volatility has no significant effect on imports in Nigeria
1.6    LIMITATION OF THE STUDY
Yomere, G.O and Agbonifoh B.A (1999) “Research methodology in the     management and social sciences”; Benin-City, Uniben Press, Benin-City. Tenreyro S.    (2006) “on the trade impact of nominal exchange rate volatility” Working paper 9435 National Bureau of Economic research Rose, A.K. (2000) “one money, one market: the effect of common currencies on trade” Economic policy, 9-45 Oyejrde, T-A (1986)”the effects of trade and exchange rate policies on Agriculture in Nigeria” Research report 5, international food policy Research institute, Washington D.C C B N (2007b) “the external of naira exchange rate  misalsnment    “Research and statistics  department, CBN.

IMPACT OF EXCHANGE RATE VOLATILITY ON IMPORTS IN NIGERIA 1980 TO 2011

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Details

Type Project
Department Banking and Finance
Project ID BFN0878
Price ₦3,000 ($9)
Chapters 5 Chapters
No of Pages 86 Pages
Methodology Ordinary Least Square
Reference YES
Format Microsoft Word

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    Details

    Type Project
    Department Banking and Finance
    Project ID BFN0878
    Price ₦3,000 ($9)
    Chapters 5 Chapters
    No of Pages 86 Pages
    Methodology Ordinary Least Square
    Reference YES
    Format Microsoft Word

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