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An Assessment Of The Impact Of Exchange Rates On The Volume Of Import In Nigeria (2005-2020)

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An Assessment Of The Impact Of Exchange Rates On The Volume Of Import In Nigeria (2005-2020)

Abstract

This study was on an assessment of the impact of exchange rates on the volume of import in Nigeria (2005-2020).  The total population for the study is 200 staff of CBN, Lagos state. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made customer care officer, bank officers, senior staff and junior staff were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies

Chapter one

Introduction

1.1Background of the study

After several years of exchange rate floating among countries there is yet to emerge a consensus among academic economists regarding the impact of exchange fluctuations on economic variables like import. 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). The new view is that relative prices are not much affected by exchange rate fluctuations in the short-run (Obstfeld, 2002, and Engel, 2002).

In contrast to this debate among academic economists, businesspeople appear convinced that exchange rate fluctuations have real effects. Executives, especially of import firms, agonize over declining imports when their home currency depreciates in nominal terms. This was pointed out by a Nigerian importer during one of the economic forums held in Abuja.

 

Importers expend much time and resources planning hedging strategies, to lessen the impact of exchange rate fluctuations on their imports. They also expend much time and resources lobbying policymakers, to persuade them to stabilize currencies, either by intervening in foreign exchange markets, or by more extreme measures such as fixing exchange rates.

Available evidence generally suggests that most developing countries registered a persistent decline in their foreign exchange earnings from the early 1980s. This is attributed largely to the collapse of commodity prices in the world market. Combined with this, there are two principal factors. First, is reduced foreign lending and second is the increased cost of external borrowing.

This triggered a series of developments in most developing countries. It is a statement of fact that external trade dominates government revenue in these countries. Both imports and exports of developing countries are subject to periodic fluctuations in the world market as evidence in the 2008 global economic meltdown, and revenue from this source tends to fluctuate accordingly. Thus, it was not surprising that the collapse of commodity export prices in the early 1980s engendered fiscal crises in most African countries, as reflected in their huge budget deficits. In part, this led to the adoption of economic reform programmes.

However, there is little systematic research, examining whether exchange rates affect Nigerian import. This study fills the gap by examining the impact of exchange rate fluctuations affects the volume of imports to Nigeria.

STATEMENT OF THE PROBLEM

The importance of foreign trade in the development process has been of interest to development economists and policy makers alike. Imports are a key part of international trade and the import of capital goods in particular is vital to economic growth. This is so because imported capital goods directly affect investment, which in turn constitutes the motor of economic expansion. Economic reform is expected to affect imports as part of the strategy to restore external balance. However, unless policy makers know the major factors that affect exchange rate and how it affects imports, such a policy decision can be harmful to investment and output if domestic production relies on imports. This study seeks to examine the effects of exchange rate fluctuations on the volume of imports in Nigeria.

 

OBJECTIVES OF THE STUDY

The main objective of this study is to examine the relationship between exchange rate and the volume of imports to Nigeria.

Specifically, the study aims to:

(i) To examine the trend of exchange rate of Nigeria over the years;

(ii) To investigate empirically, the effect of exchange rate fluctuations on Nigeria’s import;

(iii) To identify the macro-economic factors that influence exchange rate in Nigeria.

RESEARCH HYPOTHESES

From the research questions stated above, the core hypotheses to be investigated empirically are stated below:

(1) H0 : That exchange rate fluctuations does not affect the volume of imports to Nigeria.

H1 : That exchange rate fluctuations affect the volume of imports to Nigeria.

 

(2) H0 : That inflation rate, interest rate, volume of foreign direct investment do not determine the exchange rate of Nigeria.

H1 : That inflation rate, interest rate, volume of foreign direct investment determine the exchange rate of Nigeria.

SIGNIFICANCE OF THE STUDY

In the light of the stated objectives which this study is set to achieve, the following are the significance of the study:

(a) It would present an empirical prove of the relationship between the exchange rate fluctuations and Nigeria’s volume of import.

(b) It would provide a yardstick to assess the exchange rate policies of Nigerian government.

(c) The study would also contribute to knowledge by suggesting how imports could be exchange rate responsive.

SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers an assessment of the impact of exchange rates on the volume of import in Nigeria (2005-2020). The researcher encounters some constrain which limited the scope of the study;

  1. a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
  2. b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

1.7 DEFINITION OF TERMS

EXCHANGE RATE: In finance, an exchange rate is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in relation to another currency.

VOLUME OF IMPORT: World export (import) volumes are constructed by aggregating measures of the volume of exports (imports) of individual countries on a constant price basis

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