The economic implications of exchange rate volatility on the prices of imports in Nigeria from 1995-2018

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THE ECONOMIC IMPLICATIONS OF EXCHANGE RATE VOLATILITY ON THE PRICES OF IMPORTS IN NIGERIA FROM 1995-2018

ABSTRACT

This study investigated the effect of exchange rate trends and volatility on Nigeria’s imports from 1995 to 2018. The empirical methodology, employed co-integration and Parsimonious ECM model using Schwarz criterion and Akaike information criterion as lag length selection criterion. Empirically, it was discovered that Exchange rate and exchange rate volatility are found to have a negative and significant effect on Nigeria’s import sector. The findings revealed that exchange rate trends had positive and significant effect on imports only in the long run and that exchange rate volatility depressed imports. It further revealed that a unidirectional causality runs from exchange rate volatility to imports. The policy implication is that trends in exchange rate if not checked will lead to wide exchange rate volatility and poor performance of the import sector. This should be avoided, deregulation not-withstanding by adopting a managed float exchange rate system.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF STUDY

Exchange rate is a predominant determinant of world trade, receiving much attention in the context of global imbalances. The subject of exchange rate came to be a topical issue in Nigeria because it is the goal of every economy to have a stable exchange rate with its trading partners. The volatility in exchange rate is a major constraint on development of an economy, making planning more problematic and investment more risky. For instance, volatility in exchange rate may reduce or increase the activities of potential investors because it increases uncertainty in the determination of the returns of a given investment. Potential investors will invest in a foreign location only if the expected returns are high enough to cover for the currency risk (Gerado, 2002). Risk in international commodity trade usually arise from two main sources changes in the world price or the changes in the exchange rate. A country’s exchange rate behavior is an important determinant of  of its imports and it serves as a measure of its international competitiveness (Bah and Amusa, 2003). Chukwu (2007) observed the instability of the exchange rate as a determinant of trade (imports and exports) in Nigeria; having a positive influence on trade.

A limited number of empirical works has been carried out on exchange rate and its volatility on imports in the context of Nigeria. The results of these empirical research findings were ambiguous. For instance Oyovwi (2012) found that real exchange rate volatility has no significant effect on Nigeria’s import using the Schwarz criterion and Akaike information criterion as lag length selection criterion to estimate parsimonious error correction model (ECM). Conversely, Abba and Zhang (2012) employed the Johansen multivariate co-integration technique and found a significant effect of exchange rate volatility on imports in Nigeria over the period 1970-2009. Thus, the variation in empirical results partially motivated the present study.

 

1.2 STATEMENT OF PROBLEM

Despite the existence of literature on the influence of exchange rate volatility on trade in Nigeria, theoretical and empirical works on the subject are yet to produce a consensus.  The first strand of literature argues that it might hamper the growth of international trade (Chowdhury, 1993). This research is aimed at providing an empirical insight into the relationship between exchange rate volatilitys and the rate of total import in Nigeria. Hence, it is on this note that this research seeks to find out the  economic implications of exchange rate volatility on the prices of imports in Nigeria, as well as suggest methods of minimizing the adverse effects it can produce on the economy as a whole.

1.3 RESEARCH OUESTIONS

The study attempts to give answers to the following questions

  • To what extent does trend in exchange rate and its volatility influence imports in Nigeria?

 

  • What is the nature of causality between exchange rate volatility and imports in Nigeria?

1.4 OBJECTIVES OF THE STUDY

The major objective for this research is to determine the economic implications of exchange rate volatility on the prices of imports in Nigeria from 1995-2018. The specific objectives include:

  • Ascertain the extent  to which exchange rate volatility influence imports in Nigeria?
  • Determine the relationship between exchange rate volatility and imports in Nigeria?

1.5 RESEARCH HYPOTHESIS

In effort to realize the objectives of the study, the following hypothesis will be tested:

Ho1: The level of exchange rate volatility does not significantly influence imports in Nigeria.

Ho2:  Exchange rate policies have not significantly influenced the direction of imports in Nigeria.

1.6 SIGNIFICANCE OF STUDY

This project seeks to fill this gap in literature as it focuses on the effect of exchange rate volatility  and whether or not it has a significant influence on import   activities in Nigeria. Thus, this study is of great benefit to the government and policy makers. It will also serve as additional literature for further research in this area of study.

 

1.7 SCOPE OF STUDY

The purpose of the study is to determine the economic implications of exchange rate volatility on the prices of imports in Nigeria . It covers the period between 1995 and 2018.

1.8 OUTLINE OF CHAPTERS

This study is divided into five chapters. Chapter one which is the present chapter, gives a general overview of the study. Chapter two reviews papers related to this topic. It includes theoretical issues, empirical issues and the results of research relating to this topic.

The third chapter focuses on the research methodology it includes, technique of estimation, model specification and it also employs statistical technique in finding statistical relationship between the variables. Chapter four involves the presentation of data, analysis and discussion of results in chapter three. Lastly, chapter five, summarizes the major findings in this research study, concludes and gives policy implications of findings.

1.9 DEFINITION OF TERMS AND CONCEPTS

VOLATILITY: Fluctuations in the value of a variable, especially price.

EXCHANGE RATE: The price of one currency in terms of another. It can be expressed in one of two ways, as units of domestic currency per unit of foreign currency or units of foreign currency per unit of domestic currency

ECONOMIC GROWTH: This is the growth of the real output of an economy overtime.

EXCHANGE RATE VOLATILITY: It refers to the swings of fluctuations in the exchange rates over a period of time or the deviations from a benchmark or equilibrium exchange rate.

THE ECONOMIC IMPLICATIONS OF EXCHANGE RATE VOLATILITY ON THE PRICES OF IMPORTS IN NIGERIA FROM 1995-2018

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