IMPACT OF EXCHANGE RATE ON THE VOLUME OF IMPORT IN NIGERIA (1986-2020)

ABSTRACT

This study investigated the impact of exchange rate on volume of imports in Nigeria. The study is conducted over the period 1986 – 2020 and is done using the autoregressive distributed lag (ARDL) approach. The data for the study was obtained from the World Bank, Central Bank of Nigeria, and United Nations Conference on Trade and Development. The data were subjected to unit root test, Bounds test for cointegration, and error correction mechanism. The unit root test revealed that the variables were integrated in mixed order, while the Bounds test for cointegration and error correction mechanism supported the existence of a long-run equilibrium relationship between import demand and the explanatory variables. It was further discovered that the exchange rate had a negative and insignificant effect on import demand in the short run but a negative and significant effect in the long run. The real income exerted a negative and insignificant effect on the demand for imports in the short run, while in the long run, import demand is influenced by real income in a positive and significant manner. Though the import price index exerted a negative and insignificant short-run effect on the demand for imports, its effects became significant in the long run. The study recommended that domestic production of most of the imported goods should be stimulated so as to ameliorate the dangers associated with over importation of even basic items.

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Nigeria aims to become one of the leading developed economies in the world by the year 2050 (Obi et al, 2016). A crucial strategy towards obtaining this aspiration is the development of a well-structured exchange rate policy.

Exchange rate refers to the amount units of an economy’s currency (the home country) when it comes to another economy’s currency. It is the recommended number of denominations of a currency that can purchase one or more units of another country’s currency. Hence, exchange rate is best explained as the value of one currency in respect of another (Mordi 2006).

Ngerebo–a and Ibe (2013) define exchange rate as the portion of a unit of one medium of exchange to the unit of another medium of exchange at a specific time. It decides the general cost of homegrown and external merchandise, including the quality of foreign sector involvement in global trade.

In the 1980s and recently in 2014, Nigeria witnessed a tremendous decline in export prices, which caused the evolution of various economic reform in the likes of the import substitution industrialization (ISI) strategy, export promotion program (export free zones), Structural Adjustment Programme (SAP) to mention but a few (Bredin et al., 2003). These reforms, which were geared towards stimulating domestic production, promoting exportation, discouraging importation of locally produced goods, and propelling economic growth, had hitherto been matched with increasing import demand in the country over the years.

In the pre-SAP era of 1986 to 1985, total imports averaged N9.35 billion (Adamu, 2018). With the introduction of SAP, imports declined to N5.98 billion in 1986 but rose up to N30.86 billion in 1989, averaging N23.39 billion between 1987 to 1989. The period 1990 – 1999 was characterized by the significant rise in total imports demand in the country. Total Import was put at N165.63 as at 1993 with a record high of N862.52 billion as at 1999. Meanwhile, total imports from 1990 to 1999 averaged N447.02 billion, which is very high when compared to just an average of N13.66 billion from 1986 to 1989.

Within 2000 and 2009, the Nigerian economy was characterized by a tremendous upsurge in import demand even more than that experienced in the 1980s and 1990s. Total imports within the period averaged N3362.03 billion with a maximum value of N8,163.97 billion as of 2010. Meanwhile, imports averaged N11,777.35 billion between 2011 and 2020, with the highest total Import within the period being put at N20,448.92 billion as of 2020 (Philemon et al., 2020). One thing to note is that Nigeria’s imports have maintained a continuous rise over the review period.

Nigeria imports machinery, refined petroleum product, automobile, etc. The exchange of goods between countries is predicted from the economists’ concept of the doctrine of comparative advantage which enjoins countries to produce goods in which they are endowed in order to minimize the cost of producing such goods. Therefore, this study was carried out on the impact of exchange rate on the volume of import in Nigeria (1986-2020).

1.2 Statement of the problem

In the course of the most recent decades a few developing countries utilized rigid trade controls to secure their domestic businesses. Today numerous financial experts have ascribed the monetary plunge in some to these equivalent protectionist strategies. Ewa (2013) concluded that the exchange rate of the Naira was relatively stable during the post-independence period when agricultural merchandise reckoned for greater than 70% of the nation’s GDP, and during the oil boom era between 1973 and 1979, when crude oil became the country’s major export.

The drop in the oil prices in the world market has led to drastic reduction in foreign earnings with its attendant consequences in the economy. The depreciation of local currency has also affected the non – oil sector and imported goods have become expensive. Economists believe that appreciation of exchange rate increases imports while depreciation would increase exports and discourage imports. Also exchange rates depreciation causes a change from foreign goods to local goods. Generally, it is believed that trade is an instrument of growth and increases the welfare of a nation. There is still some ambiguity with empirical evidence on benefit of trade mainly for countries with volatile exchange rates. However, to bridge this gap, this study examined the impact of exchange rate on the volume of import in Nigeria (1986-2020).

1.3 Objectives of the study

The main objective of the study is to examine the impact of exchange rate on the volume of import in Nigeria (1986-2020). Specifically, the study sought to:

Examine the long-run relationship between imports and the explanatory variables.

Estimate the error correction model.

1.4 Research questions

What is the long-run relationship between imports and the explanatory variables?

What is the error correction model?

1.5 Hypothesis of the study

H_O1: There is a long-run relationship between imports and the explanatory variables.

H_O2: There is no distribution in the error terms

1.6 Significance of the study

The study is of relevance to the Nigerian economy in the following ways:

It serves as a future guide to the policy makers in the formulation of better and efficient policy options for managing exchange rate fluctuations in Nigeria. Also, the research is of immense help to the general economy, as it provides possible measures that monetary authority could adopt in order to maintain stability in exchange rate so that, it can influence importantly export growth, consumption, resource allocation, employment and private and foreign investments as research has shown. Above all, it adds to the existing literature thus, provides relevant information that could guide further researchers on the subject.

1.7 Scope of the study

The discussions in this work are based on the macroeconomic issue (exchange rate fluctuations) affecting Nigerian volume of import in Nigeria and international competitiveness. Hence, the study is limited to the Nigerian economy for the period of 34 years covered, which is 1986-2020. This range is chosen to ensure availability of data and for the analysis to be meaningful and aid in the achievement of the objectives of the work.