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TOPIC : IMPACT OF EXCHANGE RATE FLUCTUATION ON VOLUME OF IMPORTS TO NIGERIA
(1981 - 2010)
BACKGROUND TO 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.
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
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
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.
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.
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.
This research work shall be guided by the following
1. What has been the trend and pattern of Nigeria’s
major exchange rates over the years?
2. To what extent does exchange rate fluctuations impacts
on the volume of Nigeria’s imports?
3. What are the macro-economic factors that influence
exchange rate in Nigeria?
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.
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.
OF THE STUDY
The scope of this study covers Nigeria’s exchange
rate policies over the years to date. The general overview
of the profile of Nigeria’s exchange rate over
the years shall also be discussed. The empirical investigation
of the relationship between exchange rate and Nigeria’s
volume of imports are restricted to the period between
1981 and 2010 due to non-availability of data. Furthermore,
the study shall seek to identify the macroeconomic factors
that are responsible for exchange rate fluctuations
Secondary data shall be the basis for this study. The
relevant data to be used would be sourced from the Central
Bank of Nigeria’s statistical reports, annual
reports and statement of accounts for the years under
review. The data to be collected include: exchange rate,
volume of imports, inflation rate, interest rate and
foreign direct investment.
The empirical investigation of the effect of exchange
rate on Nigerian volume of imports would be conducted
using the Ordinary Least Square (OLS) method. The hypothesis
testing would be conducted at 5% level of significance.
The method would be applied with the use of Statistical
package for social science (SPSS).
OF THE STUDY
The presentation of this study takes the following form:
The first chapter is introductory. The second part deals
with the literature review and related issues on exchange
rate. Recent developments in Nigerian exchange rate
movement shall also be discussed in the chapter. The
third chapter shall focus on the research methodology
and shall entail the specification of the models. Chapter
four of the study would present the analysis of data
and discussion of empirical results of the estimations.
Chapter five shall conclude the study, stating the findings
Engel, C. (2002) “Expenditure Switching and Exchange
Policy”. NBER Working Paper, No. 9016.
Obstfeld, M. (2002) “Exchange Rates and Adjustment:
Perspectives from the New Open Economy Macroeconomics”.
Manuscript, University of California, Berkeley.
Regression Data and Results are included
rate fluctuations, causes of exchange rate fluctuations,
foreign exchange rate fluctuations, imports to nigeria