IMPACT OF FOREIGN RATE FLUCTUATIONS ON AGRICULTURAL INPUTS IN NIGERIA

0
694

ABSTRACT

For four traded nonfarm-produced inputs (fertilizer, chemicals, farm machinery, and feed) in the naira, the impacts of the exchange rate is analyzed. With a trend model, unit root tests imply that the exchange rate and the four input price ratios support the presence of unit roots, but the presence of unit roots in the first difference model may be denied. This finding is in line with a fixed price/flex price conceptual framework, with industrial pricing being more resistant to exchange rate fluctuations than agricultural commodities prices.

The study’s purpose was to investigate the relationship between exchange rate fluctuations and agricultural inputs in Nigeria.

The study discovered a link between exchange rate fluctuations and agricultural inputs, as well as a positive association between exchange rate and agricultural inputs in the near run.  

LIST OF ABBREVIATIONS

ADF                Augmented Dickey Fuller 

AIC                 Akaike Information Criterion

ARDL             Autoregressive Distributed Lag

FISP                Farm Input Subsidy  

GDP                Gross Domestic Product

IMF                 International Monetary Fund

NGDS              Nigeria Government Development Strategy

NBS                National Bureau of Statistics

WADC            West African Development Community

SAP                 Structural Adjustment Policies

SDR                Special Drawing Rights

CBN               Central Bank of Nigeria

CHAPTER ONE

INTRODUCTION

1.1 Background of study

The flow of commodities and services across national borders gives birth to the idea of foreign exchange. In one direction, the movement of products and services across national borders necessitates the flow of foreign exchange in the other. This necessitates the establishment of a rate of exchange between the currencies of the two trading partners in order to pay trade-related debt. The movement of various macroeconomic aggregates is influenced by the exchange rate. It is basically an exogenous variable that controls the movement of most other variables, as well as macroeconomic stability and resource flows into and out of the nation (Odili, 2014).

By analyzing the impacts of currency rates across various sectors of the economy (agricultural, industry, etc.), Maskus (1988) discovered that aggregate bilateral commerce (the United States and its main Western trading partners) is highly sensitive to exchange rate fluctuations. Agricultural products are more vulnerable to exchange rate changes than manufactured commodities because agricultural inputs are generally open when evaluated by the ratio of exports and imports to domestic agricultural production and have a low level of industrial concentration.

The dollar has lost value versus a variety of currencies in recent years. In theory, assuming imports are elastic, the dollar’s decline should assist to reduce the US trade deficit by lowering imports. However, the recent decline in the dollar has not resulted in a significant decrease in imports or a significant reduction in the trade deficit.

One possible explanation for the United States’ recent experience is that exchange rate “pass-through,’ or the degree to which a change in the value of a country’s currency causes a change in the price of the country’s imports and exports, has declined relative to previous levels. While pass-through is virtually always “incomplete,” recent research (Campa and Goldberg, 2005; Goldberg and Knetter, 1997) suggests that import prices in a number of industrial countries have been less sensitive to exchange rate fluctuations over the last decade or so.

The impact of a possible drop in exchange rate passthrough on the US economy is significant. To begin with, it has a considerable impact on the United States’ efforts to address the country’s trade deficit. If import prices have become significantly less sensitive to changes in currency values, a higher dollar depreciation will be required to close the gap. Second, pass-through has concerns for domestic pricing stability. Low import costs are thought to help keep inflation low by putting pressure on domestic producers to maintain their pricing competitive. Though exchange rate pass-through has long been a topic of discussion, the focus of that discussion has shifted significantly over time. Osei Yeboah is an associate professor of International Economics at North Carolina A&T State University in Greensboro, NC, after a lengthy period of disagreement over the law of one price (LOP) and cross-country convergence. Saleem Shaik is an agricultural economist at North Dakota State University in Fargo, North Dakota. Albert Allen is an Agricultural Economics professor at Mississippi State University.