CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background of the Study

It is the primary objective of any development aspired country to be buoyant in

international trade. But the extent to which this could be achieved reckons on the ability

of such country to expand and sustain exports. The fact still remains that in this

globalised world, no nation can live absolute independently since all economies are

directly or indirectly connected through assets or/and goods markets. This linkage is

made possible through international trade and foreign exchange.

More so, an economy with more exports than imports will enjoy favourable

balance of payment as it receives more than it pays in her international transactions with

the rest of the world. Among the factors that determine the volume of international trade,

exchange rate plays an important role because it directly affects domestic prices,

profitability of traded goods and services, allocation of resources and investment

decision. Stability of exchange rate is therefore required for better outcome of

international trade and favourable balance of payment.

Exchange rate is an important macroeconomic variable used as parameter for

determining international competitiveness and it is being regarded as an indicator of

competitiveness of any currency of any country and an inverse relationship between this

competitiveness exists. Lower the value of this indicator (exchange rate) in any country,

higher the competitiveness of such currency of that country will be. Exchange rate is the

price of units of currency of one country expressed in terms of units of currency of

another. In other words, it represents the number of units of the currency of one country

that can be exchanged for another. The Exchange rate is also seen as a measure of the

value of the national currency against other countries, which reflects the economic

1
situation of the country compared to other countries (Obadan, 1994). The exchange rate

is therefore potentially an extremely sensitive price changes that occur rapidly,

automatically and continuously (Stephen, 2017). It is therefore important to note that

exchange rates of currencies are never constant for an indefinite period; it fluctuates in

response to demand for and supply of foreign exchange in the foreign exchange market.

It becomes imperative to distinguish between the real exchange rate and nominal

exchange rate. The Nominal exchange rate (NER) is a monetary concept, which

measures the relative price of the two moneys or currencies e.g Naira in relation to U.S

dollar. While Real exchange rate (RER) is being regarded as real concept that measure

the relative price of two tradeable goods (exports and imports) in relation to non-

tradeable goods (goods and services produced and consumed locally). But it should be

noted that a relationship between two goods could be seen from the fact that change in

NER causes short-run changes in RER.

As Nigeria is a developing nation, the role of foreign exchange rate cannot be

neglected or ignored. Therefore, exchange rate traditionally played a crucial role in

Nigerian monetary policy because of its crucial impact on the country trade relation with

other countries, first, as a mono-product (oil) export dependent economy and second, as

an import dependent (developing) nation; besides the country’s competitiveness and

overall economic growth. Therefore, the monetary authorities (Central Bank of Nigeria)

on several occasions in recent past had engaged in different exchange rate adjustment

policies (fixed and flexible) for the main purpose of attaining the macro-economic

objective of price stability. It is one of the macroeconomic variables that reflects the

strength and weakness of an economy. As a potent monetary tool, exchange rate is used

in attaining certain economic objectives. The major objective of exchange rate policy in

Nigeria is how to have a realistic exchange rate.

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 Nigerian government, over the years, has been adopting different policies in

stability of exchange rate as to have more exports and have favourable balance of trade

and payment. In Nigeria and indeed any developing countries, the price of foreign

exchange plays a critical role in the ability of the economy to attain optimal levels in

production activities. In the wake of policy change, occasioned by the introduction of

Structural Adjustment Programs (SAP) in July, 1986, led to the emergence of the flexible

exchange rate as oppose to Fixed Exchange Rate as a regime that was in place before the

policy change.

During the fixed exchange rate regime, the supply of foreign exchange was highly

subsidized through the overvaluation of domestic currency. The essence of the policy

was to maintain a relatively cheaper cost of importation of industrial raw-material and

equipment, so as to sustain the policy of import substitution industrialization strategy. To

further consolidate the period of the oil boom of 1970s, the government continued to

sustain overvaluation of domestic currency, so as to douse the inflationary pressure arose

from the monetization of the oil windfall gains through the Udoji Committee known as

“Udoji Awards” of 1975. But in the wake of persistent balance of payment deficit caused

by the downward trend in the oil price in the international market led to the jettison of

the fixed exchange rate, and emergence of flexible exchange rate through Second-tier-

Foreign Exchange Rate Market (SFEM). This policy led to the downward trend in

exchange rate and the impact of over valuation of the this exchange rate came with

massive importation of foreign goods because they are cheaper and while exports are

relatively expensive and uncompetitive at the international market and led to the

importation large volumes of consumer goods and thereby worsen the country’s balance

of payment deficit.

3
 On other hand, exportation is required by any economy to enhance revenue and

usher in economic growth and development. It is therefore crucial for economic progress

and this has informed the idea of export-led growth. Export is a catalyst necessary for the

overall development of an economy (Abou-Strait, 2005). It was also noted that foreign

trade creates an avenue for foreign capital to flow into a country (Ricardo, 1817 cited in

Kubalu and Hanif, 2016). This increases the earnings of the country thereby creating an

avenue for growth by raising the national. Export performance is of paramount

importance because it contributes to the economic development of nations by influencing

the amount of foreign exchange reserves as well as the level of imports a country can

afford. It enhances societal prosperity and help national industries to develop and

improve productivity and create new jobs (Lages and Montgomery, 2014). Exporting

provides an opportunity for firms to become less dependent on the domestic market. By

reaching new customers overseas, the firm may also explore economies of scale and

achieve lower production costs while producing more efficiently. By export it means

goods produced domestically and sold abroad. When goods are sold abroad, payment is

made in the currency of the buyer; hence, there is a need for exchange of currency at a

given rate (Stephen, 2017).

In a country like Nigeria where the level of investment is low, foreign capital is

very much needed in order to accelerate the creeping rate of economic growth. The

Nigerian economy is one that depends largely on foreign trade for growth and is also one

which depends majorly on one export commodity at a time. For instance, at

independence, the major export commodity was cocoa and the leading sector in the

economy was the agricultural sector but today, the major export commodity is crude oil

and the leading sector is now the petroleum sector. This has not allowed for balanced

growth in the economy as some sectors have been allowed to grow while growth has

4
been impeded in others and this has made the country remain a developing country. In

Nigeria, crude oil is the major export because of the large revenue it generates. This has

led the economy to focus on the petroleum sector while ignoring the other sectors as well

as the potential revenue they can generate.

More so, prior to the oil boom of the 1970s, Nigeria’s export trade was largely

dominated by non-oil products such as groundnuts, palm kernel, palm oil, cocoa, rubber,

cotton, and coffee, amongst others. Other non-oil exports of significant value then were

tin ore, columbite, hides, skin and cattle. Over 66% of total exports on the average were

accounted for by these commodities, and this continued into the early 1970s. Agriculture

through export of non-oil products had a high record contribution up to 80% of the gross

domestic product and providing employment for over 70% of the work population

(Ogunkola,2008). In contrary, since the oil boom of the 1970s, the Nigerian economy has

become a mono-cultural one with oil being the major source of income. Despite having

the largest economy in Africa, the country still experiences an increasing rate of

unemployment and poverty (WDI,2013) and this could be attributed to the over-reliance

of the country on oil earnings from the oil sector and negligence of other sectors

(agriculture, manufacturing, services etc). The oil boom has not translated into increase

in the standard of living of Nigerians. The history of oil in Nigeria has been

characterized by almost an equal measure of progress and retardation, blessings and

curse, hope and hopelessness, wealth and poverty (Adenikinju, 2008).

Exports in the Nigerian economy could be viewed from the oil and non-oil exports

as these are the major sources of foreign exchange earnings for the country, with oil been

the dominant sector (Enoma and Isedu, 2011).The non-oil sector includes agriculture,

manufacturing and service sectors. The contributions of these sectors to economic

growth have been dismal over the years. Non -oil exports constituted 33% of total

5
exports in 2010, while oil exports constituted 67% in the same year as against non-oil

export’s contribution of 67% and oil sector export’s contribution of 33% in

1970(CBN,2010).

The agricultural sector which should be the mainstay of the economy and the bane

of non-oil exports in Nigeria is largely characterized by low productivity (Abogan et al,

2014). This is due to factors such as small farm size, crude and outdated farm

implements, and inadequate access to credit facilities among others. The decline of the

sector has a gross impact on industry that relied heavily on the sector for raw material.

Thus, the decline comes with surge of revenue from oil export as well as the poor

implementation of the various policies, strategies and reform programmes in the sector.

Several policies have emerged over time for the development of the non-oil sector over

the years with these policies having varying degree of success owing largely to poor

implementation. These include the protectionism policy in the light of import

substitution policy of industrialization in the 1960s (Pre-SAP Era); trade liberalization

policy (Structural Adjustment Programme Era) of the mid 1980s and export promotion

policy of 1990s (Post SAP) which was executed through intensified policy support to

Small and Medium Scale Enterprises (SMEs) to enhance productivity and subsequently,

export of local products (Onodugu et al,2013; Abogan et al,2014).

Additionally, Nigeria overall economic performance since independence in 1960

has been decidedly unimpressive. Despite the availability and expenditure colossal

amount of foreign exchange derive mainly from its oil and gas resources, economic

growth has been weak and the incidences of poverty has increased. The objective of

every independent nation like Nigeria is to improve the standard of living of its citizenry

and promote economic growth and development of the country but due to vicious circle

6
of poverty, scarcity of resources and the law of comparative advantage, countries depend

on each other to foster economic growth and achieve sustainable economic development.

Hasanov and Samadova (2012) noted that expanding non-oil export to get rid of

one-product economy has been known as a solution for economic development in oil

producing countries which Nigeria is one of them and is the sixth largest oil producing

and exporting countries in the world. According to export-led growth hypothesis,

increased export can perform the role of “engine of economic growth” because it can

increase employment, create profit, trigger greater productivity and lead to rise in

accumulation of reserves allowing a country to balance their finances.

Hasanov and Samadova (2012) also revealed that there are some challenges for

countries with natural resource abundance such as oil in comparison with other countries.

The main point is that in parallel with windfall of oil revenues these countries have to

pay more attention to the development of the non-oil sector as well as its export

performance. Because in the most of the cases oil driven economic development leads to

some undesirable consequences such as Dutch Disease in the oil rich countries.

The Dutch Disease concept provides the relationship between the exchange rate

and non-oil export. According to this concept the appreciation of a country’s real

exchange rate caused by the sharp rise in export of a booming resource sector draws

capital and labour away from a country’s manufacturing and agricultural sectors, which

can lead to a decline in exports of agricultural and manufactured goods and inflate the

price of non-tradable goods. Corden (1982); Corden and Nearly (1984) and Hassanov

and Samadova, 2012) postulated that if we divide overall export of oil rich countries into

oil and non-oil exports appreciation of real exchange rate which is specific for these

countries negatively affects non-oil exports while export revenues of oil sector mainly

depends on oil price in the world markets.

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 Experimental studies of the growth rates of countries endowed with natural

resources have showed paradoxal finding that countries which are amply endowed with

resources tend to grow slower than others. One economic explanation for this

paradoxical phenomenon is that the resource exporter’s real exchange rate co-moves

with highly volatile commodity prices. In price upturns, the real exchange rate

appreciates and undercuts the competitiveness of the domestic industry. Lost industry is

then difficult to reconstruct when the commodity price falls and over several price

cycles, the country loses its non-resource industrial base ((Sachs and Warner, 2005;

Auty, 2001; Torvik, 2001; Collier and Goderis 2007).

Omojimite and Akpokodje (2010) asserted that the dependence of Nigeria on crude

oil exports had important implications for the Nigerian economy since the oil market is a

highly volatile one. For example, being dependent on the export of crude oil, the

Nigerian economy became subject to the vicissitudes and vagaries of the international oil

market such that international oil price shocks were immediately felt in the domestic

economy. Coupled with this, Nigeria implemented a fixed exchange rate system that

engendered overvaluation of the domestic currency, serving as a disincentive for

increased exports through non-competitiveness of the country’s non-oil exports. On the

other hand, the overvalued exchange rate enhanced imports thereby exacerbating the

already precarious balance of payment position.

The Nigerian government has over the years engaged in international trade and has

been designing trade and exchange rate policies to promote trade (Adewuyi, 2005).

Although a number of exchange rate reforms or depreciation has been carried out by

successive governments, the extent to which these policies have been effective in

promoting export has remained unascertained. This is because despite’ government

efforts, the growth performance of Nigeria non-oil export has been very slow. It grew at

8
an average of 2.3% during the 1960 -1990 period, while its share of total export declined

from about 60% in 1960 to 3.0% in 1990 (Ogun,2004). Looking at the sectoral

contribution to non-oil export in the period before the introduction of the Structural

Adjustment Programme (SAP) (1975-1985), it can be seen that agricultural sector

contributed about 4.0% and Windfalls that result from volatile oil price surges/shocks

overwhelmingly flow through the economy; expand the oil sector and penalise the non-

oil sector (Mieiro and Ramos, 2010).

On this premise, this study will investigate the effect of exchange rate depreciation

on non-oil export in the Nigerian economy. The need to correct the existing structural

distortions and put the economy on the path of sustainable growth is therefore

compelling.

1.2 Statement of the problem

Since the breakdown of the Bretton Woods fixed exchange rate system in the early

1970s, the effect of exchange rate volatility on trade flows and other macroeconomic

variables has attracted a lot of attention of people in authority and researchers. Exchange

rate volatility is a statistical measure of the tendency of the exchange rate to rise or fall

sharply within a short period and is important in understanding foreign exchange market

behaviour. Be it of the nominal or real exchange rate, volatility creates uncertainty in

macroeconomic policy formulation, investment decisions and international trade flows.

Although there is a growing body of literature on the impact of exchange rate volatility

on trade, empirical evidence has been ambiguous both within developed and developing

countries and across countries (Cote, 1994). Many empirical findings support the

hypothesis that an increase in exchange rate volatility leads to a decrease in trade flows

because in most international transactions, goods are denominated in terms of the

currency of either the exporting or importing country. Therefore, unanticipated variation

9
in the exchange rate should adversely affect trade flows through the effects on profits.

There is also some conflicting evidence on the relationship between exchange rate

volatility and trade, which suggests that exchange rate volatility, has a positive impact on

trade. Given such contradictions, the debate on the impact of exchange rate volatility on

trade is remained inconclusive.

Moreover, most of empirical studies available on effectiveness of exchange rate

volatility are concentrated only on international trade, oil sector, economy growth,

balance of trade and payment. Little has been conducted on impact of exchange rate

depreciation on non-oil export. Also, the available ones, there are misspecification of

models and variables such as joel and adejosi (2013) who examined the impacts of

exchange rate volatility on export demand in Nigeria from 1970-2015, employing

descriptuive statistics for data analysis; Paul and Oluwatomsin (2013)who estimated the

Effect of exchange rate devaluation on the trade balance in Nigeria from 1970- 2010,

adopted Trade balance as dependent variable while export revenue, export expenditure,

price of output, quantity of output, foreign currency, quantity of import, domestic

national income and foreign income are the independent variables. They are concerned

in finding the relationship exist between the two variables, and employed only Ordinary

Least Square (OLS). Finally, they were not looked at their short run and run effects.

To rectify above misspecifications, therefore this research will examine the short

run and long effects of exchange rate depreciation on non-oil export for period of 36

years (1982-2017) by using Autoregressive Distributive Lag (ARDL), the theory for this

research is balance of trade theory. From the adopted theory, the model and variables for

this study will be derived. Non-oil export is dependent while exchange rate is the

variable of interest; real export, real import, and interest rate are controlled variables.

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Finally, time series data would be sourced for from Central Bank of Nigeria (CBN)

Statistical Bulletin on the variables of the study.

1.3 Objectives of the study

The general objective of this study is to empirically assess the effectiveness of

exchange rate volatility on non-oil export in Nigeria; the study has the following specific

objectives to complement the main objective:

1. To examine the relationship exists between the exchange rate,

non-oil export real export, real import and interest rate in Nigeria.

2. To analysis the short run relationship between the exchange rate,

non-oil export and dependent variables, and speed of adjustment, if any, in

Nigeria.

3. To assess the long run correlation exists among the variables, and

their impact (co-efficiencies) on the non-oil export in Nigeria.

4. To examine to causal relationship between exchange rate, non-oil

export and variables, and speed of adjustment, if any, in Nigeria.

1.4 Research hypothesis

In achieving the stated objectives, the following hypotheses are formulated:

HO= there is no significant relationship between the exchange rate, non-oil export

real export, real import and interest rate

HO= there is no significant short run relationship between the exchange rate, non-

oil export real export, real import and interest rate, and no speed of adjustment

HO= there is no significant long run relationship between the dependent variable

(economic growth) and independent variables ( exchange rate, non-oil export real export,

real import and interest rate ).

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 HO= there is no significant causal relationship between the dependent variable

(economic growth) and independent variables ( exchange rate, non-oil export real export,

real import and interest rate ).

1.5 Significance of the study

1. This research will contribute immensely in aiding the government, monetary

policy makers, economic planners, international traders, in formulating policy suitable

for non-export promotion.

2. The research will provide an insight and understanding of the government on

how appropriate policies will be implemented to curb down the fluctuation in exchange

rate with aiming to having a sustainable economic growth in Nigeria.

3. Furthermore, the findings of this research will be useful to both foreign and

Nigerian investors in solving unpredictable fluctuations of exchange rates to suit their

managerial decision makings.

4. Finally, the findings of this research work would be used as a basic foundation

for further researches by other researchers, who have interest in examining relationship

between the exchange rate and non-oil export promotion, and add to existing empirical

studies on impact of exchange rate deprecation on non-oil export promotion in Nigeria.

1.6 Scope of the Study

This research is conducted in Nigeria purposely to examine the effectiveness of

exchange rate depreciation on non-oil export in Nigeria within the period of thirty-six

years (1982-2017).The time series data covering the time frame of 36 years (1982-2017)

will be used. The choice of this period is due to the fact that Nigerian economy is largely

depending on oil sector since the discovery of crude oil, and neglecting other sectors of

economy. Since then, government has been putting in place several strategies to diversify

economy from monoculture oil economy to multicultural economy, and adopt optimal

12
exchange rate policy as to have equilibrium balance of trade and balance of payment.

Lastly, the research will use macro-economic data obtaining from relevant statistical

institutions in Nigeria such as CBN, NBS, etc.

1.7 Limitation of the study

The scope of the research covers an analysis of effect of exchange rate

depreciation policy on non-oil export in Nigeria from 1982-2017. In the cause of the

study, there were some factors which militate against the scope of the study;

A) Availability of Research Material: The research material available to the

researcher is insufficient, thereby limiting the study

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.

C) Financial resources: in carrying out this study, the researcher confronted with

inadequate financial commitment, thus this leads to limitation of the study.

1.8 Scheme of chapters

The research has a very-arranged and organized five chapter; chapter one covers

the background of the study, statement of problem, research questions, objectives of the

study, research hypothesis, the scope and significance of the study. Chapter two focuses

on literature review and theories relevant to the research topic. Chapter three captures the

methodology of study while chapter four deals with data analysis and its discussion.

Lastly, chapter five provides the summary, conclusion and recommendations of the

research findings.

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 CHAPTER TWO

LITERATURE REVIEW

2.0 INTRODUCTION

This chapter is concerned with reviewing of the works of other scholars that are related

to the subject matter. In this chapter, the researcher discusses some concepts in details

and elucidates on various theories and latter suits the theory to the topic.

2.1 Conceptual Literature

The concept of exchange rate and concept international trade are critically discussed

below:

2.1.1 Concept of Exchange Rate

Oloyede, (2002) viewed exchange rate as the price of one country’s currency in

relation to another country, which is a key variable for healthy economic management in

every nation. Exchange rate is also seen as a measure of the value of the national

currency against other countries, which reflects the economic situation of the country

compared to other countries (Obadan, 1994).

Aliyu (2011) asserted that appreciation of exchange rate results in increased

imports and reduced export while depreciation would expand export and discourage

import. Also, depreciation of exchange rate tends to cause a shift from foreign goods to

domestic goods. Hence, it leads to diversion of income from importing countries to

countries exporting through a shift in terms of trade, and this tends to have impact on the

exporting and importing countries’ economic growth.

In the same vein, Hossain (2002) agreed that exchange rate helps to connect the

price systems of two different countries by making it possible for international trade and

also effects on the volume of imports and exports, as well as country’s balance of trade’s

position.
14
 Eichengreen (1998) was of the view that fixing the exchange rate implies three

important dimensions, firstly, that the domestic country imports monetary disturbances

occurring in the base country unless devaluation is carried out. Secondly fixing exchange

rate also constrains monetary policy that is subordinated to the exchange rate policy

leaving a leeway that depends on the amount of foreign exchange reserves available to

monetary authorities. The room for fiscal policy can substantially diminish. Thirdly, the

trade-off between the lenders of last resort function and the defiance of the exchange rate

parity sometimes makes monetary authorities interventions inefficient in the presence of

bank runs Altogether, these points may make the defence of pegged rates undesirable to

some countries at some periods of time.

2.1.1.1 Exchange Rate Management in Nigeria

The concern with exchange rate management policy in Nigeria can be traced back

to 1960 when the country became politically independent, even though the Central Bank

of Nigeria and the Federal Ministry of Finance had come into being two years earlier

(Ogiogio, 1996).

Management of exchange rate can be traced to two divisions/phases; pre-Structural

Adjustment era of 1960-1985 and post-Structural Adjustment era 1986 – till date. The

above binary classifications occasioned a closely historical sequence of about five

phases, namely:

2.1.1.2.Phase I: Fixed parity between the Nigerian pound and the British pound

(1960-1967)

There was a fixed parity of a one-to-one relationship between the Nigerian pound

(N£) and the British pound sterling (B£) until the British pound was devalued in 1967.

15
2.1.1.3 Phase II: Fixed parity between the Nigerian pound and the American dollar

(1967-1974)

This time, there was a fixed parity with the USD. As a result of the international

financial crisis of the early 1970s, which constrained the US President Nixon to devalue

the dollar, Nigeria then abandoned the US dollar and re-kept its currency at par with the

British pound. During this stage of Nigeria's exchange rate policy it became apparent that

there were drawbacks in pegging the naira to a single currency which led to its

abandonment.

2.1.1.4. Phase III: Independent exchange rate policy (1974-1976)

Neglecting the peg policy of naira to a single currency of US dollar in 1974-1976,

CBN opted to an independent exchange rate management policy that pegged the naira to

either the US dollar or British pound sterling, whichever currency was stronger in the

foreign exchange market.

2.1.1.5. Phase IV: Pegging the naira to an import-weighted basket of currencies

(1976-1985)

Here, import-weighted basket experiment was carried out between 1976 and 1985.

Due to oil boom of mid 70s, naira was deliberately depreciated, and, so as to ensure

stability and viability of the naira, it was pegged to a basket of currencies which

comprises the seven currencies of Nigeria's major trading partners; the American dollar

(USD), the British pound sterling (GBP), the German mark, the French franc (CFA), the

Dutch guilder, the Swiss franc

(CHF), and the Japanese yen (JPY) The 1981-1985 global economic crises led to

unavailability of exchange rate while naira was grossly over-valued against the US dollar

and gave FGN two options; one is to continue with the overvalued naira as a result of

fixed exchange rate while the second alternative is to adopt the IMF-World Bank

16
imported SAP which enshrined market forces (free hands of DD and SS). The Federal

Government of Nigeria chose the second option and introduced the Second-tier Foreign

Exchange Market (SFEM) which later transformed to foreign exchange market (FEM) in

September 1986 during IBB regime.

2.1.1.6. Phase V: Market determined exchange rate policy (1986 – Date)

The Nigerian fifth exchange rate management commenced during post-SAP era up

to date.

The first market, SFEM was established with immediate effect in September 26,

1986. The Nigerian forex market was liberalized with the introduction of an Autonomous

Foreign Exchange Market (AFEM) and the Inter-bank Foreign Exchange Market (IFEM)

in 1995 and 1999 respectively. The AFEM metamorphosed into a daily, two-way quote

IFEM, October 25, 1999. From 16 July 2002, CBN has replaced IFEM with the Dutch

Auction System (DAS) which has been in operation till date.

2.1.2 Flexible Exchange Rate Policies

The main rationale behind the choice of flexible exchange rates is the autonomy in

monetary policy they allow when capital mobility is high according to Dornbusch, et al.

(1990), therefore, flexibility in exchange rates, as stated allows a country to choose its

long term inflation rate and, it frees monetary policy that can be aimed at domestic

stabilization.

Furthermore, exchange rate flexibility would ease the reaction of policy to external

shocks by initiating an automatic adjustment of the domestic economy to changes in the

balance of trades. Accordingly Dornbusch and Giovannini (1990) argued that an

economy adjusts to changes in money aggregates under flexible exchange rate regimes.

Apart from monetary policy, a flexible exchange regime would soften the constraints on

available policy instruments. Constraints imposed by exchange rate fixity on monetary

17
and fiscal policies can impede the authorities' ability to influence domestic economic

conditions shifting the bulk of the adjustment process on the real economy. Therefore,

one would expect, ceteris paribus, a higher volatility of growth under a system of fixed

exchange rates relative to a flexible exchange rate arrangement.

Obaseki and Bello (1996) is the view of that a flexible exchange rate mechanism

was adopted to correct a perceived overvaluation of the Naira, stimulate the external

sector, ensure competitiveness of the economy and above all secure a realistic exchange

rate. In other words, the movement from a fixed regime to a flexible regime was to

stimulate growth and maintain a healthy external balance, which is what is generally

referred to as macroeconomic stability.

2.1.3 Fixed Exchange Rate Policy

Obstfeld (1994) argued that the opposite, under fixed exchange rate regimes,

monetary policy will be diverted, partially or totally, to pursue external balance. And, in

the presence of high capital mobility and perfect substitutability between domestic and

foreign assets monetary policy becomes entirely devoted to the defense of the exchange

rate parity. Indeed, when the nominal exchange rate is credibly fixed, interest rate parity

predicts the equality of domestic and foreign interest rates, adjusted for risk premium and

transaction costs. Any additional money creation will push domestic interest rates

downwards and k2trigger an equivalent amount of capital outflow. Therefore, in a small

country, monetary policy becomes inefficient in stabilizing the economy when the

exchange rate is pegged and capital is highly mobile.

Eichengreen (1998) was of the view that fixing the exchange rate implies three

important dimensions, firstly, that the domestic country imports monetary disturbances

occurring in the base country unless devaluation is carried out. Secondly fixing exchange

rate also constrains monetary policy that is subordinated to the exchange rate policy
18
leaving a leeway that depends on the amount of foreign exchange reserves available to

monetary authorities. The room for fiscal policy can substantially diminish. Thirdly, the

trade-off between the lenders of last resort function and the defiance of the exchange rate

parity sometimes makes monetary authorities interventions inefficient in the presence of

bank runs Altogether, these points may make the defense of pegged rates undesirable to

some countries at some periods of time. And pegged exchange rates would likely raise

growth volatility in an insufficiently flexible economy because the loss of automatic

adjustment and the decrease in monetary policy autonomy when capital markets are

highly integrated are not sufficiently compensated for (Goldstein, 2002).

2.1.4 The Concept of Exchange Rate Volatility

Mundell (1968) has brilliantly set out the implications of financial flows and

financial markets integration. He demonstrated that, with increasing capital mobility,

monetary policy is constrained and sometimes inefficient under fixed exchange rates.

The stock of money, which is endogenous, adjusts to the economy. This implies an

increased sensitivity of the economy and growth to disturbances.

Levy Yeyati and Sturzenegger (2002) reached the conclusion that exchange rate

flexibility reduces growth volatility in developing countries whereas fixed and

intermediate regimes perform better than floats in industrialized countries.

2.1.5 Determinants of Exchange Rate Regimes

Meon and Rizzo (2002) assumed that the empirical findings on the determinants of

exchange rate regimes are numerous and controversial. The reason for the differences

among the findings mostly depends on the country samples taken into consideration,

time periods, regime classifications used in the analyses, estimation methods and

assumptions of econometric models. The econometric methods and regime

19
classifications used in the papers are different from each other. Thus, it creates different

results.

Gosh et al., (1995) insist that if a flexible exchange rate arrangement is able to

reduce growth volatility, why do several countries have recourse to various forms of

fixed exchange rate systems which, as aforementioned, can limit monetary autonomy in

a considerable way?

Credibility in exchange rates, monetary and financial policies serves sometimes as

a justification to the choice of a fixed exchange rate regime. Nominal exchange rate

fixity it is the argued goes enables a country to import the monetary policy credibility of

the base country. This gain of credibility will guide economic agent‘s expectations and

increase monetary policy efficiency, therefore allowing the smoothing of economic

cycles. Through credibility and discipline effects on monetary and fiscal policies, fixed

exchange rates help create a domestic economic environment favorable to investment

and trade (Gosh, et

al., 1995) leading to a relatively sustained and stable growth. As a result, fixed

exchange rate regimes reduce the risks of instabilities coming from profligate fiscal and

monetary policies observed in many developing countries such as those in Latin America

in the 1980's.

2.1.6 Historical and Current Developments of Exchange Rate Policies in Nigeria

For an open economy, whose currency is not internationally traded, exchange rate

policy is a key factor in economic management. In other words, the behaviour of an

economy depends on the exchange rate system and policy it has adopted. Since the

establishment of the CBN, Nigeria’s exchange rate policy has been aimed at preserving

the external value of the domestic currency and maintaining a healthy balance of

payments position, which indeed, is a major provision of the enabling law. With the

20
failure of the Autonomous Foreign Exchange Market (AFEM), introduced in 1995, an

Inter-Bank Foreign Exchange Market (IFEM) was introduced in 1999. IFEM was

designed as a two-way quote system, and intended to diversify the supply of foreign

exchange in the economy by encouraging the funding of the inter-bank operations from

privately-earned foreign exchange. It also aimed at assisting the naira to achieve a

realistic exchange rate. The operation of the IFEM however, experienced similar

problems and setbacks as the AFEM, owing to supply-side rigidities, the persistent

expansionary fiscal operations of government and the attendant problem of persistent

excess liquidity in the system. Specifically, the sustained demand pressure and the

consequent depreciation of the naira exchange rate under the IFEM were traced to the

following causes:

- Limited sources of foreign exchange supply

- The excess liquidity in the system induced by the transfer of government accounts

from the CBN to banks.

- The huge extra-budgetary spending on unproductive investments.

- The heavy debt service burden; and

- Speculative demand, driven by uncertainties created by social and political unrest,

expectations of future depreciation of the naira as well as the deterioration of the external

sector position.

It became a matter of serious concern that despite, the huge amount of foreign

exchange, which the CBN supplied to the foreign exchange market, the impact was not

reflected in the performance of the real sector of the economy. Arising from Nigeria‟s

high import propensity of finished consumer goods, the foreign exchange earnings from

21
oil continued to generate output and employment growth to other countries from which

Nigeria‟s imports originated (CBN: 2003). This development necessitated a change in

policy in 2002, when the demand pressure in the foreign exchange market intensified and

the depletion in external reserves level persisted. The CBN thus re-introduced the Dutch

Auction System (DAS) to replace the IFEM. The DAS represents an improvement over

the previous mechanisms for determining the exchange rate of the naira, and its

operation was/is in line with the current global trends. However, to further liberalize the

foreign exchange market as a long term strategy in making naira a convertible currency

in the future and also to unify exchange rates such as: inter-bank rates, parallel market

rates and official rates, the CBN established a framework and guidelines for the

introduction of a Wholesale Dutch Auction System (WDAS) after the completion of the

recapitalization and consolidation of the banking industry by the end of 2005. Hence, in

2006 WDAS was introduced in order to deepen the foreign exchange market and ensure

sustained exchange rate stability (Soludo, 2008). Furthermore, the strong determination

to resolve the fluctuations of foreign exchange and restore stability made the CBN to

suspend the WDAS and in 2008 re-introduced the Retail Dutch Auction System (RDAS).

The RDAS was re-introduced to check the excesses of market players that engage in

speculation, which had slashed the value of naira against major foreign currencies. Under

the RDAS regime, bid for the purchase of foreign exchange must be cash-backed at the

time of the bid and also "funds purchased from CBN at the auction would be used for

eligible transactions only, subject to stipulated documentation requirements." And such

funds "should not be transferable in the inter-bank foreign exchange market" (Soludo,

2008).

The peculiarity of the Nigerian Foreign Exchange Market needs to be highlighted.

The country‟s foreign exchange earnings are more than 90 per cent dependent on crude

22
oil export receipts (CBN: 2003). This implies that the fluctuations of the world oil

market prices have a direct impact on the supply of foreign exchange. Moreover, the oil

sector contributes more than 80 percent of government revenue (CBN: 2003). Therefore,

when the world oil price is high, the revenue shared by the three tiers of government rise

correspondingly and, as has been observed since the early 1970s, elicited comparable

expenditure increases, which had been difficult to bring down when oil prices collapse

and revenues fall concomitantly. Indeed, such unsustainable expenditure level had been

at the root of high government deficit spending. It is therefore, pertinent that reserves be

built up when the oil price is high to cushion the effect of revenue shortfall on

government spending when oil price falls in the international oil market. Precisely,

throughout the developing world, the choice of exchange rate regime stands as perhaps

the most contentious aspect of macroeconomic policy (Philippe, et al: 2006). Several

factors influence the choice of one regime over the other. But the major consideration is

the internal economic conditions or fundamentals, the external economic environment,

and the effect of various random shocks on the domestic economy. Thus, countries like

Nigeria which are vulnerable to unstable internal financial conditions and external

shocks (including terms of trade shocks, and excessive debt burden), which require real

exchange rate depreciation, tend to adopt a regime that ensures greater flexibility.

Generally, there is a consensus that a fixed exchange rate regime is preferred if the

source of macroeconomic instability is predominantly endogenous. Conversely, a

flexible regime is preferred if disturbances are predominantly exogenous in nature.

Nevertheless, it is increasingly recognised that whatever exchange rate regime a country

may adopt, the long term success depends on its commitment to the maintenance of

strong economic fundamentals and a sound banking system. Finally, the greatest

challenge is to ensure that exchange rate is used as an appropriate instrument to enhance

23
the productivity of the economy. A strong naira not supported by the economic

fundamentals will only destroy the productive base. But an appropriate exchange rate

will make local production, other things being equal, competitive. Therefore, to achieve

wealth creation and generate employment in the domestic economy, there is need to

change the import dependency syndrome and export more. Do we want a strong naira? If

the answer is yes, our motto should be:

a. To produce more;

b. Import less;

c. Export more; and

d. Buy more Nigerian goods

The right exchange rate, is therefore, the one that facilitates the optimal

performance of the Nigerian economy as a part of the new integrated global village and

make the above objectives (a – d) possible (Sanusi, 2004).

2.1.7 The Impact of Exchange Rate Fluctuations on Nigeria’s Trade and Growth

The evil effect of having an over-valued exchange rate is legion. The most critical

is the creation of a high propensity to import because an over-valued currency makes

import cheaper and promotes balance of payments deficits. Nigeria experienced an

unsustainable demand for foreign exchange in the early 1980s when the government

resorted to exchange control mechanism to support the over-valued naira. Also, the days

of foreign exchange rationing through import licensing created suffocating distortion and

corruption, to the Nigerian economy. The economic agents have resources in naira that

command more foreign exchange at the official rate than could be made available, hence,

foreign obligations contracted, which could not be settled immediately subsequently,

crystallised into Paris and London Clubs foreign debts. These debts, with the accrued

24
interest and penalties, constituted more than 80 per cent of Nigerian total external debt.

Indeed, most of these debts were not incurred by the government but rather by Nigerian

sprivate sector induced by over-valued naira.

Furthermore, the period when exchange rate was $1.8 to the naira did incalculable

damage to the economy. It destroyed the agricultural base as food import became so

cheap that farmers abandoned their farms and became traders. The manufacturing sector

was not spared. A new culture of import dependency was created, which proved slow

and difficult to change and at a painful cost caused frustrations and discomfort in the

land. Hence, the most critical factor and challenge, however, remains how to increase the

productivity of the domestic economy. The higher the productivity, the lesser the

pressure on the naira exchange rate and its fluctuations, and all the structural rigidities

facing the economy would be reduced to the barest minimum if they cannot be

completely eliminated. In general it is imperative to let the exchange rate find its

equilibrium level, as it is only when the equilibrium exchange rate prevails that there is

viability of the balance of payments position. Moreover, a stable foreign exchange rate

regime will lead to macroeconomic stability and encourage investment and growth,

reduce capital flight and encourage capital inflows in the form of foreign private

investment.

25
2.1.10 The CBN’s Policy Responses To Exchange Rate Fluctuations

26
 The need to ensure that a realistic exchange rate of the naira is achieved has been a

major objective of the Central Bank of Nigeria. This is because a realistic exchange rate

would result in the simultaneous achievement of sustainable economic growth and

development. Indeed, the CBN has gone a long way in evolving an enduring exchange

rate management policy, and have no doubt made appreciable progress in this regard. A

realistic exchange rate would ensure that the naira is not overvalued in real terms, and

that the external sector remains competitive. However, in the quest for a realistic naira

exchange rate, the CBN employs the Purchasing Power Parity (PPP) model as a guide to

gauge movements in the nominal exchange rate and to determine deviations from the

equilibrium exchange rate. Although the PPP as a relative price does not provide clear

criteria for choosing a base period, and is generally criticized for its insensitivity to short-

term policy actions, it nonetheless, provides a reasonable framework for a comparative

analysis of trading partners‟ performances (Sanusi, 2002). The monetary authority also

usually intervenes through its monetary policy actions and operations in the money

market to influence the exchange rate movement in the desired direction such that it

ensures the competitiveness of the domestic economy. For instance, in 2002, the CBN

adopted a medium term monetary policy framework subject to periodic amendments in

order to free monetary policy implementation from the problem of time inconsistency

and minimize over-reaction due to temporary shocks.

27
 Also, in 2005, some new reforms were introduced as “amendments and addendum”

to the monetary policy circular, which include: exchange rate band (of +/- 3.0%), in

which under the West African Monetary Zone Exchange Rate Mechanism (ERM)

arrangement, member countries are required to maintain a band of +/- 10.0%. The band

was intended to anchor expectations, enable investors and end-users of foreign exchange

to plan and minimize transaction costs and also discourage the destabilising practices of

speculation and hoarding. However, the CBN maintained a narrower band of +/- 3.0%

due to the appreciable level of external reserves and the relative stability of naira

exchange rate achieved then (Soludo, 2008). In Nigeria, maintaining a realistic exchange

rate for the naira is very crucial, given the structure of the economy, and the need to

minimize distortions in production and consumption, increase the inflow of non-oil

export receipts and attract foreign direct investment. Moreover, the persisting problems

of import dependency, capital flight, and lack of motivation for backward linkages in the

production process need to be addressed, amongst others. And to this end, the CBN is

ready to consider suggestions on possible strategies for enhancing the efficiency of

foreign exchange management in Nigeria, particularly in meeting the urgent need, which

is to strengthen and diversify the non-oil export base of the economy.

Other Policy Strategies to tackle Exchange Rate Fluctuations

The government has committed itself to strengthening trade as an instrument for

achieving accelerated economic development. Some of the government’s strategies as

documented in her policy direction for foreign trade include:

 Effective implementation of incentives and their review;

 Establishment of market search of exports houses;

 Bilateral trade negotiations to diversify trade;

 Establishment of reciprocal trade and investment centres;

28
  Establishment of a databank on trade and related matters;

 Adoption of measures for exploring Africa’s potential for trade;

 Continuous reforms at ports, and measures to check dumping;

 Effective implementation of the ECOWAS Protocol on free movement of goods

and people;

 Full operationalisation of the existing Export Promotion Zones (EPZs), the

establishment of new ones, and the granting of export-processing status to deserving

factories that contribute to non-oil exports; and

 Institutional strengthening and reorientation of staff, and streamlining of

procedures and processes (Akindele: 1988, Isitua, et al: 2006).

The implementation of some of these policies is underway in Nigeria. These

include review of customs tariffs with a view to raising revenue, as well as protecting

domestic industry, import-prohibition strategies, aimed at not only boosting

government’s revenue base, but encouraging the agricultural sector, thereby increasing

the income of farmers. Export promotion and incentives to encourage non-oil exports

and reduce the over-dependence on oil revenue are also being encouraged. Other

measures being implemented are the liberalization of trade in accordance with the

demands of international financial institutions and the ECOWAS Trade Liberalization

Scheme (TLS), and inspection at destinations to replace pre-shipment inspection.

2.1.8 Concept of International Trade

International trade has been regarded as an engine of growth, which leads to

steady improvement in human status by expanding the range of people's standard and

preferences (Adewuyi, 2002).

29
 International trade is the exchange of capital, goods and services across the

international borders or territories. In most countries such trade represents a significant

share of Gross Domestic Product (GDP). Therefore, international trade has been an area

of interest to policy makers as well as economists. It enables nations to sell their

domestically produced good to other countries of the world (Adewuyi, 2002).

According to (Adedeji 2006) international trade is simply known as the exchange

of goods and services between nations of the world. At least two countries should be

involved in the activities, that is, the aggregate of activities relating to trading between

merchants across borders. Traders engage in economic activities for the purpose of the

profit maximization engendered from differentials among international economic

environment of nations.

2.1.9 General Survey of Nigeria’s Trade Policies and Performance

Trade policy is within the realm of macroeconomic policy. Trade policies broadly

defined, are policies designed to influence directly the amount of goods and services

exported or imported in a country. The Federal Ministry of Commerce is the principal

government agency with the overall responsibility for trade policy formulation, including

for bilateral and multilateral agreements. Under the present political dispensation in

Nigeria, there are three principal organs responsible for decision-making. These are the

Federal Executive Council, the National Council of State and the Senate. Trade policy

ratification ultimately rests with the Federal Executive Council. Until recently, trade

policy formulation and implementation, even though conditioned by the global context,

was dominated by governmental and inter-governmental agencies and dispersed among

several public sector agencies whose responsibilities overlap and between which

coordination is deficient (Afeikhena: 2005). The major policy thrusts of the Nigerian

30
trade policy includes integrating the economy into the global market system,

liberalization to enhance competitiveness of domestic industries, effective participation

in trade negotiations to harness the benefits in the multilateral trading system, adoption

of appropriate technologies and support of regional integration and corporation. The

export policy seeks to diversify the export base of the economy and replace the mono-

commodity export orientation configured by the dominant petroleum exports. The import

policy is concerned with further liberalization of the import regime to promote efficiency

and international competitiveness of domestic producers. In reviewing trade policies of

the past, the government’s policy framework acknowledges that: … trade and

distribution were characterised by inter-regional trade barriers, many layers of

distribution that raise the cost of goods; bureaucracy in the implementation of trade

incentives including long delays in business registration, payment of export-rebate

incentives etc; and the dumping of substandard and subsidised goods. The non

implementation of the ECOWAS Treaty on Free Trade for many years after its

ratification served as a serious disincentive to exploring the potential of West Africa

Trade. The large number of security agents at the ports and the long procedures for

goods clearance were further impediments to trade.

2.2 Theoretical Literature

The different theories on the topic at hand will be reviewed. The theories of

exchange rate are explained first followed by theories of international trade. Later one or

two theories will be adopted for this research

31
2.2.1 Theories of Exchange Rate

In this section, some theories of exchange rate will be strictly reviewed. These

theories are: Theory of fixed exchange rate, Inflation Theories of Exchange Rates and

Balance of Trade Theory

2.2.1.1Theory of fixed exchange rate

The earliest theory developed by Mundell (1961) and Mickinnon (1963) focused on

trade and stabilization of the business cycle. According to the theory a fixed exchange

rate regime can increase trade and output growth by reducing exchange rate uncertainty

and encourages investment by lowering currency premium from interest rates. On the

other hand a flexible exchange rate could increase output growth and trade by price

adjustment process. For this theory there is a positive relationship between exchange rate

and economic growth.

2.2.1.2 Inflation Theories of Exchange Rates

Another standing point of exchange rate theory is the purchasing power parity

(PPP) which is also called the inflation theory of exchange rates. This theory argues that

the exchange rate will change so that the price of a particular good or service will be the

same regardless of where you buy it. For this reason, the theory of PPP is often known as

the law of one price. It is expressed with the equation:

E = Pdd /Pff

Where;

E = Nominal exchange rate

Pdd = Domestic prices in domestic currency (P)

Pff = Foreign prices in foreign currency (P*)

This is simply expressed as E = P/P*.

32
 From the equation, it is deduced that E depends mainly on the factor that influence

domestic price level. Therefore taking E as endogenously determined. A commonly used

variant expresses the equation in terms of differences relating the changes in the nominal

exchange rate of changes in relative prices. This is known as relative PPP: Showing that;

% ΔE = %ΔP - %ΔP*

Where %Δ = Percentage change (Chamberline and Yaeh, 2006)

2.2.1.3 Balance of Trade Theory

Another theory that explained exchange rate is the balance of trade theory. It holds

that under free exchange rates, the exchange rate of the currency of a country depends

upon its balance of trade. A favorable balance of trade raises the exchange rate, while an

unfavorable balance of trade reduces the exchange rate. Thus the theory implies that the

exchange is determined by the demand for and supply of exchange which depends on

imports and exports of goods/services, international loans, reparation payments, etc.

(Jhingan, 2003). It takes exchange rate to be endogenously determined.

2.2.2 Theories of International Trade

In this subsection, we quickly examine the various theories propounded by

prominent economists, such as Adam Smith, David Ricardo among others.

2.2.2.1 Comparative Cost Theory

After taking the great concern of the Absolute Advantage theory of Adam Smith,

David Ricardo opposed the analysis of Adam Smith Theory of Absolute Advantage

which is also known as the Ricardian theory of comparative cost in which he argued that

even the countries does not have absolute advantage in any line of production over the

other, international trade would be beneficial, bringing gains from trade to all the

participating countries. Comparative cost advantage model is a refinement of Smith’s

theory. In this respect the model of comparative advantage is quite similar to absolute

33
advantage model but only the differenk2ce is that in the comparative advantage model is

that if the one country is either efficient in producing both the commodities and the other

country is inefficient in producing both the commodities as compared to the first. Still

the trade can benefit both the countries on the basis of cost of productionwhich is not

described in the Absolute Advantage model.

2.2.2.2 Neo- Classical Theory of International Trade

As the classical approach of International Trade is based upon some unrealistic and

many restrictive assumptions, the Neo-classical model of International Trade came to

advocate the Theory on some basic and real concepts by which the theory can be

extended up to longer and the mystery of trade can be understandable by the help of

some of the concepts which are thoroughly discussed by the Neo-classical. The Neo-

Classical started their theory with the basic concepts like opportunity cost and production

possibility frontier. Then especially the economists like, Haberler, Leontief, Lerner

Marshall, Edge worth and Meade had contributed for the Neo-classical model of

international trade and analyzed the previous theories of trade and tried to modify the

theories then after and have made their model more comprehensive and applicable to all

returns to scale conditions in production. Here we have a brief discussion on the concepts

of Neo-classicalism had been put down by the economists of that time confidently to

understand the international trade in a logical and comprehensive manner.

2.2.2.3 The Opportunity Cost Approach

The Haberlers theory of opportunity cost is the restatement of Ricardo’s theory of

comparative costs in terms of the opportunity cost. A remarkable attempt has been made

by Haberler to reformulate the theory of comparative cost advantage. Therefore the

theory can be also said the alternate cost theory.

34
 According to the opportunity cost theory if a country can produce either of the

commodity x or y, the opportunity cost of the community x is the amount of other

community y that must be given up in order to get one additional unit of community x.

Thus the exchange ratio between the two commodities is expressed in terms of their

opportunity costs. But of despite of that comparative cost theory has been based upon the

labor theory of value. This means that the value of the commodity is equal to the amount

of labor time involved in the production of that commodity which means that according

to the Ricardo’s theory that labor is the only factor of production of the commodity, that

there is homogeneity in the labor and labor is used in the fixed same proportions in the

production of all the commodities. Haberler’s opportunity cost theory1overcome these

short comings and explains the doctrine of comparative cost in terms of what call the

substitution curve or what Samuelson terms ‘Productive Possibility curve or

‘Transformation curve’ or what Lerner calls ‘Production indifference curve’ or

Production Frontier.

Some of the important assumptions have been made by Haberler are as under:

I. Only two countries say A and B took place in trade according to this

theory.

II. Two commodities and two factors of production (labour and capital are

taken).

III. The supply of Factors is fixed.

IV. There is full employment.

V. Free trade exists between the two countries.

VI. The price of each factor equals its marginal value productivity in each

employment.

35
 Under these heavy gains from trade can be determined by the different cost

conditions, the trade under constant opportunity cost, and the trade under increasing

opportunity cost and the trade under decreasing opportunity cost.

2.2.2.4 Mills Theory of Reciprocal Demand

J.S Mill is one of most renounced and optimistic by nature. That is why particularly

in his theory of reciprocal demand the openly criticized the theory of David Ricardo and

admitted and reformulated the theory of comparative cost advantage in which he claims

that the Ricardo did not pay the attention to the ratio or rate at which one commodity

would exchange for the other commodity. The term ‘reciprocal demand ‘was introduced

by mill to explain the Determination of the equilibrium terms of trade, It is used to

indicate a country’s demands for one community in terms of the quantities of the other

commodities it is prepared to give up an exchange.

After restating the Ricardian theory of comparative cost by J.S Mill, Instead of

taking as given the output of each commodity in two countries, with the laborers costs

different, he accused a given amount of labor in which each country, but different

outputs. Thus his formulation ran in terms of comparative advantages or Comparative

effectiveness of labour as contrasted with Ricardo’s comparative labor cost

Mills Theory of Reciprocal demand is based on the following assumptions.

i. In this model two countries, two commodities and only one factor of

Production took place (2 x 2 x 1) model.

ii. There are constant Returns to scale.

iii. Absence of restrictions, free trade book place between the two countries.

iv. Transportations costs are totally absent.

v. There is perfect competition.

vi. Full employment exists in both the countries.

36
2.2.2.5 Modern Theory of International Trade

The classical theory of international trade bitterly criticized by Bertilohlin in his

famous book ‘Interregional and International Trade’ (1933) and then formulated the

General equilibrium or factor Endowment theory of International trade. It is also known

as the modern theory of International trade or the Hecksher-Ohlin (H.O) Theorem. It was

in fact the Ohlin teacher Eli Hecksher who very first proposed the idea in 1919 that the

trade in a result in the difference in factor endowments in different countries and then

Ohlin carry the theory forward to build the theory of modern international trade.

According to this theory the Relative availability of factor supplies mainly

Determines, the pattern of production, specialization and trade among the regions.

Different countries or the different Regions lane the different factor endowments and

Supplies of factors. Some countries are abundant in capital and some have much labor in

them. Now the theory says that the countries that are rich in capital will export capital

intensive goods and the countries which have much labor will export labor intensive

goods.

According to Ohlin the main cause of trade between the Regions is the difference

in prices the commodities. He admitted that the trade like situation came into forefront

only k2after when we analyze that some commodities can be brought very easily inside

the country whereas the some are very difficult to produce even at the very high prices.

Thus the trade proves to be quite beneficial for the trading countries, as per this theory

also on its realistic assumptions.

The following assumptions have been made in order to simplify the statement of

the Heckscher-Ohlin theorem.

i. The model is carried up by the two countries, two commodities and the two

factors of production (labor and capital).

37
 ii. In commodity and factor markets there exists the perfect competition.

iii. The production functions are different for different commodities.

iv. Each commodity is produced by the constant returns to scale.

v. Transport and Insurance costs are free.

vi. There is immobility in the factors of production between the countries but freely

mobile within the countries.

vii. There is full employment of both the factors of production in each country.

viii. The theory openly advocates the free trade between the two countries.

ix. The technological knowledge remains unchanged.

x. Identical Demand Patterns and Preferences of consumers in both the countries.

2.2.2.6 Mundell–Fleming Model: The model developed to extend the analysis of

aggregate demand to include international trade is the Mundell-Fleming model, which is

an open economy version of the IS-LM model. The key macroeconomic difference

between open and closed economies is that, in an open, a country’s spending in any

given year need not equals its output of goods and services. In other words, a country can

spend or consume more than it produces by importing from abroad, or can consume less

than it produces and exports the rest abroad.

To understand this fully, we take a look at the expenditure approach of national

income accounting. In a closed economy, all output is sold domestically, thus,

expenditure is divided into three components: consumption (C), investment (I), and

government purchases (G). But in an open economy, some output are exported abroad,

thus expenditure component includes exports of some domestic goods and services (EX).

Thus, the expenditure of an open economy’s output Y can be expressed into four

components identity as follows: Y = Cd + Id + Gd + Ex ………………………..….…1

Where,

38
 Cd = Consumption of domestic goods and services,

Id = Investment in domestic goods and services,

Gd = Government purchases of domestic goods and services,

Ex = Exports of domestic goods and services.

In the identity expressed above, the sum of the first three terms (C d + Id + Gd) is

domestic spending on domestic goods and services. While the fourth term (Ex) is foreign

spending on domestic goods and services. To make the identity more useful, note that

domestic spending on all goods and services is the sum of both domestic spending on

domestic goods and services and on foreign goods and services. Therefore, total

consumption denoted as C equals consumption of domestic goods and services (C d) plus

consumption of foreign goods and services (Cf), Total investment (I) equals investment

in domestic goods and services (Id) plus investment in foreign goods and services (If),

and total government purchases (G) equals government purchases of domestic goods and

services (Gd) plus government purchases of foreign goods and services (Gf).

Thus, C = Cd + Cf,

I = Id + If,

G = Gd + Gf

We substitute these three equations into the identity in equation 1 above:

Y = (C - Cf) + (I - If) + (G - Gf) + Ex …………….…………….………………2

Equation 2 can be rearranged to obtain: Y = C + I + G + Ex – (Cf + If+ Gf)

The sum of domestic spending on foreign goods and services (Cf + If + Gf) is

expenditure on imports (IM). Thus, the national income accounts identity can be written

as: Y = C + I + G + Ex –IM Since spending on imports is included in domestic spending

(C + I + G), and because goods and services imported from abroad are not part of a

country’s output, this equation subtracts spending on imports, thus net exports is defined

39
to be exports minus imports (NX = EX – IM), the identity becomes: Y = C + I + G + NX

…………….……………………………..………………3 Equation 3 states that

expenditure on domestic output is the sum of consumption, investment, government

purchases, and net exports. To show the relationship between domestic output, domestic

spending, and net exports, we have that:

NX = Y – (C + I + G) Net Exports = Output – Domestic spending This equation

shows that in an open economy, domestic spending need not equal the output of goods

and services. If output exceeds domestic spending, we export the difference: net exports

are positive. But if output falls short of domestic spending, we import the difference: net

exports are negative. The model is built of the small open economy, under three

assumptions:

 The economy’s output Y is fixed by the factors of production,

 Consumption C is positively related to disposable income Y − T,

 Investment I is negatively related to the real interest rate r, and r must equal the

world interest rate r*, hence, I = I(r*)

Thus, Y=C (Y −T )+ I ( r ) +G+ Nx ( e )

Transform as: Y =C ( y d )+ I ( r ) +G+ Nx ( e ) … … … … 3

2.2.2.6 Policies Influence on Trade balance/Net Exports

There are two policies influencing trade balance or net export, namely; fiscal policy

at home and net export, and fiscal policy abroad and net export.

2.2.2.6.1 Fiscal Policy at Home and Net exports: Suppose the economy starts in a

position of balanced trade, a fiscal policy change (increase in government purchases or

reduction in taxes) that increases consumption and reduces national saving, (because S =

Y – C – G), investment remains the same since the world real interest rate is unchanged.

40
Thus, the fall in saving (S) implies a fall in net exports (NX). In other words, a change in

fiscal policy that reduces national saving, leads to a trade deficit and vice versa. )

2.2.2.6.2 Fiscal Policy Abroad and Net export: A fiscal expansion in a foreign

economy large enough to influence world saving and investment, raises the world

interest rate. The higher world interest rate raises the cost of borrowing and thus, reduces

investment in the small open economy. Thus, domestic saving now exceeds investment.

Since NX = S – I, the reduction in investment stimulates NX. Hence, fiscal expansion

abroad through fiscal policy leads to a trade surplus at home. The Real Exchange Rate

and Net Exports: Suppose that the real exchange rate is lower, domestic goods are less

expensive relative to foreign goods, domestic residents purchase few imported goods and

foreigners buy many domestic goods. As a result of both of these actions, the net exports

are greater. The opposite occurs if the real exchange rate is high. The relationship

between the real exchange rate and net exports can be written as: NX = NX(e) The

equation states that net exports are a function of the real exchange rate. Trade Policies

and Net Exports: Suppose that government through a tariff or quota prohibits the

importation of foreign cars. For any given real exchange rate, imports would now be

lower, thus, this leads to increase in net exports. In other words, a protectionist trade

policy stimulates the trade balance or net exports. Exchange Rate Fluctuations and Trade

flows: The traditional theory is of the opinion that exchange rate fluctuations depress

trade. Fluctuations in exchange rate lead to costs, risk and uncertainty of profit in

international transactions. As a result of this, economic agents who are only but price-

takers in the market; rather than involving in international transaction with uncertainty of

profit in the face of fluctuations would prefer to redirect their activity from international

or foreign trade to home trade and avoid the risk and cost associated with foreign trade.

In other words, exchange rate fluctuations reduce the volume of international trade.

41
2.2.3 Theoretical Framework

However, after examining various theories on both exchange rate and international

trade critically, therefore, this research work will be anchored on Balance of Trade

Theory. The researcher adopts this theory because of its following implications on this

study.

The theory connects both exchange rate and international trade together;

Exchange rate fluctuations are attributed to imbalance in balance of trade; a

favorable balance of trade raises the exchange rate, while an unfavorable balance of trade

reduces the exchange rate.

Finally, exchange rate is determined by the demand for and supply of exchange

which depends on imports and exports of goods/services,

2.3 Empirical Literature

Dania and Ogedengbe (2019) investigated the impact of exchange rate volatility on

non-oil export performance in Nigeria from 1982-2017,the study used serial annual and

secondary data gotten from the Central Bank of Nigeria, statistical bulletin, annual

reports. Error correction model was used to analyse the data. Non-oil export is the

dependent variable while exchange rate volatility, interest rate, foreign direct investment

and total government expenditure are independent variables. Exchange rate has an

ARCH positive significant effect on non-oil export performance in Nigeria. It was

recommended that the managers of the economy should apply policies that can stabilize

the exchange rate as the sector has the capability to generate jobs and reduce extreme

poverty in the land.

Victor (2015) evaluated the impact of the Real Effective Exchange Rate on non-oil

exports in Nigeria from 1980 to 2014.The research used time series data obtained from

42
CBN. He identified non-oil export as dependent variable while real exchange rate

(REER), Gross Domestic Product (GDP), openness of Nigerian economy as independent

variables. The cointegration technique was employed to analysis the data. The study

indicated that the Real Effective Exchange Rate and the degree of openness have positive

and significant impact on non-oil exports in Nigeria. The study, however recommends

further devaluation of the exchange rate backed by increased domestic production

through a diversified production base.

Ajinala and Popoola (2017) examined the Impact of Exchange Rate Volatility on

Export Performance in Nigeria from 1981-2015.The data obtained from Statistical

Bulletin of Central Bank of Nigeria. They made use of Gross Domestic Product (GDP)

as dependent variable while exchange rate, foreign direct investment as independent

variables. They employed Ordinary Least Square method to analyse the data. The finding

of study showed that it was deduced that Gross Domestic product (GDP), exchange rate

fluctuation (EXCt) and foreign direct investment have positive relationship to export

performance (Xt) in Nigeria. It was recommended that the government should encourage

the export promotion strategies in order to maintain a surplus balance of trade.

Aminu and Bello (2013) investigated the impact of exchange rate volatility on

export in Nigeria from 1970-2009.Time series data was used and the data sourced from

Central Bank of Nigeria Statistical Bulletin. The study used export as dependent variable

and exchange rate as independent variable. Ordinary Least Square (OLS); Granger

causality test; and ARCH and GARCH techniques were used for the analysis of the data.

The findings of the study showed that exchange rate is volatile nevertheless export is

found to be non-volatile. It was recommended that the pursuance of a stable and

sustainable exchange rate policy and to put in place measures that will promote greater

43
exchange rate stability and improve terms of trade, promote greater openness in order to

augment non-oil exports. Hence, these measures could greatly promote export trade.

Lawrence and Mohammed (2015) examined the impact of exchange rate on non-oil

export. The research used time series data obtained from CBN for a period of 27 years

that is 1986 to 2013.Ordinary Least Square (OLS) was used to analyse the data. Non-Oil

Export Ratio as dependent variable while Exchange Rate; Openness of the Economy;

Credit to the private sector; Inflation Rate; broad money supply, Gross Domestic Product

as independent variables. The study shows that exchange rate, money supply, credit to

the private sector and economic performance have a significant impact on the growth of

non-oil export in the Nigerian economy and appreciation of exchange rate has negative

effect on non-oil export which is consistent with the economic theory. The study

recommended among others that monetary authority should ensure exchange rate

stability in order to stem inflationary tendencies in Nigeria which have adverse effect on

the growth of non-oil export.

Anthony and Victor (2014) investigated the impact of exchange rate volatility on

non-oil export in Nigeria 1986-2008. The researchers used quarterly time series data

obtained from International Monetary Fund (IMF), International Statistics CD-ROM

(2007) and Central Bank of Nigeria statistical bulletin 2008 and 2009 edition. The multi-

variety co-integration and error correction model have been used to analyse data. Real

nonoil-export as dependent variable while real foreign exchange rate, real intermediate

import and real exchange rate, foreign income as independent variables. The finding of

this study shows that exchange rate volatility and foreign income have significant

positive effect on non-oil export while import on the other hand have a statistically

negative effect on export. It was recommended that exchange rate volatility is only

affected in the long run but not in the short run in the case of Nigeria area.

44
 Shehu (2008) assessed the impact of exchange rate volatility on export trade in

Nigeria. Data were obtained from Central Bank of Nigeria (CBN) statistical bulletin in

nominal terms from 1986Q1 to 2006Q4. Vector co-integration estimates was employed

for data analysis. Non-oil export is the dependent variable while naira exchange rate, US

volatility, Nigerians terms of trade and index of openness are the independent variables.

The finding shows that the nearer exchange volatility decrease non-oil export while US

dollar volatility increase export of non-oil. This study recommended measures that will

promote greater openness of the economy and exchange rate stability in the economy.

Jameelah (2010) examined the exchange rate changes on output performance in

Nigeria from 1970-2007. Time series data was used and the data sourced from Central

Bank of Nigeria Statistical Bulletin 2007. Real income is the dependent variable while

real consumption, real government expenditure, real investment, real export and real

import are the dependent variables. The data were analysed with the help of seeming

unrelated regression estimation (SURE) techniques. The finding of this study shows that

exchange rate has significant contractional effect on agricultural and manufacturing

sector while it expansionary effect on service sectors. The study recommended that more

effort should be put in place to check the importation of goods that could be locally

produced so as to improve the performance of the manufacturing sector.

Adeniran and Adeyemi (2014) examined the impact of exchange rate fluctuation on

economic growth from 1986 to 2013. The data used in this study is secondary data;

sourced from Central Bank of Nigeria statistical bulletin, the researchers of this study

used correlation and regression analysis and ordinary least square (OLS) to analyse the

data. Gross domestic product is dependent variable while exchange rate, interest rate,

inflation rate as independent variables. The finding shows that exchange rate has positive

impact but not significant while interest rate and inflation have negative impact on the

45
economic growth but not significant. The study recommended that government

encourage the export promotion strategies in order to maintain surplus balance of trade

and also conducive environment, adequate security, effective physical and monetary as

well as infrastructural facilities should be provided so that foreign investor will be

attracted to invest Nigeria.

Paul and Oluwatomsin (2013) estimating the effect of exchange rate devaluation on

the trade balance in Nigeria from 1970- 2010.The researcher sourced the data from

World Development Indicator (WDI) data base, Central Bank of statistical bulletin.

Johasen co-integration technique and vector error correction model were used to analyse

data. Trade balance as dependent variable while export revenue, export expenditure,

price of output, quantity of output, foreign currency, quantity of import, domestic

national income and foreign income are the independent variables. The findings of the

study shows that exchange rate induce an inelastic and significant relation on trade

balance in the long run, there exist no short run causality from exchange rate to trade

balance and money supply volatility contribute more to variance in trade balance than

exchange rate volatility. The study recommended that government should concentrate on

policy that will standardize and raise money supply to the real sector which has the

tendency to increase volume of goods available for export and reduce demand for

imported goods.

Ricardo and Victorio (1986) examined the effect of real exchange rate certainty on

export. The research was conducted in Chile, Columbia, Peru, Philippines, Thailand and

Turkey. The data obtained from International Financial Statistic and International

monetary Fund (IMF). Export demanded is the dependent variable while export and

world price, price elasticity, labour and capital are independent variables. The findings of

the study shows that expected and realized separately and thus that both should enter the

46
right side of export, the expected should enter through it effect on the capital and actual

through it effect on hiring and firing flexible factor. It was recommended that

ineffectiveness of monetary policy in stabilizing exchange rate and therefore calls for

need of tighting measure especially in controlling high demand of foreign currency.

Joel and Adesoji (2016) examined the impacts of exchange rate volatility on export

demand in Nigeria from 1970-2015. The data sourced from Central Bank of Nigeria

Statistical Bulletin. The study used using a descriptive approach for data analysis. The

findings from descriptive analysis show that despite the policy pronouncements in the

period covered, exchange rate volatility greatly affected export performance in Nigeria,

in particular, the volume of export demand. The study recommends a deliberate

exchange rate policy action that will have good implication for export growth in Nigeria

Oladipupo et el (2011) examined the impact of exchange rate on balance of trade in

Nigeria. The variables are Balance of trades, Exchange rates, Money supply, Real

Output, Price level, Interest rate, Inflation rate and Nominal domestic credit. Therefore,

the study used ordinary least square method and also find out that exchange rate has a

Significant, impact on the balance of trades, position. The price level can be substituted

for inflation. It finally concluded that, the exchange rate depreciation can actually lead to

improved balance of trades, position if Fiscal discipline is imposed.

Okorontah et al (2016) it also examined exchange rate fluctuation on economic

growth in Nigeria. The variables used are Economic Growth rate measure with real GDP

(RGDP) Growth rate of money supply. Nominal exchanges rate and Rate of inflation

(INF) yearly average consumer price Index. The study employed the ordinary least

square (OLS) technique, the Johansson co-integration test and the error correction

mechanism (ECM). The result shows that there is no strong relationship between

exchange rate and economic growth in Nigeria. The result shows that there is no strong

47
relationship between exchange rate and economic growth in Nigeria. The time frame for

the study is just 26 years. It is therefore concluded that Nigeria improves its competitive

capacity in the international market through export diversification.

Anthony (2008) examined the exchange rate volatility and non-traditional export

performance. The research was conducted in Zambia. The data sourced from Export

Board of Zambia Audit report, Bank of Zambia. Estimated and error correction model

were used to analyse data. Non-traditional export (NTEs) is the dependent variable while

foreign income (WY), terms of trade (TOT), real effective exchange rate (REER) are

independent variables. The finding of the study shows that exchange rate volatility

depresses export in both short run and long run. Recommendation of the study, to both

export performance and domestic policy and non-policy supply impediments must be

removed to level, the plain field for non-traditional exporters. However, electricity tariff,

better road infrastructure and efficiency in processing exports paper and other logistic at

border should be encouraged.

Wenahwo (2004) investigated exchange rate depreciation on export; the research

was conducted in Singapore. General Autoregressive Conditional heterokedasticity and

generalized method of movement were used to analyse data. Exchange rate is dependent

variable while export, foreign income, depreciation rate and exchange rate volatility are

the independent variables. The findings of the study shows that depreciation does not

significantly improve export while exchange rate risk is significantly impede export. The

research recommended that Singapore Authority can elicit stronger export growth by

ensuring a more stable exchange rate rather than by engineering it depreciation.

Adenira, et el (2014) examine the impact of exchange rate fluctuation on Nigeria

economic growth. The variables used are Rate (EXR), Interest Rate (INT), Inflation,

Rate (IFR), and Gross Domestic Product (GDP). And therefore, the method used was

48
correlation and regression analysis of the ordinary least square (OLS). However, he find

out that The result revealed, that exchange rate has positive impact on economy but not

significant, interest rate and rate of inflation have negative impact on economic growth

but not significant. The study did not test stationary of data and other test such causality,

short run relationship. It finally concluded that that government should encourage the

export promotion strategies in order to maintain a surplus balance of trade and also

conducive environment, adequate security, effective fiscal and monetary, as well as

infrastructural facilities should be provided so that foreign investors will be attracted to

invest in Nigeria.

2.3.1 Gaps in literature

Most of empirical studies available on effectiveness of exchange rate volatility are

concentrated only on international trade, oil sector, economy growth, balance of trade

and payment.for instance Adenira, et el (2014) examine the impact of exchange rate

fluctuation on Nigeria economic growth; Mbanasor et al (2017) examines the effect of

exchange rate fluctuation on Nigeria’s Balance of Payment; Oladipupo et el (2011)

examined the impact of exchange rate on balance of trade in Nigeria. Little has been

conducted on impact of exchange rate depreciation on non-oil export. Also, the available

ones, there are misspecification of models and variables. They were concerned in finding

the relationship exist between the two variables, and employed only Ordinary Least

Square (OLS). For examples: Adeniran and Adeyemi (2014) examined the impact of

exchange rate fluctuation on economic growth from 1986 to 2013. The data used in this

study is secondary data; sourced from Central Bank of Nigeria statistical bulletin, the

researchers of this study used correlation and regression analysis and ordinary least

square (OLS) to analyse the data. Gross domestic product is dependent variable while

exchange rate, interest rate, inflation rate as independent variables; Lawrence and

49
Mohammed (2015) examined the impact of exchange rate on non-oil export. The

research used time series data obtained from CBN for a period of 27 years that is 1986 to

2013.Ordinary Least Square (OLS) was used to analyse the data. Non-Oil Export Ratio

as dependent variable while Exchange Rate; Openness of the Economy; Credit to the

private sector; Inflation Rate; broad money supply, Gross Domestic Product as

independent variables; Ajinala and Popoola (2017) examined the Impact of Exchange

Rate Volatility on Export Performance in Nigeria from 1981-2015.The data obtained

from Statistical Bulletin of Central Bank of Nigeria. They made use of Gross Domestic

Product (GDP) as dependent variable while exchange rate, foreign direct investment as

independent variables. They employed Ordinary Least Square method to analyse the

data. Finally, they were not look at their short run and run effects.

To rectify above misspecifications, therefore this research will examine the short

run and long effects of exchange rate depreciation on non-oil export for period of 36

years (1982-2017) by using Autoregressive Distributive Lag (ARDL), the theory for this

research is balance of trade theory. From the adopted theory, the model and variables for

this study will be derived. Non-oil export is dependent while exchange rate is the

variable of interest; real export, real import, and interest rate are controlled variables.

Finally, time series data would be sourced for from Central Bank of Nigeria (CBN)

statistical bulletin on the variables of the study.

Also, in the model of this research shall be inclusion of some variables: non- oil

export, exchange rate, export, import, and interest rate which are lacked in the some

previous empirical studies.

50
 CHAPTER THREE

RESEARCH METHODOLOGY

3.0 Introduction

This chapter describes the method employed in carrying out this research work

under the following headings: area of study, research design, source of data collection,

variables measurement, model specification and data analysis

3.1 Area of study

Nigeria is the area of study for this research. Nigeria is derived from the word

‘Niger’ which is the name of the river that constitutes the most remarkable geographical

feature of the country. Nigeria attains her independence from Britain in 1960 and became

a republic in 1963. It is made of thirty-six states, seven hundred and seventy four local

governments and the Federal Capital Territory FCT), Abuja.

Nigeria has an area of 9,323.723 square kilometres which encourages extensive

agricultural practices. She lies east of Benin Republic, south of Niger and Chad

Republics, West of the Republic of Cameron, and North of the Gulf of Guinea. Her

population is over 140 million people, going by the 2006 census figure.

The country’s economy is essentially agriculture in spite of its rich endowment in

back oil and other mineral resources; the country depends largely on agriculture for

national output and employment generation. About seventy percent (70%) of the

population live in the rural areas and engage in agriculture (CBN, 2006). The urban

centers have manufacturing firms, service firms and commercial banks, among other

(Anyanwu in Ogbu 2012).

Nigeria has a Central Bank known as the Central Bank of Nigeria (CBN)

established in 1958. There are about twenty four consolidated commercial banks, with

51
branches scattered all over the country. Also, there are micro-finance banks (MFB) in

many parts of the country.

The Nigerian economy is structurally grouped into production, general commerce,

service and others. The industrial sector comes under production with farming industries

(Anyanwu et al, 1997). The industrial particularly the manufacturing sub-sector is seen

as the heart of the economy, this implies that the economy cannot grow and develop

without efficient and effective industry.

3.2 Research design

This research will make use of inferential statistics. The research also uses time

series data on the variables of the research to examine the impact of exchange rate

depreciation on non-oil export in Nigeria from 1982 to 2017. The study examines the

impact of exchange rate depreciation on non-oil export in Nigeria. The study cover the

period of (36) years from 1982 to 2017 which has is in accordance of central limit

theorem. We use non probability sampling inform of availability sampling techniques.

The choice of non-probability sampling techniques arises due to the constraint in the

availability of data. The study covers the period from January 1982 to December 2017 to

examine the impact of exchange depreciation on non-oil export trade in Nigeria. The

justification for the use of the period arises from the availability of data. Moreover, the

period of 1980s was oil boom while in 2016, after economic recession, government has

been putting in place the strategy to diversify to on-oil sector.

3.3 Method of Data Collection

This study used secondary data to examine the impact of exchange rate

depreciation on non-oil export in Nigeria. The data was obtained from the Central Bank

of Nigeria Statistical bulletin (CBN, 2018) and World Bank Development Indicator

(WDI, 2018).

52
 3.4 Model Specification

Following the study of Shehu (2008) who examined the impact of exchange rate

volatility on export trade in Nigeria, we adopt the model of the study, but with some little

modification in the model which include addition of new variables and new techniques.

3.4.1 Economic model

The economic model describe that non-oil export is a function of exchange rate,

real export, real import and interest rate. This model is as follows:

NOE=f ¿………………………………………………….. (1)

3.4.2 Econometric model

The econometric model is to be specifying as follows:

NOEt =β 0 + β 1 REER t + β 2 exp t + β 3 IMP t + β 4 RINT t + μt … … …………… (2)

Where:

NOE= non-oil export

REER=Exchange rate

EXP= Export

IMP= Import

INT= Interest rate

µ= Error term not included in the model

t= time trend

β 0>0 intercept of the model

β 1 , β 2 , β 3 ,Are coefficients of independent variables?

The next model to be developed is Autoregressive Distributed Lag (ARDL) model,

which is to be specifying as follows:

The dynamic short run and long run ARDL model is specified as;

53
 ∆ [ ( ln NOEt ) ]=β 0 + β 1 ln ⁡( NOE¿¿ t−1)+ β 2( REE R¿¿ t−1)+ β 3 ¿(exp¿ ¿t−1)+ β 4 (IMP ¿¿ t−1)+ β

Similarly the error correction model is specified as:

p m n o
∆ [ ( ln NOEt ) ]=β 0 + ∑ α 1 ∆ ln ⁡(NOE ¿¿ t−1)+ ∑ α 2 ∆( REER ¿¿ t−1)+ ∑ α 3 ∆∈(exp ¿¿ t−1)+ ∑
i=1 i=1 i=1 i=1

3.4.3 A Priori Expectation

According to adopted theory of this research work (balance of trade theory) and

some empirical studies, exchange rate, real import and interest rate have negative effect;

real export has negative effect. Thus, the parameters of these variables of this research

work are expected to be in line with theory. β1 and β3 <0, and β2>0

3.4.4 Pre Estimation Techniques

To examine the impact of exchange rate depreciation on non-oil export in Nigeria.

Unit root which are part of the properties of time series need to be diagnose. Moreover,

various test such as Ramsey stability test, Serial correlation test, heterokedsticity test,

Bound test and normality test using histogram are to be diagnoses to confirm the

classical assumptions and valid conclusion

3.5 Variable Measurement

The variables to be employ in the model are divided into two. The dependent

variable which include is non-oil export (NOE) and the independent variable comprises

Real Effective Exchange Rate (REER), export (EXP), import (IMP) and interest rate

(INT). The descriptions of the variable are as follows:

3.5.1 Exchange rate is the rate of price by which one country currency exchange

with another. The selection of the variable is in line with the study of Oloyede, (2002)
54
viewed exchange rate as the price of one country’s currency in relation to another

country, which is a key variable for healthy economic management in every nation.

3.5.2 Non-Oil Export: The non-oil export product are unlimited as they include

agricultural crops, manufacturing goods, solid minerals, entertainments and tourism

services etc. (Agbogan, Akinola & Baruwa, 2014), defined the non-oil sector of the

Nigerian economy as the whole of the economy less oil and gas sub-sector. It is proxy as

NOE.

3.5.3 Export: this is the sending locally produced goods to other countries of the

world, that is, visible goods sent to other countries. It is proxy as EXP

3.5.4 Import: this refers to bringing in foreign produced goods into country that is

visible goods brought to country. It is proxy as IMP

3.5.5 Interest Rate: Interest rate is the amount charged on borrowed money,

expressed as a percentage of the principal, by a lender to a borrower for the use of

money. It is proxy as INT.

3.6 Method of Data Analysis

The study examines the impact of exchange rate depreciation on non-oil export in

Nigeria. We analyzed the data using descriptive statistics and inferential statistics.

Moreover, we conduct diagnostic test to make the result more robustness. The

descriptive statistics described the statistics using mean, median, standard deviation,

maximum and minimum, with probability of Jarquebera. While inferential statistics is

the time series regression analysis. To examine the both short and long effects of

exchange rate on non-oil export, the research will adopt ARDL.

55
 CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS

4.0 Introduction

This chapter is dedicated to data presentation, analysis as well as discussion of

findings. Summary statistics is firstly presented to examine the nature of the data under

investigation, followed by the result of Augmented Dickey and Fuller test of unit root,

the ARDL, bound test, cointegrated and long run form were all reported also. Diagnostic

results and granger causality results were equally presented.

4.1 Analysis and Interpretation of Result

This reports the average, median, range and standard deviation of the data, it also

reports the diistribution of data by reporting their Skweness, Kurtosis and the Jarque-

Bera Probability.

4.1.1 Descriptive Statistic

Table 4.1 depicts the summary statistics of individual sample under investigation,

summary statistics reported are mean, median, maximum, minimum observations,

standard deviation, kurtosis, skewness, and Jacque Bera statistics. In all we have total of

36 observations, mean average for non oil export, real exchange rate, export, import and

interest rate approximately stood at #13.58, 146.78%, #2.86, #3.29 and  1.87%

respectively. Median for each of the above mention variables are approximately,

#14.37901, 100.24%, #3.04, #-0.28 and 3.67%. Maximum and minimum observation for

non-oil export are #16.54 and #9.023 respectively, while for real exchange rate has

541.46% and 50.16%, export has #3.58 and #1.66 as maximum and minimum

observation that of import and interest rate stood at #85.51, and #-37.14, 18.18% and -

31.45%.

56
 TABLE 4.1.1: Summary Statistics

Statistics NONOILEXP REER LEXPORTS IMPORT INT

Mean 13.58036 146.7956 2.863007 3.294329 1.868797
Median 14.37901 100.2384 3.044729 -0.284237 3.666917

Maximum 16.54088 541.4648 3.584165 85.51444 18.18000

Minimum 9.023229 50.16845 1.658055 -37.14301 -31.45257

Std. Dev. 2.613230 120.9097 0.531055 30.53485 10.12920

Skewness -0.492613 1.961376 -0.954055 0.675869 -0.987359

Kurtosis 1.828705 5.987300 2.801653 2.912433 4.606346

Jarque-Bera 3.513903 36.46791 5.520338 2.752295 9.719790

Probability 0.172570 0.000000 0.063281 0.252550 0.007751

Sum 488.8931 5284.641 103.0683 118.5959 67.27668

Sum Sq. dev. 239.0139 511670.8 9.870672 32633.21 3591.021
Observations 36 36 36 36 36
Researcher’ computation, May 21, 2019, E-view 9

More so, the standard deviation for the variables is as follows #2.61, 120.91%,

#0.535, #30.53 and 10.13%.

The non-oil export, export and interest rate are skewed negatively, while exchange

rate and import skewed positively, and all the variables are coincided except real

exchange rate has value greater than zero (1.961376), as for kurtosis, export and import

are mesokurtic curved, real exchange rate and interest rate platykurtic because their

values are greater than three platykurtic shaped while non- oil export is leptokurtic

curved. The probabilities of Jarque-Bera of non-oil export and import not are statistically

significant while those of real exchange rate, export and interest rate are statistically

significant which contradicts the role of Jarque-Bera probability.

57
4.2: Ordinary Least Square Regression Result:

Ordinary least technique is employed to estimate the kind of relationship exist

between the dependent variable and its explanatory variables.

TABLE4.2.1: RESULT OF ORDINARY LEAST SQUARE

Variable Coefficient Std. Error t-Statistic

REER -10474.84 8105.581 -1.292300
EXPORTS 161071.1 129828.6 1.240644
IMPORT -54814.62* 30307.44 -1.808619
241497.5**
INT * 81298.87 2.970490
C 2618219. 3419710. 0.765626
R-squared 0.321001
Adjusted R-
squared 0.233388
Prob(F-statistic) 0.014803
Durbin-Watson
stat 0.450239
***, * imply 1%, 10% level of significance

Researcher’ computation, May 21, 2019, E-view 9

From the result of ordinary least square, the real exchange rate and import depict

inverse relationship with non-oil export but both export and interest rate show direct

relationship. As the all the variables increase, non-oil export will be increased by the

parameters of the export and interest rate; however declined by the parameters of the

import and real exchange rate in Nigeria during the study.

However, only import and interest rate are statistically significant, the other two are

not. Therefore, having the import value increases by #1, non-oil export will be declined

by 548.14%. Likewise the interest rate rises by 1% the non-oil export value will be

increased by 2414.98% in Nigeria from 1982 to 2017.

58
 Regarding R-square and its adjusted, it is very weak; 32% and 23%. R-squared

explains only 32% variations (changes) in non-oil export is caused by real exchange rate,

export, import and interest rate while remaining 68% caused by other independent

variables not included in the model. Adjusted R-squared also explains if other variables

are included in the model, they will account for 23% variation in non-oil export after the

adjustment. This shows that the model is relatively weak in examining the impact of

exchange rate depreciation on non-oil export. F-statistic shows fitness of the econometric

model because it is significant. Durbin-Watson Statistic is less than 2; there is presence

of autocorrelation. The problem of autocorrelation can be rectified through conducting

unit root test and other tests.

Hypotheses testing:

The null hypothesis states that there is no significant relationship between the

exchange rate, non-oil export real export, real import and interest rate is rejected on the

account that import and interest rate are significant and alternative hypothesis states there

is no significant relationship between the exchange rate, non-oil export real export, real

import and interest rate is accepted on the same account.

4.2.1 UNIT ROOT TEST

When carryout unit root, Augmented Dickey Fuller (ADF) and Phillip perron are

the most commonly used. This study used ADF and PP to test stationary of the series.

The null hypothesis states that variable has unit root. When a variable has root, it means

that such variable is fluctuating. Most of macroeconomic variables have this problem.

The null hypothesis can be rejected by 1%, 5% and 10% otherwise is accepted.

59
 TABLE4.2.1.1: RESULT OF UNIT ROOT TEST AT LEVEL

ADF PP
Variables Intercept Trend with None Intercept Trend with None
intercept intercept

Non-oil 0.0893* 0.0945*

export

REER 0.2551 0.5762 0.0751* 0.3578 0.7040 0.0773*

Export 0.1291 0.4919 0. 0.1549  0.6146 0.6955
6424
Import 0.0001*** 0.0001***
Interest 0.0096***  0.0105**
rate

***,** and * imply 1%, 5% and 10% level of significances

Researcher’s computation, May 21, 2019, E-view 9

In the above table, the result of unit root test at level is presented. From the same

table, it can be seen that non-oil export, real exchange rate, import and interest rate are

significant by using both ADF and PP approaches. In other word, they are stationary at

level. The export is found not to be significant due to its probability value that greater

than 10%. Therefore, it is necessary to take 1st difference of export.

TABLE 4.2.1.2 RESULT OF UNIT ROOT TEST AT 1ST DIFFERENCE

ADF PP
Variables Intercept Trend None Intercept Trend None
with with
intercept intercept
Export 0.0000*** 0.0000***  
*** implies 1% level of significance

Researcher’s computation, May 21, 2019, E-view 9

60
 As it can be seen that after taking 1 st difference of export it is now significant by

using both ADF and PP approaches.

TABLE 4.2.1.3: SUMMARY REPORT OF UNIT ROOT TEST

Augmented Dickey Fuller Phillips Perron

Test

Variable Level 1st I Level 1st I Remark

s difference (d) difference (d)

Non-oil
export 0.0893* I 0.0945* I Stationary
(0) (0)
REER 0.0773*
0.0751* I I Stationary
(0) (0)
Export 0.6955
0.6424 0.0000** I 0.0000*** I Stationary
* (1) (1)

Import 0.0001* 0.0001***

** I I Stationary
(0) (0)
Interest  0.0096*  0.0105**
rate ** I I Stationary
(0) (0)
***,** and * imply 1%, 5% and 10% level of significances

Researcher’s computation, May 21, 2019, E-view 9

At the glance, we can see that all the variables are stationary either the level or 1 st

difference. Non-oil export, real exchange rate, import and interest rate are stationary at

level but export is stationary at 1st difference.

In nutshell, the order of integration is combination of I(0) and I(1). With the result of unit

root, ADRL technique will be adopted for this project for its data analysis. Since the

result is combination of I(0) and I(1), we need to test the co-integration. To this, ARDL

61
bound test is suitable.

4.2.2 Cointegration and Long Run Coefficients

The process of estimating cointegration through the popular Paseran and Shin

(2001) method entails establishing the order of integration of the variables under

investigation to ensure that none of the series is I(2), in other words mixture of 1(1)

variables and I(0) variables can cointegrate. Table 4.4 depicts the bound test conducted

from the autoregressive distributed lagged model utilizing automatic lag selection

method.

TABLE 4.2.2.1 RESULT OF ARDL BOUNDS TEST

F-statistic  3.37 4

Critical Value Bounds

Significance level Lower bounds 90% Upper bounds 90% Remark

10% 2.45 3.52 Co-integration

5% 2.86 4.01 Co-integration

2.5% 3.25 4.49 Co-integration

1% 3.74 5.06 No Co-integration
Researcher’s computation, May 21, 2019, E-view 9

The Table 4.4 presented the result of ARDL bound test. The result is inconclusive

at 10% and 5% level of significances, this is the fact that the value of F- statistic (3.37) is

between critical values of I(0 and 1(1)). But at 1% the value of F- statistic (3.37) is less

than critical values of both I(0) and I(1). So, at 1% there is no co-integration. Thus, the

result of ARDL bounds test is known as inconclusive. Hence, the research will proceed

to report the ARDL long-run and dynamics models as to establish long-run and dynamics

62
effects of real exchange rate, export, import and interest rate on non-oil export in Nigeria

under the time consideration.

Hypotheses testing:

The null hypothesis which states that no co-integration among the variables is

rejected, and the alternative hypothesis which states that there is co-integration among

the variables is accepted.

TABLE 4.2.2.2: RESULT OF ARDL LONG RUN RELATIONSHIP

Dependent variable: Non-oil

export

Variables Coefficient Std. Error t-Statistic

REER -0.019801 0.010250 -1.931788
LEXPORTS 4.890610*** 1.213061 4.031626
IMPORT -0.048373 0.027157 -1.781246
INT 0.122163** 0.049459 2.469975
*** and **Imply 1% and 5% level of significances

Researcher’ computation, May 21, 2019, E-view 9

The result of long run model is presented in above table. In the long-run, both

export and interest rate are depicted positive relationships with the non-oil export but real

exchange rate and import have inverse relationship with non-oil export in Nigeria during

the time of study. Unfortunate, only two variables are statistically significant, export and

interest rate; the other two are not significant.

Additionally, export and interest rate are significant; and both are directly influence

the non-oil export. As both increase, they cause an increase in non-oil export value by

their co-efficient.

63
 If the export value increases by one thousand naira, the non-oil export value will

increases by 49%. Similarly, if interest rate is raised by one per cent, it will lead to an

increase in no n-oil export value by 12%.

Hypotheses testing:

Thus, the null hypothesis which states that there is no long-run relationship the

dependent variable and independent variables is rejected and alternative hypothesis

which states that there is long-run relationship the dependent variable and independent

variables is accepted.

4.2.3 Short Run Dynamics and Error Correction Term

The short-run dynamics which is otherwise known as the error correction model

was carried out after the retrieval of the long run coefficients. The error correction model

shows the possibility of the restoration of the equilibrium in case of distortion in the

economy. It also collaborate the cointegration as derived by the conduct of wald test. The

result of the short run dynamics is presented in Table 4.6. The one period lag coefficient

of the error correction term yield a negative sign (-0.36) and statistically significant at

1%. This implies that, in case of distortion in the economy, equilibrium can be re-

established by 36% percent annually. Theoretically the 36% annual adjustment towards

equilibrium signifies a relatively slow adjustment process, as it will take the economy

long period before reverting to the long run equilibrium.

TABLE 4.2.3.1: SHORT RUN DYNAMICS MODEL WITH ECM

Dependent variable: Non-oil export

Variable Coefficient Std. Error t-Statistic
D(REER) -0.007463*** 0.001139 -6.551074
0.0011 -
D(REER(-1)) -0.003707** 33 3.272040
D(REER(-2)) 0.004299*** 0.000864 4.977256
D(REER(-3)) -0.001136 0.000702 -1.617252
64
 D(LEXPORTS) 1.247272*** 0.144674 8.621240
D(LEXPORTS(-1)) -0.701199** 0.243774 -2.876437
D(LEXPORTS(-2)) -1.004852** 0.278556 -3.607365
D(LEXPORTS(-3)) -2.108379*** 0.326895 -6.449720
D(LEXPORTS(-4)) -0.684319* 0.282919 -2.418779
D(IMPORT) -0.010061** 0.001952 -5.155072
D(IMPORT(-1)) 0.002448 0.002121 1.153850
D(IMPORT(-2)) -0.004305* 0.002107 -2.043196
D(IMPORT(-3)) -0.000305 0.001667 -0.183081
D(IMPORT(-4)) 0.002199 0.001208 -1.820615
D(INT) 0.040769*** 0.009404 4.335393
D(INT(-1)) -0.014281* 0.005888 -2.425259
D(INT(-2)) 0.012630* 0.005778 2.186098
D(INT(-3)) -0.046313*** 0.007088 -6.533588
D(INT(-4)) -0.045939*** 0.007554 -6.081584
C 0.939011 0.139739 6.719746
CointEq(-1) -0.363434*** 0.068556 -5.301280
R-squared 0.997862
Adjusted R-squared 0.989310
Prob(F-statistic) 0.000003
Durbin-Watson stat 3.431244
*** and **Imply 1% and 5% level of significances

Researcher’ computation, May 21, 2019, E-view 9

In the short run, all the variables are statistically significant such as current real

exchange rate is negatively and significant effect on non-oil export, current export,

current import and current interest rate depict positively significant effects on non-oil

export in Nigeria from 1982 to 2017; as the variables increase, they will cause an

increase or a reduction depend the correlation and coefficients

Furthermore, R-squared and adjusted R-squared are very high. R-squared is 99%:

this implies that about 99% out of total variations in non-oil export is caused by real

exchange rate, export import and interest rate included in the model, whereas remained

1% is caused by other factors or variables not included in the model. The F-statistics is

statistically significant, this indicates the fitness of the model and all the independent

variables (oil price, foreign reserve position, exchange rate, and inflation rate) jointly

65
influence non-oil export. The Durbin Waston statistics is 2.45, so there is no presence of

serial correlation.

Hypotheses testing:

Thus, the null hypothesis which states that there is no short run dynamic of

independent variables on dependent variable is rejected and alternative hypothesis which

states that there is short run dynamic of independent variables on dependent variable is

accepted.

4.2.4.1 Pairwise Granger Causality

To further confirm the nature and extent of relationship among the variables of the

study, analysis of pairwise granger causality test was carried out using 2 lags period of

each individual series.

TABLE 4.2.1.1: PAIRWISE GRANGER CAUSALITY TESTS AT LAG 2

Null hypothesis Obs F-statistic P. Value

LNON_OIL_EXPORT IMPORT 34  3.99263 0.0294
 LNON_OIL_EXPORT INT 34  3.08204 0.0611
 REER LEXPORTS 34  2.49988 0.0996
 REER IMPORT 34  2.92990 0.0694
LEXPORTS IMPORT 34  4.01609 0.0289
 LEXPORTS INT 34  3.55518 0.0416
*** and **Imply 1% and 5% level of significances

Researcher’ computation, May 21, 2019, E-view 9

There exist of none directional granger causality relationship between real

exchange rate and non-oil export. This can be said that there is no causal relationship

running either from real exchange rate to non-oil export or from non-oil export to real

exchange rate. Similarly, no causal relationship that running either from non-oil exports

to export or from export to non-oil export. Non-oil export does granger cause import and

interest rate; implying that causality relationship is unidirectional running only from non-

66
oil export to both import and interest rate but it is not running back from them to non-oil

export.

Moreover, real exchange rate does granger cause export, import and interest rate.

This indicates that there is unidirectional causal relationship running only from to export,

import and interest rate. Finally, export does granger cause both import and interest rate

because causality is running from export to both interest rate.

Hypotheses testing:

The null hypothesis states that there is no causality relationship running among the

variables of the study is rejected and alternative hypothesis states that there is causality

relationship running among the variables of the study is accepted because there are

unidirectional causality exist among the variables.

4.2.4.2 Short Run Diagnostic Test

A microscopic examination of the model is reliable, indicated by coefficient of

determination which is carrying a value (R-Square = 99%) and the adjusted R-squared is

98% which is close to the value of R-square indicating less penalty to the model

specification. The result explained only 99% per cent variation that occurred in the

model.

TABLE 4.2.4.2.1: RESULT OF THE SHORT RUN DIAGNOSTIC TESTS

Testes Test statistics Prob. Value

Serial correlation 4.227651 0.1031
Heteroskedasticity 1.470424 0.3328
Normality 0.862910 0.649563
Stability test  3.054711  0.1409
Researcher’ computation, May 21, 2019, E-view 9

The result of Breusch-Godfrey Serial Correlation depicts that there is no serial

correlation. This is true because the value of F-statistic is not significant. The effects of

67
previous periods do not affect the current situation. More so, the coefficient of the

heteroskedasticity is non-significant even at 10% implying lack of evidence of

Heteroskedasticity. In other words, we reject fail to reject the null hypothesis that

residuals of the model is homoscedastic. Hence, the null hypothesis of the test cannot be

rejected as result of insignificance p. value.

Furthermore, the normality test is conducted through histogram test and shows non-

significance of the probability value of f-statistic 0.862910, indicating that the model is

normally distributed.

The stability test through the Ramsey RESET Test shows the insignificance of

p.value, which means the model is stable. Also the result of CUSUM and CUSUM of

square at 5% level of significance imply that the model of this study is stable; this is

because the blue line passes in-between the two red lines. As it can be seen from the

graph

FIGURE 1 CUSUM

FIGURE 2

68
4.2 Discussion of Findings

The result of ordinary least square regression shows that real exchange rate and

import depict inverse relationship with non-oil export but the both export and interest

rate show direct relationship. However, only import and interest rate are statistically

significant, the other two are not. Therefore, having the import value increases by #1,

non-oil export will be declined by 548.14%. Likewise the interest rate rises by 1% the

non-oil export value will be increased by 2414.98% in Nigeria from 1982 to 2017. The

result of OLS is similar to Ajinala and Popoola (2017), Adeniran and Adeyemi (2014),

Adenira, et el (2014), and it is contrary to Lawrence and Mohammed (2015), Anthony

and Victor (2014) founding positively significance of exchange rate. The insignificance

of real exchange rate may be due to inability to implement a sound exchange rate policy.

This study finds that there is co-integration among the variables of the study at 5%

because the value of F-statistic is greater than critical value of I(0) and I(1). But at 1%,

there is no co-integration because the value of F-statistic is less than critical value of I(0)

and I(1). The result is inconclusive. Error Correction Mechanism (ECM) from short run

69
dynamics indicate that the speed of adjustment to the long run equilibrium is relatively

slow, with approximately 36% per annual, it will take few periods of time before the

economy will finally adjust to the equilibrium in case of any distortion in the economy.

In the long-run, both export and interest rate are depicted positive relationships

with the non-oil export but real exchange rate and import have inverse relationship with

non-oil export in Nigeria during the time of study. Unfortunate, only two variables are

statistically significant, export and interest rate; the other two are not significant.

Additionally, export and interest rate are significant. Even both are directly

influence the non-oil export. As the both increase, they cause an increase in non-oil

export value by their co-efficient.

If the export value increases by one naira, the non-oil export value will increases

by 49%. Similarly, if interest rate is raised by one per cent, it will lead to an increase in

non-oil export value by 12%. The result of ARDL long-run of this project is similar to

the findings of the authors: Ajinala and Popoola (2017), Dania and Ogebedengbe (2019),

Victor (2015), Anthony and Victor (2014) but contrary to the findings of Sheu (2008).

In the short run, all the variables are statistically significant such as current real

exchange rate is negatively significant effect on non-oil export, current export, current

import and current interest rate depict positively significant effects on non-oil export in

Nigeria from 1982 to 2017; as the variables increase, they will cause an increase or a

reduction depend the correlation and coefficients

There is exist of none directional granger causality relationship between real

exchange rate and non-oil export. This can be said that there is no causality relationship

running either from real exchange rate to non-oil export or from non-oil export to real

exchange rate. Similarly, no causality relationship running either from non-oil export to

export or from export to non-oil export. Non-oil export does granger unidirectional cause

70
import and interest rate; implying that causality relationship running only from non-oil

export to both import and interest rate but it is not running back from them to non-oil

export.

Moreover, real exchange rate does granger unidirectional cause export, import and

interest rate. This indicates that there is causality relationship running only from to

export, import and interest rate. Finally, export does granger cause both import and

interest rate because causality is running from export to both interest rate.

71
 CHAPTER FIVE

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.0 Introduction

This chapter summarizes the whole study, draw conclusion based on the findings,

and finally proffers policy recommendations

5.1 Summary

This project is aimed at evaluating the impact of exchange rate depreciation on

non-oil export in Nigeria. It was carried out using annual series spanning 1982 to 2017

using Autoregressive Distributed Lag model to establish or otherwise of the long run

relationship between exchange rate and non-oil export as well as short run dynamics.

After wider literature consultation, the project controlled for export, import and interest

rate to achieve robustness in the model. The five variables under investigation were

subjected to ADF and PP tests of unit root to ascertain the stationarity status of each

series. It was discovered that four (4) series namely, non-oil export, exchange rate,

import and interest rate are integrated of order zero, while export is integrated of order

one.

Bound test of cointegration establish long run relationship among the variables and

statistically significant at 5%. The result of ARDL bounds test is inconclusive. This

implies that there is co-movement among the variable in the long run, (ECM) Error

Correction Term depict steady but slow adjustment (36% per annual) to the long run

equilibrium.

This project ran OLS and found that the real exchange rate and import depict

inverse relationship with non-oil export but the both export and interest rate show direct

relationship. However, only import and interest rate are statistically significant, the other

two are not.

72
 In the long-run, both export and interest rate are depicted positive relationships

with the non-oil export but real exchange rate and import have inverse relationship with

non-oil export in Nigeria during the time of study. Unfortunate, only two variables are

statistically significant, export and interest rate; the other two are not significant.

Additionally, export and interest rate are significant; even both are directly

influence the non-oil export. As the both increase, they cause an increase in non-oil

export value by their co-efficient.

If the export value increases by one naira, the non-oil export value will increases

by 49%. Similarly, if interest rate is raised by one per cent, it will lead to an increase in

non-oil export value by 12%.

In the short run, all the variables are statistically significant such as current real

exchange rate is negat1ively significant effect on non-oil export, current export, current

import and current interest rate depict positively significant effects on non-oil export in

Nigeria from 1982 to 2017; as the variables increase, they will cause an increase or a

reduction depend the correlations and coefficients

There is exist of none directional granger causality relationship between real

exchange rate and non-oil export. This can be said that there is no causality relationship

running either from real exchange rate to non-oil export or from non-oil export to real

exchange rate. Similarly, no causality relationship running either from non-oil export to

export or from export to non-oil export.

Non-oil export does granger unidirectional cause import and interest rate; implying

that causality relationship running only from non-oil export to both import and interest

rate but it is not running back from them to non-oil export.

Moreover, real exchange rate does granger unidirectional cause export, import and

interest rate. This indicates that there is causality relationship running only from to

73
export, import and interest rate. Finally, export does granger cause both import and

interest rate because causality is running from export to both interest rate.

5.2 Conclusion

This research work critically examines the impact of exchange rate depreciation on

non-oil export in Nigeria for the period 1982 to 2017 and found that the both export and

interest are statistically significant in predicting and formulating policy for influence

non-oil export in Nigeria, especially in the long run. So, this research work concluded

that both export and interest are the major variables affecting the level of non-oil export

in Nigeria during the time study.

5.3 Recommendation

Based on the findings of this project, the following are recommendations:

1 An effective policy should be made based on the fiscal (export duty) and

monetary policies (interest rate), and exchange rate policy which should be aimed at

achieving a realistic exchange rate for naira.

2 The managers of the economy should diversify from oil export to non-export

and also stabilize the exchange rate to enable non-oil exporters not to fall to the

negative effect of exchange fluctuation on their trade.

3 The government should create incentive such as loans subsidy etc to small

scale industries, thereby encouraging them to process domestic goods into

processed goods that will help boost our export.

4 The government should encourage the export promotion strategies in

order to maintain a surplus balance of trade.

5 Also, special exchange rate window should be opened to non-oil

exporters, as it is for some imported items into the country, as the sector has the

capability to generate jobs and reduces extreme poverty in the land.

74
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79
80
 APPENDIX 1

Data on this project

Time non-oil export REER Exports Import INT

1982 9,196.36 331.7945 6.693707 26.0669 -4.58618
1983 8,293.51 392.7125 5.533548 -35.2662 -8.02239
1984 9,137.77 541.4648 6.350781 -30.8957 4.342493
1985 11,738.69 486.7959 7.096823 7.853069 2.343231
1986 9,047.47 265.927 5.24909 -30.0683 4.310292
1987 29,578.10 84.71289 12.84766 -37.143 -4.76964
1988 31,192.56 86.04183 11.16915 -6.60132 2.96268
1989 59,876.89 76.96334 25.25077 36.75261 -6.61241
1990 109,681.57 71.61963 20.97477 19.55679 17.46624
1991 124,660.77 60.57468 24.24687 30.54574 0.990847
1992 205,613.11 50.16845 23.97475 -14.9728 -14.9872
1993 189,777.73 54.87048 20.06654 20.83702 -7.05247
1994 103,424.52 101.4317 13.54925 -21.6 -15.9202
1995 567,211.04 161.4496 24.15582 -11.8741 -31.4526
1996 801,752.06 209.2543 23.0247 48.8085 -5.26078
1997 785,472.71 238.0315 28.64975 34.82689 12.12661
1998 483,193.58 275.294 18.14409 -6.53771 11.48467
1999 1,559,299.53 69.77832 21.33433 -33.7026 6.047248
2000 2,745,102.21 70.75906 36.02327 12.57514 -1.14089
2001 1,979,337.67 78.8467 28.25096 60.88926 12.1387
2002 2,167,412.41 79.1034 23.23972 6.353364 3.023542
2003 3,109,288.41 74.29868 26.75138 53.4449 9.935713
2004 5,137,695.68 75.97667 20.2538 -33.2139 -2.60485
2005 6,621,303.65 87.03181 21.03396 33.61901 -1.59368
2006 7,555,141.33 92.28545 29.51613 10.81733 -5.62797
2007 6,881,501.32 91.35626 21.23634 85.51444 9.187171
2008 10,387,693.62 100.4768 25.67007 -11.2587 6.684909
2009 8,606,319.73 92.65195 18.63034 11.67893 18.18
2010 12,011,475.89 100 25.66061 12.66528 1.067736
2011 15,236,666.00 100.5292 31.61694 -7.83336 5.68558
2012 15,139,326.15 110.5182 31.54659 -32.8917 6.224809
2013 15,262,013.62 117.409 18.04991 12.21581 11.20162
2014 12,960,493.24 124.4894 18.43513 5.969237 11.35621
2015 8,845,158.80 119.039 10.6567 -25.6786 13.59615
2016 8,835,611.89 110.1676 9.21811 -10.3613 6.686234
2017 13,988,143.19 100.8163 13.17156 -10.3613 5.790567

Source: CBN and WDI

81
 APPENDIX 2

summary statistics

Statistics LNONOIL_ IMP

EXPORT REER LEXPORTS ORT INT
 Mean  13.58036 146.7956  2.863007  3.294329  1.868797
 Median  14.37901  100.2384  3.044729 -0.284237  3.666917
 Maximum  16.54088  541.4648  3.584165  85.51444  18.18000
 Minimum  9.023229  50.16845  1.658055 -37.14301 -31.45257
 Std. Dev.  2.613230  120.9097  0.531055  30.53485  10.12920
 Skewness -0.492613  1.961376 -0.954055  0.675869 -0.987359
 Kurtosis  1.828705  5.987300  2.801653  2.912433  4.606346
 Jarque-Bera  3.513903  36.46791  5.520338  2.752295  9.719790
 Probability  0.172570  0.000000  0.063281  0.252550  0.007751
 Sum  488.8931  5284.641  103.0683  118.5959  67.27668
 Sum Sq.dev.  239.0139  511670.8  9.870672  32633.21  3591.021
 Observation
s  36  36  36  36  36

APPENDIX 3

Ordinary least square

Dependent Variable: NON_OIL_EXPORT

Method: Least Squares
Date: 05/21/19 Time: 17:09
Sample: 1982 2017
Included observations: 36

Variable Coefficient Std. Error t-Statistic Prob.  

REER -10474.84 8105.581 -1.292300 0.2058

EXPORTS 161071.1 129828.6 1.240644 0.2240
IMPORT -54814.62 30307.44 -1.808619 0.0802
INT 241497.5 81298.87 2.970490 0.0057
C 2618219. 3419710. 0.765626 0.4497

R-squared 0.321001  Mean dependent var 4515773.

Adjusted R-squared 0.233388 S.D. dependent var 5375131.
S.E. of regression 4706269.  Akaike info criterion 33.69494
Sum squared resid 6.87E+14 Schwarz criterion 33.91487
-
Log likelihood 601.5088    Hannan-Quinn criter. 33.77170
F-statistic 3.663862 Durbin-Watson stat 0.450239
Prob(F-statistic) 0.014803
82
 APPENDIX 4

Unit root tests

Null Hypothesis: LNON_OIL_EXPORT has a unit root

Exogenous: Constant
Lag Length: 3 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -2.675356 0.0893

Test critical values: 1% level -3.653730
5% level -2.957110
10% level -2.617434

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: LNON_OIL_EXPORT has a unit root

Exogenous: Constant
Bandwidth: 33 (Newey-West automatic) using Bartlett kernel

Adj. t-Stat Prob.*

Phillips-Perron test statistic -2.641544 0.0945

Test critical values: 1% level -3.632900
5% level -2.948404
10% level -2.612874

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: LEXPORTS has a unit root

Exogenous: Constant

Lag Length: 0 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -2.478939  0.1291

83
Test critical values: 1% level -3.632900

5% level -2.948404

10% level -2.612874

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: LEXPORTS has a unit root

Exogenous: Constant, Linear Trend

Lag Length: 0 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -2.167705  0.4919

Test critical values: 1% level -4.243644

5% level -3.544284

10% level -3.204699

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: LEXPORTS has a unit root

Exogenous: None
Lag Length: 0 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -0.099370  0.6424

Test critical values: 1% level -2.632688
5% level -1.950687
10% level -1.611059

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: LEXPORTS has a unit root

84
 Exogenous: Constant
Bandwidth: 2 (Newey-West automatic) using Bartlett kernel

Adj. t-Stat Prob.*

Phillips-Perron test statistic -2.378244  0.1549

Test critical values: 1% level -3.632900
5% level -2.948404
10% level -2.612874

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: LEXPORTS has a unit root

Exogenous: Constant, Linear Trend
Bandwidth: 1 (Newey-West automatic) using Bartlett kernel

Adj. t-Stat Prob.*

Phillips-Perron test statistic -1.935995  0.6146

Test critical values: 1% level -4.243644
5% level -3.544284
10% level -3.204699

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: LEXPORTS has a unit root

Exogenous: None
Bandwidth: 4 (Newey-West automatic) using Bartlett kernel

Adj. t-Stat  Prob.*

Phillips-Perron test statistic  0.060388 0.6955

Test critical values: 1% level -2.632688
5% level -1.950687
10% level -1.611059

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: D(LEXPORTS) has a unit root

Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=9)

t-Statistic  Prob.*

Augmented Dickey-Fuller test statistic -8.058812 0.0000

Test critical values: 1% level -3.639407
5% level -2.951125
85
 10% level -2.614300

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: D(LEXPORTS) has a unit root

Exogenous: Constant
Bandwidth: 1 (Newey-West automatic) using Bartlett kernel

Adj. t-Stat Prob.*

Phillips-Perron test statistic -8.028616  0.0000

Test critical values: 1% level -3.639407
5% level -2.951125
10% level -2.614300

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: REER has a unit root

Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=9)

t-Statistic  Prob.*

Augmented Dickey-Fuller test statistic -2.075910  0.2551

Test critical values: 1% level -3.632900
5% level -2.948404
10% level -2.612874

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: REER has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -2.009119 0.5762

Test critical values: 1% level -4.243644
5% level -3.544284
10% level -3.204699

*MacKinnon (1996) one-sided p-values.

86
 Null Hypothesis: REER has a unit root
Exogenous: None
Lag Length: 0 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -1.756008  0.0751

Test critical values: 1% level -2.632688
5% level -1.950687
10% level -1.611059

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: REER has a unit root

Exogenous: Constant
Bandwidth: 8 (Newey-West automatic) using Bartlett kernel

Adj. t-Stat Prob.*

Phillips-Perron test statistic -1.835616 0.3578

Test critical values: 1% level -3.632900
5% level -2.948404
10% level -2.612874

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: REER has a unit root

Exogenous: Constant, Linear Trend
Bandwidth: 7 (Newey-West automatic) using Bartlett kernel

Adj. t-Stat   Prob.*

87
 Phillips-Perron test statistic -1.756492  0.7040
Test critical values: 1% level -4.243644
5% level -3.544284
10% level -3.204699

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: REER has a unit root

Exogenous: None
Bandwidth: 8 (Newey-West automatic) using Bartlett kernel

Adj. t-Stat Prob.*

Phillips-Perron test statistic -1.741992 0.0773

Test critical values: 1% level -2.632688
5% level -1.950687
10% level -1.611059

*MacKinnon (1996) one-sided p-values.

88
 Null Hypothesis: IMPORT has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=9)

t-Statistic  Prob.*

Augmented Dickey-Fuller test statistic -5.434240 0.0001

Test critical values: 1% level -3.632900
5% level -2.948404
10% level -2.612874

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: IMPORT has a unit root

Exogenous: Constant
Bandwidth: 4 (Newey-West automatic) using Bartlett kernel

Adj. t-Stat Prob.*

Phillips-Perron test statistic -5.428377  0.0001

Test critical values: 1% level -3.632900
5% level -2.948404
10% level -2.612874

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: INT has a unit root

Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=9)

t-Statistic  Prob.*

Augmented Dickey-Fuller test statistic -3.651013 0.0096

Test critical values: 1% level -3.632900
5% level -2.948404
10% level -2.612874

*MacKinnon (1996) one-sided p-values.

89
 Null Hypothesis: INT has a unit root
Exogenous: Constant
Bandwidth: 3 (Newey-West automa
tic) using Bartlett kernel

Adj. t-Stat  Prob.*

Phillips-Perron test statistic -3.614900 0.0105

Test critical
values: 1% level -3.632900
5% level -2.948404
10% level -2.612874

*MacKinnon (1996) one-sided p-values.

APPENDIX 5

ARDL Bounds Test

Date: 05/21/19 Time: 17:54
Sample: 1987 2017
Included observations: 31
Null Hypothesis: No long-run relationships exist

Test Statistic Value k

F-statistic 3.372428 4

Critical Value Bounds

Significance I0 Bound I1 Bound

10% 2.45 3.52

5% 2.86 4.01
2.5% 3.25 4.49
1% 3.74 5.06

APPENDIX 6

ARDL long run relationship

ARDL Cointegrating And Long Run Form

Dependent Variable: LNON_OIL_EXPORT

Selected Model: ARDL(1, 4, 5, 5, 5)

90
 Date: 05/21/19 Time: 17:56

Sample: 1982 2017

Included observations: 31

Cointegrating Form

Variable Coefficient Std. Error t-Statistic Prob.   

D(REER) -0.007463 0.001139 -6.551074 0.0006

D(REER(-1)) -0.003707 0.001133 -3.272040 0.0170

D(REER(-2)) 0.004299 0.000864 4.977256 0.0025

D(REER(-3)) -0.001136 0.000702 -1.617252 0.1570

D(LEXPORTS) 1.247272 0.144674 8.621240 0.0001

D(LEXPORTS(1)) -0.701199 0.243774 -2.876437 0.0282

D(LEXPORTS(-2)) -1.004852 0.278556 -3.607365 0.0113

D(LEXPORTS(-3)) -2.108379 0.326895 -6.449720 0.0007

D(LEXPORTS(-4)) -0.684319 0.282919 -2.418779 0.0519

D(IMPORT) -0.010061 0.001952 -5.155072 0.0021

D(IMPORT(-1)) 0.002448 0.002121 1.153850 0.2924

D(IMPORT(-2)) -0.004305 0.002107 -2.043196 0.0871

D(IMPORT(-3)) -0.000305 0.001667 -0.183081 0.8608

D(IMPORT(-4)) 0.002199 0.001208 1.820615 0.1185

D(INT) 0.040769 0.009404 4.335393 0.0049

D(INT(-1)) -0.014281 0.005888 -2.425259 0.0515

D(INT(-2)) 0.012630 0.005778 2.186098 0.0715

D(INT(-3)) -0.046313 0.007088 6.533588 0.0006

D(INT(-4)) -0.045939 0.007554 -6.081584 0.0009

91
C 0.939011 0.139739 6.719746 0.0005

CointEq(-1) -0.363434 0.068556 -5.301280 0.0018

Cointeq = LNON_OIL_EXPORT - (-0.0198*REER +

4.8906*LEXPORTS  

 -0.0484*IMPORT + 0.1222*INT )

Long Run Coefficients

Variable Coefficient Std. Error t-Statistic Prob.   

REER -0.019801 0.010250 -1.931788 0.1016

LEXPORTS 4.890610 1.213061 4.031626 0.0069
IMPORT -0.048373 0.027157 -1.781246 0.1252
INT 0.122163 0.049459 2.469975 0.0485

Dependent Variable: LNON_OIL_EXPORT

Method: ARDL

Date: 05/21/19 Time: 17:56

Sample (adjusted): 1987 2017

Included observations: 31 after adjustments

Maximum dependent lags: 1 (Automatic selection)

Model selection method: Schwarz criterion (SIC)

Dynamic regressors (5 lags, automatic): REER LEXPORTS

IMPORT INT      
       
Fixed regressors: C
Number of models evalulated: 1296
Selected Model: ARDL(1, 4, 5, 5, 5)

Variable Coefficient Std. Error t-Statistic Prob.*  

LNON_OIL_EXPOR 0.636566 0.116924 5.444266 0.0016

92
T(-1)
REER -0.007463 0.002323 -3.212480 0.0183
REER(-1) -0.003440 0.002655 1.295778 0.2427
REER(-2) 0.008006 0.002439 3.281964 0.0168
REER(-3) -0.005434 0.001867 -2.910172 0.0270
REER(-4) 0.001136 0.001134 1.001275 0.3553
LEXPORTS 1.247272 0.224105 5.565563 0.0014
LEXPORTS(-1) -0.171059 0.285519 -0.599115 0.5710
LEXPORTS(-2) -0.303653 0.291577 -1.041417 0.3378
LEXPORTS(-3) -1.103526 0.368709 -2.992944 0.0242
LEXPORTS(-4) 1.424059 0.399325 3.566164 0.0118
LEXPORTS(-5) 0.684319 0.397932 1.719690 0.1363
IMPORT -0.010061 0.002693 -3.735453 0.0097
IMPORT(-1) -0.005072 0.003190 -1.589861 0.1630
IMPORT(-2) -0.006752 0.002472 -2.731308 0.0341
IMPORT(-3) 0.003999 0.002853 1.401760 0.2105
IMPORT(-4) 0.002505 0.002723 0.919806 0.3932
IMPORT(-5) -0.002199 0.001989 -1.105898 0.3111
INT 0.040769 0.014632 2.786310 0.0317
INT(-1) -0.010651 0.012777 -0.833638 0.4364
INT(-2) 0.026911 0.013089 2.056050 0.0855
INT(-3) -0.058943 0.013650 -4.318070 0.0050
INT(-4) 0.000374 0.015088 0.024760 0.9810
INT(-5) 0.045939 0.011365 4.042302 0.0068
C 0.939011 1.321056 0.710803 0.5039

Mean dependent var 14.29491

R-squared 0.997862
S.D. dependent var 2.041121
Adjusted R-squared 0.989310
    Akaike info criterion -0.302868
S.E. of regression 0.211039
 Schwarz criterion 0.853573
Sum squared resid 0.267226
Hannan-Quinn criter. 0.074103
Log likelihood 29.69446
Durbin-Watson stat 3.431244
F-statistic 116.6785

Prob(F-statistic) 0.000003

*Note: p-values and any subsequent tests do not account for model

selection.

93
APPENDIX 7

Pairwise Granger Causality Tests

Date: 05/21/19 Time: 18:06
Sample: 1982 2017
Lags: 2

Null Hypothesis: Obs F-StatisticProb. 

 REER does not Granger Cause LNON_OIL_EXPORT 34 1.23470 0.3058

LNON_OIL_EXPORT does not Granger Cause REER  1.24705 0.3023

 LEXPORTS does not Granger Cause

LNON_OIL_EXPORT 34 0.58361 0.5643
 LNON_OIL_EXPORT does not Granger Cause LEXPORTS  1.36489 0.2713

 IMPORT does not Granger Cause

LNON_OIL_EXPORT 34 0.52020 0.5998
 LNON_OIL_EXPORT does not Granger Cause IMPORT 3.99263 0.0294

 INT does not Granger Cause LNON_OIL_EXPORT 34 1.47222 0.2461

 LNON_OIL_EXPORT does not Granger Cause INT 3.08204 0.0611

 LEXPORTS does not Granger Cause REER 34  1.96432 0.1585

REER does not Granger Cause LEXPORTS 2.49988 0.0996

 IMPORT does not Granger Cause REER 34 1.64716 0.2101

 REER does not Granger Cause IMPORT 2.92990 0.0694

INT does not Granger Cause REER 34  2.40789 0.1078

REER does not Granger Cause INT 0.60552 0.5525

 IMPORT does not Granger Cause LEXPORTS 34  0.18063 0.8357

LEXPORTS does not Granger Cause IMPORT 4.01609 0.0289

 INT does not Granger Cause LEXPORTS  34 0.56448 0.5748

 LEXPORTS does not Granger Cause INT  3.55518 0.0416

 INT does not Granger Cause IMPORT 34  2.08700 0.1423

 IMPORT does not Granger Cause INT  0.11113 0.8952

94
 APPENDIX 8

Breusch-Godfrey Serial Correlation LM Test:

F-statistic 4.227651  Prob. F(2,4) 0.1031

Obs*R-squared 21.04440 Prob. Chi-Square(2) 0.0000

Heteroskedasticity Test: Breusch-Pagan-Godfrey

F-statistic 1.470424  Prob. F(24,6) 0.3328

Obs*R-squared 26.49530  Prob. Chi-Square(24) 0.3285

Scaled explained SS 1.023311  Prob. Chi-Square(24) 1.0000

normality test

Stability test

Ramsey RESET Test

Equation: UNTITLED

Specification: LNON_OIL_EXPORT LNON_OIL_EXPORT(-1)

95
REER

REER(-1) REER(-2) REER(-3) REER(-4) LEXPORTS LEXPORTS(-

1)

 LEXPORTS(-2) LEXPORTS(-3) LEXPORTS(-4) LEXPORTS(-5)

IMPORT IMPORT(-1) IMPORT(-2) IMPORT(-3) IMPORT(-4)

IMPORT(-5)

 INT INT(-1) INT(-2) INT(-3) INT(-4) INT(-5) C 

Omitted Variables: Squares of fitted values

Value df Probability
t-statistic  1.747773  5  0.1409
F-statistic  3.054711 (1, 5)  0.1409

F-test summary:
Sum of df Mean
Sq. Squares
Test SSR  0.101344  1  0.101344
Restricted SSR  0.267226  6  0.044538
Unrestricted SSR 0.165882  5  0.033176

96
97
APPENDIX 9

Figure 3 distribution of non-oil export

Figure 4 distribution of export

98
Figure 5 distribution of real exchange rate

Figure 6 distribution of import

Figure 7 distribution of interest rate

99
Figure distribution of logarithms of non-oil export

Figure 10 distribution of logarithms of export

100
101