Exchange rate volatility and export growth in Nigeria

Abstract

This article examines the impact of exchange rate volatility on Nigeria's exports to its most important trading-partner–the United States over the quarterly period January 1980 to April 2001. Using cointegration and vector error correction (VECM) framework, empirical tests indicate the presence of a unique cointegrating vector linking real exports, real foreign income, relative export prices and real exchange rate volatility in the long run. Furthermore, the results show that increases in the volatility of the real exchange rate raise uncertainty about profits to be made which exert significant negative effects on exports both in the short- and long-run. Our results also show that improvements in the terms of trade (represented by declines in the real exchange rate) and real foreign income exert positive effects on export activity. Most importantly, we found that the trade liberalization and economic reform policies implemented in the post-1986 structural adjustment period contributed to Nigeria's export performance. Overall, our findings suggest that Nigeria's exporting activities can be further boosted by policies aimed at achieving and maintaining a stable competitive real exchange rate.

Notes

¹ See Secru and Raman (2000, Ch. 6) for theoretical examples showing an ambiguous relationship between variability of exchange rate and exports, and Baccheta and Wincoop (2000) for a theoretical example showing no relationship. Empirical studies by Bahmani-Oskooee (2002), Choudhry (2001), Arize et al. (2000), Hook and Boon (2000), Adubi and Okumadewa (1999), Kim and Lee (1996), Caporale and Doroodian (1994), Arize (1995) and Chowdhury (1993) report a negative relationship. On the other hand, Baum et al. (2001), Doyle (2001), Chou (2000), McKenzie and Brooks (1997), Qian and Varangis (1994), Assery and Peel (1991) report both positive and negative implications on exports for some countries.

² For example, Aristotelous (2001), Bahmani-Oskooee and Payesteh (1993), and Hooper and Kohlhagen (1978) report an insignificant relationship.

³ Since the 1980s, Nigeria's exports to the US have on average made up about 47% of the country's total exports. Before OPEC (Organization of Petroleum Exporting Countries) quota production limitations in 2001, Nigeria was exporting about 1.8 million barrels of oil per day, with half of that oil destined for the US market.

⁴ The brief discussion in this section benefits greatly from the studies by Nnanna (2001), Adubi and Okumadewa (1999) and Egwaikhide (1999).

⁵ In Obasonjo’s Economic Direction, 1999–2003, the government targeted output growth of at least 6–10% a year by the end of its administration.

⁶ Some examples include: the moving average SD (MASD) of the growth rate of the exchange rate (e.g. Chowdhury, 1993; Arize et al., 2000; Bahmani-Oskooee, 2002); the absolute percentage change of the exchange rate (e.g. Bailey et al. (1987); the residuals from an autoregressive integrated moving average (ARIMA) model (Assery and Peel (1991), and the measures generated by various types of autoregressive conditional Heteroskedasticity (ARCH) models (e.g. Kroner and Lastrapes, 1993; Caporale and Doroodian, 1994; Mckenzie, 1998; Chou, 2000).

⁷ Previous empirical studies show that there are no qualitative differences in using nominal or real exchange rate volatility (see McKenzie and Brooks (1997) and Qian and Varangis (1994)).

⁸ Among some of its many advantages, the Johansen and Juselius approach produces asymptotically optimal estimates because it incorporates a parametric correction for serial correlation (which comes from the underlying vector autoregression (VAR)) and the system nature of the estimator means that the estimates are robust to simultaneity bias. Moreover, the Johansen method is capable of detecting multiple cointegrating relationships (if they exist) and it does not suffer from problems associated with normalization.