Tag Archives: Exchange Rate

COMMERCIAL BANK CREDIT AND NON-OIL EXPORT TRADE

THE IMPACT OF COMMERCIAL BANK CREDIT ON NON-OIL EXPORT TRADE IN NIGERIA

ABSTRACT

This research work examined the impact of commercial bank credit (CBC) on Non-oil export trade in Nigeria. Four variables were used in the study. This study adopted the econometric time series analysis from 1992-2015 and the data were sourced from Central Bank of Nigeria statistical bulletin. The empirical analysis that were carried out to achieve the objectives include unit root, co-integration, the long run regression model and short run error correction model. The Augmented Dickey Fuller was employed in conducting the test of unit root and the variables became stationary at first difference. The co-integration test result reveals the existence of long-run relationship among the variables. Then long run regression and short-run error model was conducted and it discovered that CBC has a direct and positive significant impact on non-oil export, it also reveals that there exist a positive and significant relationship between real exchange rate and non-oil export and significant relationship among real interest rate and non-oil export. Further,  the Central Bank of Nigeria should as an operational guideline, impose  on commercial  banks to set aside a certain amount of money from their yearly profit for financing of non-oil export as it is the case for small and medium scale equity scheme.

 

CHAPTER ONE

1.0      INTRODUCTION

1.1      Background to the study

The growth of any economy is a function of the quality and quantity of goods and services it produces. There is always a tendency to produce and market to earn a living. In the wider society, the quality of life enjoyed very much depends on the quality of goods and services available to the citizenry. There is the development aspect of growth that enables equitable distribution. This entails getting products from one part to the other (Nzotta, 2004).

Production in one country could be transported to another to enhance quality of life. Developing nations have the tendency to import greater part of their goods and services from developed nations. To square up with the developed nations, they have to increase production of exportable goods (Gbosi,1994).

Nigerian economy has depended predominantly on crude oil since the discovering of crude oil in the early fifties. Prior to this, cash crops like cocoa, palm produce, cotton, groundnut and cassava has been the mainstay of the economy. These cash crops earned so much foreign reserve of the economy.

Nigerian Bauxite is the best in the world and are sought for globally. (Soludo, 2009).

One would have expected a balance of payment that tilts to the favor of local production. This, however, is not the case with Nigeria as imports far outweigh exports. Export financing is a means of helping local producers process their products for a better market abroad. It is designed to make funds available for local producers to seek for market abroad. The essence of every productive business is to sell to a wider range of customers to reduce cost and continue in business. Oftentimes, it is propelled by the desire to increase the market share, and thus, the clientele. According to Nigerian Export Promotion Council (2009:12), export financing makes fund available for exporters to process their goods for export. It notes that in Nigeria, there are many opportunities to explore for exports created by government, noting that there could be logistics that may hinder continuity. Nigerian Export –Import Bank (NEXIM, 2008) notes that a lot of exporters do not want to take the risk of assessing funds from NEXIM due probably to high interest rate. But it states that the risk involved in export financing is such as to secure the financier’s investment while monetizing the exporter.

The roles of commercial banks in our modern economy cannot be over emphasized; Commercial banks in Nigeria as a financial institution helps in financing the exporting sector of the economy, by lending out short-term loans to those into manufacturing, exporting, trading and industries.

Lack of bank credit (loan and advances) in our economy has brought about low rate of economic growth and diversification of most industries in Nigeria. The availability of bank credits to those in trade determines what is produced and how much of that product is produced. Therefore, commercial banks perform their important role of financial assistance by rendering important services such as granting (loans and advances) to various sectors of the Nigerian economy. Commercial banks support the economy by serving the credit needs of their customers and providing a safe place for their cash balance. Of individual credit activities on the export sector of the Nigerian economy, there are general statements which guide or channel actions in decision making about the export sector advance and investment of commercial bank.

The importance of export trade to economic growth cannot be overemphasized, this trade goes beyond the national boundaries of moving goods from a country to another in order to earn foreign exchange. Export are the goods and services which a country sends to other countries abroad in return for some payment made in foreign exchange.

According to Chartered Institute of Bankers of Nigeria – CIBN(2008), export financing enables businesses to take their products all over the world, by enabling the exporter get to many places round the globe to market his products. There are a lot of benefits to a business selling overseas, but there can be a lot of financial risks involved as well. It is important to understand the risks and government regulations before selling overseas. According to International Monetary Fund (2007), export credit scheme aids export financing and boosts a country’s Balance of Payment. It notes that if done right, it can be profitable and can sometimes bring a business more profit than selling within the country. Export financing, notes Soludo (2009) is loan meant for shipping of products outside a country or region. If you have a product that is good, appealing to another country, and has great potential to sell, you could also consider a venture capitalist to help bring your business where it needs be. “CBN greatly encourages venture capital as export finance. There are also some creative methods of export financing. One of such methods is utilizing a factoring house overseas. Basically the factoring house will purchase the exported products at a discount below invoice value. The factor sells the products at a higher margin. This ensures that the exporter receives his money upfront, which reduces the risk greatly” (McJones, 2010).

According to International Development Agency (2010), funds are provided to developing countries to help them purchase United States goods and services. Mc Jones (2010) observes that IDA services are no longer highly operational in Nigeria, but there are Export Assistance Centers, EAC, that offer technical assistance to exporters of which the Nigerian Version is Export Processing Zone (EPZ). This research work looks at the impact of bank credit on export trade in Nigeria.

1.2      Statement of the Problem

Export financing through bank credit is the prime mover of the economy of industrialized nations. Goods are produced for consumption both locally and internationally. Export financing is, therefore, a key factor in any successful international trade. Exporters naturally would want to get paid as quickly as possible, while importers usually prefer to delay payment until they have received or sold the goods. Because of the intense competition for export markets, being able to offer attractive payment terms customary in trade is often necessary to make a sale. In many cases, bank credit in   export financing for small and medium scale business are not easily accessed by exporters themselves. It is either that the conditions given to exporters are too high for them from various finance sources or they are not willing to take risk associated with the finance sources. Therefore, the unavailability or the lack of commercial bank credit to exporters poses a great threat to the growth of non oil export in Nigeria which this work tends to solve. 

1.3      Research Questions

  1. What is the impact of Commercial bank credit on Non-oil export trade in Nigeria?
  2. To what extent does exchange rate have effect on Non-oil export trade in Nigeria?
  3. What impact does interest rate have on Non-oil export trade in Nigeria?

1.4      Objectives of the Study

The main objective of this research is to investigate the relationship impact of commercial bank credit on non-oil export trade in Nigeria. To achieve this, the following specific objectives were formulated as follows:

  1. To examine the impact of commercial bank credit on non-oil export trade in Nigeria
  2. To what extent does Interest rate have effect on Non-oil export in Nigeria
  3. To examine the impact of exchange rate on non oil export trade in Nigeria.

1.5      Hypothesis of the Study

Based on the objectives of the study, the following research hypothesis are formulated:

H0:  Bank credit has no significant impact on export trade in Nigeria.

H1:  Bank Credit has significant impact on export in Nigeria.

H0: Interest rate has no significant impact on  export in Nigeria.

H1: Interest rate has significant impact on export in Nigeria.

H0: Exchange rate has no significant impact on Nigeria’s  export trade

H1:  Exchange rate has significant impact on Nigeria’s export trade

1.6      Significance of the Study

The study is significant in a number of ways as follows:

  1. To policy makers and regulators of the export financing, it will present a scheme, through its analysis that could assist them in enunciating policies and reforms that will positively impact on the performance in the light of globalization.
  2. To economic watchers and the interested public, it will provide some insight into the performance of export business.
  3. To investors in general, it will expose the relationship existing between relevant variable used in the study.
  4. To students, the research will assist those who wish to take a career in economics banking and finance to advance their understanding of the concept and mechanism of export financing and it’s inter-relationship with the financial markets of nations of the world.
  5. Finally, the research work will serve as a reference material for future researchers on similar topic by providing them with some index of and the Nigerian sources of business finance, export finance.

1.7      Scope and Limitations of the Study

The scope of this study covers the Nigerian economy and will only review the impact of Bank Credit on Nigerian export trade. This study covers the quarterly data for the period of 1992-2015.

1.8      Definition of Terms

Bank Credit: Bank credit is aggregate amount of credit available to a person or business from a banking institution. It is also the total amount of funds financial institutions provide to an individual or business.

Export Trade: Export Trade is a function of international trade whereby goods produced in a country are shipped to another country for future sale or trade. This is also the exchange of capital, goods and services across international borders or territories or among nations of the world.

Exchange Rate: This is the rate at which one currency trades against another on the foreign exchange market. Currencies are being continuously traded on the foreign exchange markets, with the prices constantly changing as dealers adjust to changes in supply and demand.

Interest Rate: According to Fuller (1990), Interest rate is the factor reward  or earning of capital. Fuller opined that this source of finance will only be available if other people are willing to forgo current consumption and provide a pool of financial resources from which loans can be advanced.

 

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IMPACT OF EXCHANGE RATE ON THE NIGERIA’S BALANCE OF PAYMENT

IMPACT OF EXCHANGE RATE ON THE NIGERIA’S BALANCE OF PAYMENT

ABSTRACT

The study investigates empirically the impact of Exchange Rate on Balance of Payment in Nigeria. The broad objective of this study is; to determine the impact of exchange rate on Balance of Payment in Nigeria within the periods of 1981 to 2015. Annual time series data on Exchange Rate, Trade Openness, Import, Export and Balance of Payment from the Central Bank of Nigeria covering the period 1981 – 2015 were utilized. A model was constructed to incorporate Balance of Payment as the dependent variable, and exchange rate, Import, Export and trade openness as the independent variables and tested using the Ordinary least Square (OLS) Methods. The Stationarity (Unit roots) status of the series was examined using the appropriate statistics. Some of the assumptions of the OLS models were also tested to avoid spurious regression. The granger causality test was also conducted to determine the directions of causality. However, the result of this study indicates that exchange rate and export has positive relationships with balance of payment in Nigeria; the result also indicated that import and trade openness has negative relationships with balance of payment in Nigeria. The study recommends that the government should as much as possible encourage the production of most of the imported goods in the country by the local industries as well as encourage import substitutions.

 

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Exchange rate fluctuations have been of serious concern to the monetary authorities, policy makers and business tycoons of developing countries, Nigeria inclusive because of the relevance of exchange rate in international trade, investment and in determining the level of output growth of a country. The movement of goods and services across national frontiers in one direction involves the movement of foreign exchange in the opposite direction. This creates the needs for a rate of exchange between the currencies of two trading partners to settle indebtedness arising from trade involving them (Nzotta, 2004).Exchange rate is a price at which a currency is regulated in the market, which varies at one time or the other. In other words, it links domestic prices with international prices. Through its effects on the volume of imports and exports, exchange rate exerts a powerful influence on a country’s balance of payments position. Paul (1996) defines balance of payments as an accounting record to all monetary transactions between a country and the rest of the world. These transactions include payments for the country’s exports and imports of goods, services and financial capital, as well as financial transfer. It summarizes the international transaction for a specific period usually one year and is prepared in single currency for the country concerned. Consequently, nations in the pursuit of the macroeconomic goals of healthy external balances as reflected in their balance of payments (BOP) position, find it imperative to enunciate an exchange rate policy.

Exchange rate is a key determinant of the balance of payments (BOP) position of any country. If it is judiciously utilized, it can serve as nominal anchor for price stability. Changes in exchange rate have direct effect on demand and supply of goods, investment, employment as well as distribution of income and wealth.

Exchange rate of the naira was relatively stable between 1973 and 1979 during the oil boom era and when agricultural products like cocoa, palm oil, groundnut, rubber etc accounted for more than 70% of the nation’s gross domestic products (GDP). During this period prior to 1986, Nigeria was on a fixed exchange rate determination system. At that time, naira was very strong in reference to dollar. The exchange rate was to one U.S dollar that is:#1 = $1. The increasing demand for foreign exchange allocation in consonance with the goal of internal balance made the fixed exchange rate determination system to be discarded in September, 26 1986 while the structural Adjustment programme (SAP) came in. One of the objectives of the various macro – economic policies adopted under the structural adjustment programme (SAP) in July, 1986 was to establish a realistic and sustainable exchange rate for the naira, this policy was recommended in 1986 by the International Monetary Fund (IMF) on exchange mechanism and was adopted in 1986 (Ewa, 2011:78).

The key element of structural adjustment programme (SAP) was the free market determination of the naira exchange rate through an auction system.

This was the beginning of the unstable exchange rate; the government had to establish the foreign exchange market (FEM) to stabilize the exchange rate depending on the state of balance of payments, the rate of inflation, Domestic liquidity and employment. Between 1986 and 2003, the federal Government experimented with different exchange rate policies without allowing any of them to make a remarkable impact in the economy before it was changed. This inconsistency in policies and lack of continuity in exchange rate policies aggregated unstable nature of the naira rate. (Gbosi, 1994:70).

In Nigeria, exchange rate has changed within the time frame from regulated to deregulated regimes. During the time of fixed exchange rate, the movement of exchange rate seemed to be stable but the economy were getting worse every day, the alarming deterioration of the economy and huge balance of payments deficits called for a change, hence the switch over to flexible exchange rate. The irony of this policy instrument is that our foreign trade structure did not satisfy the condition for a successful balance of payment policy. The country’s foreign structure is characterized by export of crude petroleum and agricultural produce whose prices are predetermined in the world market and low import and export price elasticities of demand. Hence the management of the floating exchange rate has not proved better as the naira deteriorates everyday and many macroeconomic variables are not stable (Anifowose, O.K.1994). .

          Therefore, the effects of various macroeconomic shocks and Balance of payment position depends on the exchange rate policy adopted by the country, it is therefore of importance to investigate the effects of exchange rate on the balance of payment of Nigeria and also the factors that influence exchange rate in Nigeria.

1.2 Statement of Problem

Right from time immemorial, a country’s exchange rate and balance of payment is usually regarded as the sum of indices by which a nation’s strength can be measured especially its economic strength. They are also factors to look into when comparing a country’s relationship with other nations. These factors directly or indirectly affect a host of other factors

However, in recent times in Nigeria, these variables have experienced staggering difficulties. This cannot be argued considering the fact that Nigeria as a nation conduct their foreign transactions with the use of the united states dollar (USD) which is only gotten from the exports the country make to other nations.

Nigeria being a mono-product export country tends to export oil as it major exports after its discovery in 1970s while neglecting the agricultural sector which used to be its major exports. The price and quantity of the oil products been exported by Nigeria however is exogenously determined by the organization of petroleum exporting countries (OPEC) this means that the quantity been sold as well as the price are not determined by the Nigerian authorities. Moreover, the country is an import dependent country as they import 95% of the commodities consumed in the country. This implies that the forex generated from the export of oil cannot equate the forex spent on the importation of foreign commodities and this tends to move the exchange rate of the naira currency to that of other countries in a negative direction. Which directly affect the balance of payment of the country in negative forms.

          Also, the country resorts to borrowing in order to finance their annual budget deficit and afterwards spends a greater percentage of the countries inflows in financing the loans incurred. This also affects the balance of payment of the country terribly.

1.3 Research Questions

The extent to which exchange rate affects Balance of Payment in Nigeria remains unclear and therefore forms part of the problem which the research work intend to study considering the following questions:

  1. What is the impact of exchange rate on the Balance of Payment of Nigeria?
  2. What is the relationship exists between exchange rate and Balance of Payment of Nigeria?
  3. What is the causality relationship between exchange rate and balance of Payment of Nigeria?

1.4 Objective of the Study

Owing to the above listed research questions, the general objective of this study is to determine the impact of exchange rate on Nigeria’s Balance of payment. The specific objectives are to:

  1. Examine the impact of exchange rate on the Balance of Payment in Nigeria.
  2. Ascertain the relationship that exists between exchange rate and Balance of Payment in Nigeria.
  3. Obtain the causality relationship that exists between exchange rate and balance of Payment of Nigeria.

1.5 Hypothesis of the Study

Derived from the objective of this study, the following hypothesis will be evaluated.

  1. H0: Exchange rate has no significant impact on balance of payment in Nigeria.
  2. H0: Exchange rate has no relationship with balance of payment in Nigeria.
  3. H0: Exchange rate has no causality relationship with balance of payment in Nigeria

1.6 Significance of the Study

The result of this study will be beneficial to a wide range of audience, such as the following:

Policy Makers- This study will be of immense benefits to policy makers as it would assist them in the task of policy formulation by providing empirical evidence for their decision making concerning the roles of exchange rate in the balance of payment of Nigeria.

Government- The federal government will also find this study relevant as it will assist in making appropriate policies that will stabilize the exchange rate of the country or reduce the fluctuation to the barest minimum.

Subsequent Analysts- This investigation will also serve as a stepping stone for researchers who develop interest in carrying an empirical analysis on the impact of exchange on balance of payment.

Students- Students will find this piece highly relevant as it will undeniably increase their horizon and add to their existing stock of knowledge on the concept of exchange rate and its relationship with balance of payment.

1.7 Scope and Limitations of the Study

This study seeks to determine the impact of exchange rate on the balance of payment in Nigeria. The study is designed to cover a period of 36 years ranging from 1980 to 2016. The study is made up of five chapters, the chapter one which contains the introduction, chapter two concerned with literature reviews; chapter three covers the methodology of the study while chapter four focuses on the results and interpretations and chapter five on the summary and conclusion of the research work.

In the course of this work the researcher has been confronted with the difficulty in generating a valid time series data. In case where data is available, discrepancies between data on a variable from different sources still persist. The researcher was also confronted with technical problems such as lack of power supply to ensure a smooth running of the study.

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THE IMPACT OF EXCHANGE RATE ON THE NIGERIA ECONOMIC GROWTH

THE IMPACT OF EXCHANGE RATE ON THE NIGERIA ECONOMIC GROWTH

ABSTRACT

Exchange rate is the price of one currency in terms of another currency. Exchange rates this exchange rate is also used to determine the level of output growth of the country. Over the years, Nigeria has adopted various exchange rate regime ranging research work is centered on the impact of  exchange rate on the Nigeria economic growth with special emphasis on the purchasing power of the average Nigeria and the  level  of  international  trade  transaction.  To do this, the classical linear regression model is applied and the ordinary least square econometric technique is also used to estimate the impact of exchange rate on economic growth. The variables  used  are  GDP  and  non-oil  export  as  the  dependent  variables,  real exchange rates interest rates, inflation rate and degree of trade openness as the independent variables.

 

CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND TO THE STUDY

A country foreign exchange policy is derived from the perceives overall economic objectives to achieve and the expected direction of growth (CBN, 2003). Consequently, non conflicting sectoral policies are conceived within the ambit of the overall policy framework such that each sectoral policy reinforces each other.

A simplest definition has it that exchange rate is the price of one currency in terms of another. Thus, it measures the worth of a domestic economy in terms of another economics (Obeski, 1998).

Exchange rates regularly quoted between all major currencies mostly that of the trading partners, but frequently one important currency (that is the dollar) is used as a standard in which to express and compare all rates.

It is one of the key tools in economic management and in the stabilization and adjusts policies in developing countries. Exchange rates policies play a vital role in determine the position of a country in terms of international competition.

In autonomous markets, the exchange rate was seen to be volatile, and depreciated at will. This exerted pressure on the official foreign exchange market, and made the monetary policy target of the period to continually unrealistic due to the inflationary financing of government deficit with the deregulation of the economy; a market-based framework for the determination of exchange rate was adopted. It was envisaged that the realization of macroeconomic stability would lead to the elimination of distortions in the external sector and this enhance growths, stimulate non oil exports, increase foreign exchange inflows, moderate demand pressure in the foreign exchange market and generally improve foreign exchange to eliminate the parallel market premium capital flight and also enhance the inflow of foreign investigation (CBN: 2003).

From the forgoing it becomes clear that the concept of exchange rate policies has the impact so as to show in the one of the macroeconomic variables, it contribute to economic growth of Nigeria. It is therefore necessary that a research work be carried out to this effect so as to provide suggestion that will served as a guide towards the actualization of macroeconomic objectives that will bring about the level of targeted economic growth in Nigeria.

1.2 STATEMENT OF THE PROBLEM

  1. Should the range be decided in advance?

1.3 RESEARCH QUESTION

  1. What is the impact of exchange rate on Nigeria’s economic growth?

1.4 OBJECTIVES OF THE STUDY

The objectives of the study are to determine the impact of exchange rate on the growth of the country.

  1. To estimate the impact o exchange rate on Nigeria’s economic growth

1.5 RESEARCH HYPOTHESIS

Based on the objectives of the study, the following hypothesis were formulated.

1. HO: exchange rate has no significant impact on Nigeria’s economic growth

1.6 SCOPE OF THE STUDY

This research work is designed to cover the period 1980-2010, a period of thirty one years. The general overview of the profile of Nigerians exchange rate over the years shall be discussed.  The scope consist of the regulatory and

deregulatory exchange rate period that is the fixed exchange rate and the floating exchange rate period. The study is based on core macro-economic performance of Nigeria between 1980-2015.

1.7 SIGNIFICANCE OF THE STUDY

The significance of this study lies on the recommendations made at the end of the following:

  1. Importer who make payment in foreign currencies.
  2. Policy makers of the central bank of Nigeria who issues the guideline government international trade practice.
  3. Bank-especially the commercial banks and merchant banks.
  4. The general public who has a right contribute and be informed of the activities our banking institutions.
  5. It is hoped that findings and recommendations of this study will adequately benefit the various interest groups named above.

1.8 LIMITATIONS OF THE STUDY

During the course of this research the researcher experience a number limitation constrains.

          The researcher was faced with already known problem of gathering material from the Nigeria organization. Almost every information is classified and therefore most of the companies and banks approached were weary of releasing financial information related to the topic.

          Gathering of information from public organization such as federal ministry of finance, federal of statistics and central bank of Nigeria was also difficult.

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