CHAPTER ONE

1.1  INTRODUCTION

BACKGROUND OF THE STUDY  

The real exchange rate and Nigeria agricultural exports-one of the most dramatic events in Nigeria over the past decade was devaluation of the Nigeria naira with adoption of a structural adjustment programme (SAP) in 1986. A cardinal objective of the SAP was the restructuring of the production base of the economy with a positive bias for the production of agricultural exports.

       The foreign exchange reforms that facilitated a cumulative depreciation of the effective exchange rate were expected to increase the domestic prices of agricultural exports and therefore boost domestic production significantly, this depreciation resulted in changes in the studture  and volume of Nigeria’s agricultural exports as empirically determined by many researchers (Oyejide, 1986) Ihimodu, 1993, Osuntogun  et al, 1993, world Bank 1994).

       The depreciation also increased the prices of agricultural exports and studies have shown a marked increase in volume of agricultural exports over the gears. However, the volatility, Frequency and instability of the exchange rate movements since the beginning of the floating exchange rate raise a concern about the impact of such movements on agricultural treacle flows. Structural adjustment and agricultural performance among other measures, the structural adjustment programme (SAP) which starlit in 1986, abolished the commodity board, the body that since 1960 had been responsible for organization and purchase of agricultural exports. As a result farmess could sell their products directly to foreign buyers and local processtas without any intermediary, this was expected to remove the excessive taxation on formers products by the erstwhile marketing boards and leare producer prices to be determined by market forces. Giver that agricultural output is influenced by process among other factors, the depreciation of the naira and abolition of the commodity boards were expected to result in overall increase in production of exports.  

       There was a major increase in fire major agricultural export crops that had been on the decline since the 1970s. by 1985, only 375, of the 1970 output was achieved.

According to kwanaslice et al, (1994), the degree of fluctuation in prices is a major determinant of the changes in earnings given the trend in output over the years.

       In this regard however, exchanged rate could be defined as the rate which one currency can be exchanged for another are can be regarded as the price of one currency in term of another. Furthermore, the exchange rate represents a key relative price in the economy in addition its political undertone such that policies to changer it one often the centre- piece of adjustment programs designed is improve international competitiveness and selft resources towards the production of tradable goods. As a price of a currency in terms of another, exchange rate plays a very important role in national and international economy. Moroso. An Imf (1984) study cities arguments that exchange rate variability would also tend to indue macro-economic phenomena that are undesirable, for example inflation and protectionism. Despite, more recent research explains why a positive effect could also be possible (de Grauve, 1988, Caballero and Corbo, 1989). If firms hedge against exchange rate rise, one could not expect to find a strong negative effect on trade. Hedging against risk can be done via future or forward market. Where forward markets exist, the nature of the uncertainty faced by traders is transformed. A forward market represents, in effect, a guaranted forecast of the end of the contract period.

       Which a trader can take advantage of payment of a small margin around the forward rates.

       Since currency uncertainty can be removed from the short-term trading transaction by payment of this margin, the cost of such uncertainty cannot be higher than the cost of purchasing insurance against it.

       Moreover, successive government in Nigeria have devised and implemented a wide away of exchange rate policy that failed party or wholly to achieve their set objectives.

       The real sector is here defined as consisting of the following Sectors-Agriculture, manufacturing, Building, Conduction, Mining, and Quarrying a review of financial static’s for the world Bank and the Economist reveal that the real sector of Nigerians economy has been the worse for it the stringent documentation requirements in the official market crowds out some forex demands that are ultimately met in the parallel or black market.

Thriving malpractices in the parallel market and the documentation requirements of the official market have both contrived to make patronage of the farmer increasingly attractive and profitable, further discouraging domestic production and worsening Nigeria’s balance of payment position. The statistics daming.

       It is dear that Nigeria is in dine need of rapid and sustainable rate of economic growth and development, if we are to reduce the level of human miseries parading the country.

       Has come a long way in evolving an enduring exchange rate management policy, and we have, no doubt, made appreciated progress in this regard indeed, the need to ensure that a realistic exchange rate of the naira is achieved has been major objective of the central bank of Nigeria.

       This is because a realistic exchanger rate would result in the simultaneous achievement of internal and external balance and facilitate growth and development.

       The achievement of sustainable economic growth and development. The most cities factor and challenge however, remains how to increase the productivity of the domestic economy. The higher, the productivity, the less the treasure on the naira exchange rate and its volatility. All structural rigidities facing the economy have to be reduced to the barest minimum if they cannot be completely eliminated. The effect of having an over-valued exchange rate is legion.

       The most critical is the creation of a high propensity to import cheaper and promotes balance of payments deficits. We experienced an unsustainable demand for foreign exchange in the early 1980, when the government resorted to exchange control mechanism to support the over-valued naira. We will recall the days of foreign exchange rationing through import licensing and the suffocating distortion and corruption, which if created is the Nigeria economy. 

       In addition to these, because the economic agents have resources in naira that commons more foreign exchange at the official rate that could be made available.

Foreign obligations contracted which could not be settled immediately subsequently crystallized into pans and London clubs foreign debts. These debts, with the accrued interest and penalties, constitute more than 80 cent of Nigeria total external debt incleed, most of these were not debts incurred by the government but by Nigeria. Private sector induced by Over-valued naira.

       We sometime, the rate was $1.$ to the naira with nostalgia, forgetting to recognize that it did incalculable damage to our economy.

       Worst of all, it destroyed our agricultural base as food import because so cheap that farmers abandoned their farms and because traders. The manufacturing sector was not spared.

       Finally, it is critical to mention that exchange rate is used as an appropriate instrument to enhance the productroty of our economy.

1.2  STATEMENT OF PROBLEM:

A critical requirement for a freely floating exchange rate regime is the absence of any form of economic rigidity. The Nigeria economy is characterized by structural rigidities and bottlenecks. Most of our exports and imports are characterized by inelasticity either on the demand or supply side or both, real exchange rate has negative impact on non-oil real exchange rate is one of the major factors that impede non-oil export growth.

 Exports and imports to price and foreign exchange fluctuations.

       Agricultural is important segment of our culture which also help to give an insight to some people who may want to know more about the potency accredited to agriculture.

1.4  RESEARCH QUESTIONS

The study sought to find answers to the following questions:- 

To what extent do inadequate capital affect the Nigeria agricultural economy?

Are there relationship between exchange rate and the growth rate of gross domestic products?

To what extent do low exchange rate impede the growth of agricultural exports in the country?

1.5  RESEARCH HYPOTHESIS

The following hypothesis were formulated:-

Hi:  In adequate capital does not affects the agricultural export.

Ho:  There is no significant relationship between exchange rate and the growth rate of gross domestic product.

1.6  SCOPE/DELIMITATION OF THE STUDY

The scope was limited to corporate organizations and individuals. Who know the problems Nigeria’s are facing in the world economic policy especially the exchanges of our currencies.

1.7  THE SIGNIFICANCE OF THE STUDY

This study was embarked upon with the hope that the results and findings will add to the existing stock of information on this area of study.

Therefore, it is the researches belief that policy makers will gain and moreover, be in a better position to articulate policies on exchange rate given the results of this study. Also corporate organizations individuals and respond to various exchange rate policies which believe will enhance the management of scarce resources at their disposal.

1.8  THE OBJECTIVE OF THE RESEARCH

       The objective of the study are to:-

Evaluate the nature and extent of the impact of price and exchange rate volatility on agricultural trade flows.

To estimate the relationships between price and exchange rate volatility and analyze their effects on exports and imports prices.

Investigate the dynamic characteristics of the adjustments of agricultural exports and imports to price and foreign exchange.