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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS
EXCHANGE RATE DEPRECIATION AND IMPORT
DEMAND IN NIGERIA (1986 – 2008)
Dr Imimole, Benedict (Ph.D)
Department of Economics, Ambrose Alli University
Ekpoma, Nigeria.
Abstract
This paper has examined the direction and extent of exchange rate impact on import
demand for the different groups of products in Nigeria for the period 1986 -2008, using
the traditional polynomial distributed lag model. The empirical result shows that the
demand for these product groups was import inelastic, and that apart from the one
product group – manufactured goods, – exchange rate depreciation made appreciable
impact on import demand for the period covered by the investigation. Depreciation of
exchange rate was also found to have increased the volume of imports of these product
groups. It was however suggested that with more commitment on the part of government,
the high import content currently being experienced, could be explored to bring about the
needed transformation the economy requires.
Keywords: Exchange Rate Depreciation, Import Demand, Polynomial Distributed Lag
1. Introduction
1.1 Background and Problem Statement
The importance of foreign trade as a vital catalyst for economic development has gained
attention in recent times. For developing countries the contribution of trade to overall
economic development is enormous owing largely to the obvious fact that most of the
essential elements for development such as capital goods, raw materials and technical
know-how, are almost entirely imported because of inadequate domestic supply. Since
the currencies of this group of countries are not convertible foreign exchange has to be
earned through exports to be able to pay for imports. Thus, increased domestic demand
obviously requires a corresponding expansion in export. However, to enhance export
capacity, improved technology is required. Since this is not obtainable in the domestic
economy, the need for it further pushes up the demand for imports. This cycle of
activities has the tendency of pushing imports far ahead of exports and in consequence
exerts an undue pressure on balance of payment.
Mora (1989) realizing the vital role played by imports in foreign trade developed
and estimated two models that explained the import behaviour under a foreign exchange
constraint, arguing that such models are more appropriate representation of import
behaviour in less developed countries (LDCs). The study therefore emphasise the role of
foreign exchange availability in foreign trade and development. This may have prompted
several authors to be pre-occupied with the determination of imports in developing
countries with the result that a number of functional specifications have been employed.
Available evidence generally suggests that most developing countries registered
persistent decline in their foreign exchange earning from the early 1980s. This is
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JANUARY 2011
VOL 2, NO 9
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