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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS
attributable largely to the collapse of commodity prices in the world market. One possible
explanation for this is that both imports and exports in developing countries are subject to
periodic fluctuation in the world market.
This paper examines the role of exchange rate depreciation in explaining import
behaviour in Nigeria. The period covered by the investigation is 1986 – 2008 when
market deregulation was formally applied as a tool of economic reconstruction. It is
worthy of note that Nigeria experienced large-scale depreciation of the naira during this
period as table 1 in the appendix has shown.
Given the vital role played by imports in foreign trade and economic development
it is unfortunate that in Nigeria very few empirical evidence exists to determine the role
played by changes in exchange rate in explaining import behaviour. Also, traditional
trade models with imports, defined at the aggregated level have been employed in
literature to gather evidence in support of the view that depreciation in currency would
lead to a reduction in the volume of imports notwithstanding the existence of such
evidence, questions have often been raised about the use of aggregated definition of
products, since it does not allow for proper identification of product specific effect. This
paper therefore examines at the micro level of product definition, the impact of exchange
rate depreciation on demand for imports in Nigeria from 1986 to 2008.
1.2 Objectives of the Study
This paper is expected to achieve the following objectives.
i. To examine empirically the behaviour of import demand under a deregulated
exchange rate regime in Nigeria.
ii. To estimate the current and lagged exchange rate impact on imports in Nigeria.
iii. To draw policy implication for imports from the empirical findings.
The layout of this paper therefore is as follows. Section 1 is introduction. Section 2
provides the review of literature. Section 3 presents a profile of Nigeria‘s trade and
exchange rate development before and during Structural Adjustment Programme (SAP).
Section 4 is methodology of the study, which highlights data sources, estimation
procedure and model specification. Section 5 is discussion of empirical results, and
section 6 is conclusion.
2. Literature Review
Imports have continually been given considerable amount of attention in economic
literature both in relation to macroeconomic adjustment and within the broader context of
international trade. Closely related to this is the exchange rate variable, which has equally
attracted a great deal of attention possibly because of its presumed role in explaining
import behaviour. The current study examines the relationship between these two
variables within the context of the Nigerian economy.
One of the arguments often put forward in economic theory for the adoption of currency
devaluation (depreciation) is that depreciation will make import dearer, bringing about a
subsequent reduction in imports while at the same time making export of the devaluing
country cheaper. Several authorities including Dwivedi (1998) are in support of this view.
The same view was expressed by Kandil and Mirzaie (2003) when they said that a
depreciation (or devaluation) of currency may stimulate economic activity through the
initial increase in the price of foreign goods relative to home made goods. Aligning with
COPY RIGHT © 2011 Institute of Interdisciplinary Business Research 222
JANUARY 2011
VOL 2, NO 9