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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS
Kandil etal, Xiaoqin (2002) noted that exchange rate depreciation can make a country‘s
export cheaper and imports more expensive. To him, boosting a country‘s exports and
curbing its imports ultimately results in an improvement in her trade balances with the
rest countries of the world. Begg etal (1984) are also indifferent in this respect but noted
that imports respond more quickly to changes in domestic income than to changes in real
exchange rate. A major factor that can complicate this general relationship was expressed
by Dwivedi (1998) in the popular Marshall-Learner condition which states that a
devaluation/depreciation will improve the trade balance only if the sum of foreign price
elasticity of demand for exports and the home country‘s price elasticity of demand for
imports is greater than unity as illustrated in Guitian (1976) and Dornbusch (1988) who
stressed that the success of currency depreciation in promoting trade balance largely
depends on switching demand in proper direction and amount as well as on the capacity
of the home economy to meet the additional demand by supplying more goods (Mendoza,
1992).
Some empirical studies confirm that exchange rate depreciation improves trade balance.
Available statistics have proved this to be true in developed industrialized nations
(Scammel, 1975 and Samuelson, 1987). Abdulahi (1987) however noted that this success
was achieved because the Marshall-Learner condition of at least a unit elasticity of
imports had been attained. Toffler (1981) attributed the success recorded by these nations
to economic autarky, excess capacity and under-consumption and low unit cost of
production, which were among conditions prevailing then. A study of nine developing
Asian economics from 1973 to 1991 indicates that real devaluation improves trade
balance in most of these countries (Arize, 1994). Abdulahi and Suleiman (2008) have
examined the behaviour of Nigeria‘s imports for the period 1970 to 2004 and identified
GDP and measure of openness as significant determinants of imports, and exchange rates
and foreign exchange reserves as insignificant determinants.
The practice of fixed exchange rate as embedded in the Bretton Woods Agreement of
1944 was a regular feature among developing economies as long as the IMF could
provide sufficient reserves to mitigate the short-term fluctuation in the balance of
payments while maintaining the fixed exchange rate system. When the IMF could no
longer sustain this arrangement, the currencies of many countries especially the reserve
currencies were subject to frequent devaluation in the early 1970‘s. This raised doubts
about the continuation of the Bretton Wood System and also about the viability of the
fixed exchange rate system.
In Nigeria, before the adoption of the market based system, the main objective of
exchange rate policy was to operate an independently managed exchange rate system that
would influence real economic variables in the economy and bring down the rate of
inflation. Consequently, a policy of progressive appreciation of the naira was pursued
over the period and was aided by the oil boom that occurred at the same period. The
sudden switch to market based system was engineered by a wide practice of foreign
exchange management (Scammel, 1975, Killick, 1981) especially among western
countries pre-occupied with balance of payments problems (Shanks, 1973). The
International Monetary Fund inspired the choice that it must be floating exchange rate.
This was why it was made part of the conditionalities for rescheduling our external debt
(Bagura, in Longe and Moruku, 1998). Besides, Japan, USA and other industrialized
COPY RIGHT © 2011 Institute of Interdisciplinary Business Research 223
JANUARY 2011
VOL 2, NO 9