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ijcrb.webs.com INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS countries of Western Europe employed it to solve problems of excess capacity (Krein, Cited in Ndebbio, 1987) and to reach balance of payment equilibrium (Shanks, 1973). 3. A Profile of Nigeria‟s Trade and Exchange Rate Development Between 1960 and 1967, the Nigerian currency was adjusted in relation to the British pound in a one to one relationship between them. Between 1967 and 1974, another fixed parity was maintained with the American Dollar. This system was abandoned between 1974 and 1976, when an independent exchange rate management policy that pegged the naira to either the US dollar or the British pound sterling was put in place. The main objective of exchange rate policy during this phase 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 gradual appreciation of the naira was pursued over the period and was aided by the oil boom that occurred at the same period. Nigeria persistently ran appreciable external surpluses in the balance of payments, which supported the appreciation of the naira. The exchange rate over-valuation that followed helped to cheapen imports of competing food items as well as agro-based and industrial raw materials. As a result, there was rapid expansion in the importation of these goods to the detriment of local production of similar goods. When it became obvious that aggregate import demand had outstripped total foreign exchange available for imports, trade restriction through import licensing scheme was introduced. Towards the later part of 1976, arising from the changing fortunes of Nigeria‘s economic circumstances, a policy reversal was effected in the management of the naira exchange rate. There was a deliberate policy to depreciate the naira, though this was not systematic. However, a major policy reversal was affected in September 1986 when the fixed exchange rate regime had to be discarded and the flexible exchange rate regime was put in place following the adoption of the structural adjustment programme (SAP). With the adoption of SAP, foreign exchange allocation and import licensing procedures were abolished and transactions in foreign exchange were subjected to market forces under an auction system. This new exchange rate policy helped to remove the over-valuation problem to the extent that the naira now became under-valued. As noted by Adubi and Okunmadewa (1999), exchange rate depreciation had since resulted in the dramatic increase in the naira price of imports and this is expected to discourage importation, and the naira cost of imported items have also risen astronomically. Table 1 in the appendix shows that the very year SAP commenced, exchange rate stood at N2.02:US$1.00 but depreciated to an average of N4.02, N8.04 and N9.91 to US$1.00 in 1987, 1990, and 1991 respectively. It further depreciated to N17.30 and N22.05:US$1.00 in 1992 and 1993 respectively. Following the persistent depreciation of the exchange rate, it became necessary for the exchange rate policy to be completely reversed in 1994 with the reintroduction of a fixed exchange rate regime. By this new arrangement, the exchange rate of the naira was pegged at N21.8861 = US$1.00. The dismal performance of the economy at the end of that year compelled the authorities to re-introduce the marketbased approach under the autonomous foreign exchange market (AFEM) from January 1995 till October 1999. The exchange rate which depreciated from the fixed rate of N21.8881:US$1.00 in 1994 to an all height of N81.02.US$1.00 in 1995, barely one year after it was fixed, depreciated further to N84.00:US$1.00 and N92.69:$1.00 in 1998 and COPY RIGHT © 2011 Institute of Interdisciplinary Business Research 224 JANUARY 2011 VOL 2, NO 9
ijcrb.webs.com INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS 1999 respectively. It further depreciated to N128.99 between 2002 and 2005, and later appreciated to 126.30 between 2005 and 2008. 4. Methodology of the Study 4.1 Data Sources The data employed in this investigation were obtained mainly from the following sources. (i) Central Bank of Nigeria Statistical Bulletin, Golden Jubilee Edition, 2008. (ii) Central Bank of Nigeria Annual Reports and Statement of Accounts for various years. 4.2 Method of Data Analysis The empirical analysis is based on the traditional polynomial distributed lag model that estimates the delayed effects of exchange rate changes over the period 1986 – 2008. In using this model, the current and lagged exchange rate impact was estimated by employing time series data sets on the exchange rate and the imports of Nine Nigerian product groups at the level of Standard International Trade Classification (SITC). The list of these produce groups is provided in table 2 in the appendix. 4.3 Model Specification The model chosen for the empirical examination of the impact of exchange rate changes is a polynomial distributed lagged model that defines imports as a function of lagged exchange rates. The model takes the following specific form. IMP t – a0 + �bi EXCRt-i + �T + Ut ………………….. (1) n i=o Where IMPt is the import demand for the different groups of products at time t, ao is a constant, bi‘s are the lagged coefficients of the nominal exchange rate distributed over zero to n years, EXCRt-i defines the real exchange variable lagged by t-i years, � represents the trend related coefficient, T is the time trend, and Ut is the stochastic term. The apriori expectation is that depreciation in the value of the domestic currency will dampen demand for import by making these importable relatively more expensive for the domestic buyers. The model chosen for the study has two specific advantages. (i) By providing information on the slop of the distributed lag, this model represents an improvement over the linear regression. The shape of the distributed lag facilitates identification of the pattern, if any, in the time related effects of the exchange rate COPY RIGHT © 2011 Institute of Interdisciplinary Business Research 225 JANUARY 2011 VOL 2, NO 9
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