Effects of Exchange Rate Regimes on Agricultural Growth in Nigeria (1970-2014). Department of Agricultural Economics

Abstract

Exchange rate policy in Nigeria has changed over time from fixed to flexible exchange rate regimes. There have been debates over which type of exchange rate can best stimulate growth. Different regimes have been accompanied by instability and uncertainties, this necessitated this study to examine the relationship between exchange rate regimes and agricultural growth in Nigeria in different periods from 1970 to 2014. The objectives of this study were to describe the trend in exchange rate regime and agricultural growth; ascertain the effect of the fixed exchange rate regime on agricultural growth; assess the effect of flexible exchange rate regime on agricultural growth; and determine the causal relationship between exchange rate regime and agricultural growth. The study area is Nigeria. This research work covered a period of 45 years from 1970 to 2014.This was purposively chosen due to availability of data. Data were collected from Central Bank of Nigeria and Worldwide Governance Indicators (WGI). The data were grouped into three periods. The whole period (1970 -2014), the period of exchange rate fixed regime (1970-1985) and flexible regime (1986-2014) since exchange rate policy in Nigeria. This study tested the effect of the two basic exchange rate policies, namely, the fixed and flexible regimes on Agricultural growth in Nigeria, using the Ordinary Least Square Method. However, before the Ordinary Least Test was applied, the time series characteristics of the variables used in this study were tested, using Augmented Dickey-Fuller Unit Root Tests and Johanssen co integration Tests. The result showed that there exist a long run equilibrium relationship between the dependent and independent variables. Trend analysis showed increasing trend in agricultural GDP during the fixed exchange rate regime i.e. from 1970-1985 and also the agricultural gross domestic product during the flexible exchange rate regime i.e. from1986-2014. In addition, exchange rates remained stable during the fixed exchange rate regime. Exchange rates during the flexible regime were not stable except from 1994 to 1998. Results of the regression analysis on the effect of exchange rate regimes on agricultural growth showed that inflation had positively and significantly affected agricultural growth during fixed exchange rate regime while results during the flexible exchange rate regime showed that macroeconomic instability index was found to have positively influenced agricultural growth and government expenditure on agriculture was found to have positively influenced agricultural growth. Political instability index in contrast was found to have negatively influenced agricultural growth. Results of the Regression analysis for the whole period showed that exchange rate, government expenditure on agriculture and macroeconomic instability were also found to have positively influence agricultural growth. The results of the Granger Causality Test showed that exchange rate does granger cause Agricultural GDP. This study showed that no matter the exchange rate regime, whether fixed or flexible, what matters is the effectiveness of the management. Nigeria can substantially improve on its growth performance through improvements in the overall management of its exchange rate policy.

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