Download Exchange Rate Policy

Exchange Rate and Market Policy: The Nigerian
Gum Arabic Marketers’ Experience
1
Haliru, Y.U; 2Otitolaiye, J.O and 1Ebenuwa, C.I
1. Rubber Research Institute of Nigeria, PMB 1049, Benin City, Edo State, Nigeria.
2. Agricultural Economics and Extension Department, Faculty of Agriculture, Kogi
State University, Nigeria.
Correspondent’s e-mail: [email protected]
ABSTRACT
The major factors that influence marketing of goods and services are the magnitude of demand
and supply forces of the commodity in question. With regards to international market however,,
governments also, to some extent, determine the flow of the market goods among individual
nations. This is done through some control measures such as tariff, import/export quotas, license,
and exchange rate etc. The “theory of the second best” in economics states that “a hands-off
policy is desirable in any market only if all other markets are working properly.” However, Umar
(2006) cited Paul (1988) that, “for a large country that is able to effect the prices of foreign
exporters, tariff helps to lower prices of import goods and hence generate some terms of trade
benefits’’. The study was thus conducted in the North – Eastern Nigeria to examine the effects of
Naira (N) – Dollar ($) exchange rate among the gum arabic marketers at international market.
Data were collected through the use of structured questionnaire administered on 150 respondents
randomly selected. The data were analysed using descriptive and inferential statistics. The results
show that a total of 626,465 Kg of gum arabic was sold by the respondents and generated total
revenue of N 392,729,630.00 at the domestic market. However, 95% of 626,465 Kg (7191.75
Kg) was expected to have been exported and earned expected revenue of $ 2,487,287.657 from
Nigeria, and using 30% discount rate for gum arabic export from Nigeria, the actual rate of
revenue obtained was $ 1,741,101.36 ( N 150.00 per $), the real exchange rate(Price of gum
arabic) was sold at N 45. 00/Kg as against N 350 ($ 2.33). The implication is that Nigerian gum
arabic marketers purchasing power is negatively affected by the exchange rate policy, which will
also affects their contribution to Gross Domestic Product.
Keywords: Exchange rate, Gum Arabic Marketing, North –Eastern Nigeria.
1
INTRODUCTION
The major factors that influence marketing of goods and services are the magnitude of demand
and supply forces of the commodity in question. With regards to international market however,,
governments also, to some extent, determine the flow of the market goods and services among
nations. This is done through some control measures such as tariff, import/export quotas, license,
and exchange rate etc. This is based on the “theory of the second best” in economics which states
that “a hands-off policy is desirable in any market only if all other markets are working
properly.” However, Umar (2006) cited Paul (1988) that, “for a large country that is able to
effect the prices of foreign exporters, tariff helps to lower prices of import goods and hence
generate some terms of trade benefits’’.
Exchange rate is one of the international governments monetary policy which serves as the
instrument for the authorities to influence the control of capital/wealth flow among countries.
The ultimate objective is to achieve price stability (Federal Research Board, 2006).
Macroeconomic aggregates such as agricultural output, employment and prices are in turn,
affected by the monetary policy through a number of ways like interest rate, Gross Domestic
Product (GDP) contribution and exchange rate channels (Akhar, 1997, CBN, 1995). The theory
of Purchasing Power Parity (PPP) assumes that exchange rate of currencies between two
countries move in a manner that seeks to off –set the inflation differentials between the two
economies thereby maintaining the real purchasing power of either currency in the economy
(Lothains, 1989). Before the First World War, the values of world’s major currencies were fixed
in terms of gold. This was changed to US Dollar after the Second World War (Umar, 1995). The
stronger the value of a country’s currency is in the international market, the more it enjoys the
international economic transactions. A good example can be drawn to show the impact and
relationship of exchange rate between two countries in an economic transaction, say country 1
and country 2 with their export products as A and B respectively. Assuming we call country 1’s
currency as dollar ($) and country 2’s currency (N), traders who wish to import product A into
country 2 must convert Naira into dollar, and likewise traders who wish to import product B into
county 1 must convert dollar to Naira. In effect, there will be demand and supply of the
currencies between the two countries. The strength of a country’s currency will thus depends on
its bargaining power.
2
Over the last couple of years, agricultural producers and marketers showed more interest and
sensitivity in the role of exchange rates in commodity prices (Kristinek and Anderson, 2002).
Oyinlola, (2008) investigated the impact of exchange movement and tariff reduction on
import/export prices of an open market like Nigeria. The result indicated that in a short – run,
exchange rate had positive impact on the import/export prices of the consumers. Kiptui, (2007)
also studied the impact of Real Exchange Rate on the demand for Kenya’s export on tea, coffee,
horticulture and manufactured goods. His findings revealed a positive and significant impact of
real exchange rate in short –run for coffee, tea and horticulture exports but not significant for
manufactured goods exports. Aliyu (2008) assessed the impact of exchange rate volatility on
none – oil export from Nigeria between 1999 and 2006. He found out a speedy volatility in the
value of Nigerian currency in a short – run with little adjustment towards equilibrium path in the
long – run. Adeyemi, Muhammed and Busari, (2010) also reported that about 70% of
agricultural exports are usually influenced by foreign reserves, exchange rate and price of
exports of the country in question. A review of the effect of exchange rate on gum arabic export
in Nigeria is shown in Table 1. Osuntogun (1993) reported that the large importation of food
items into the country led to the high exchange rate of Naira to foreign currencies especially the
US dollar, and thus reduced the Nigerian agricultural export volume by 1,333 units in 1990. The
study therefore examined the effect of exchange rate policy of N - $ on the revenue from gum
arabic marketers in Nigeria at the international market.
Table1: Effect of Exchange Rate on Gum arabic Export in Nigeria
Year
Exchange
Gum
Arabic Revenue ($)
Rate(N/$)
exported (MT)
% change in % change in
Revenue
quantity
exported (MT)
1991
8.04
6,706.00
13,646,710.00
Base Year
Base Year
1992
9.91
8,358.00
13,957,860.00
2.28
24.64
1993
17.30
7,042.00
17921,890.00
28.40
-15.75
1994
22.33
9,822.00
33,709,104.00
88.09
39.48
3
1995
21.89
9,914.00
29,385,096.00
-12.83
0.94
1996
21.89
12,164.00
21,870,872.00
-25.57
22.70
1997
21.89
10,199.00
11,830,840.00
-45.91
-16.15
1998
21.89
8,166.00
7,921,020.00
-33.05
-19.93
1999
21.89
8,598.00
8,262,678.00
4.31
5.29
2000
85.98
8,239.00
8,519,126.00
3.10
-4.36
2001
10.60
8,747.00
9,175,603.00
7.71
5.81
2002
11.30
6,556.00
603,283,120.00
6,474.86
25.05
2003
127.00
15,838.00
21,856,440.00
-96.38
141.38
2004
130.00
15,000.00
63,750,000.00
191.68
-529
2005
136.00
13,298.00
NA
-
-11.35
2006
132.00
16,002.00
NA
-
20.33
2007
125.00
15,723.00
NA
-
-1.74
2008
120.00
15,205.00
NA
-
3.30
2009
171.00
15,019.00
NA
-
-0.0001
2010
151.00
14,905.00
NA
-
-0.76
2011
152.00
14,895.00
NA
-
-0.07
2012
158.00
14,895.00
NA
-
473.00
Sources: CBN (1995, 2006, 2013)
4
Gum Arabic Production and Marketing in Nigeria: Didier and Chidume (2004), reported
that before 1970 there were only five countries producing gum arabic in Africa; namely, Senegal,
Nigeria, Sudan, Mali and Mauritania. Gum arabic (Acacia species), has been an integral part of
some people in these countries especially the rural people who are either nomadic collectors,
sedentary small scale producers or rural merchants of gum arabic. This implies that several
thousands of people depend directly or indirectly on the production and marketing of gum arabic
for providing at least part of their subsistence. In Nigeria, the Federal Department of Agriculture
(2002) reported a total hectare of land under gum arabic cultivation of about 19,710.00 hectares
for both private and government owned gum arabic plantations and over 2,449,000 hectarage
under wild production of different grades According to RMRDC, (2004) Borno State has the
highest size of plantation (6,393.50 ha), followed by Yobe State (1,700 ha) and then Jigawa (800
ha). Quantity of gum arabic produced in Nigeria between 2000 and 2008 was 154,870 metric
tons. The trend shows fluctuation and steady increase in total production quantities over the
period of nine years. This is due to the fact that Federal Government of Nigeria has emphasized
production and marketing of gum arabic as one of the diversifying strategy of the economy.
Many literatures claimed that the gum arabic produce is as precious as Gold since time
immemorial. It has been reported that when Jesus was born the “Three wise men that came from
the East offered him Frankincense, Myrrh and Gold”. Frankincense and Myrrh are refined and
unrefined gum arabic, respectively (www.NGARA.com). Agricultural marketing in Nigeria
have been associated with unstable price since the abolition of Agricultural Commodity Board
in1986 (Ayoola, 2001). The marketing functions became grossly unreliable especially for the
peasants farmers and marketers due to the deregulation of the market forces; hitherto, prices
recommendation for every commodity were made to the Price Fixing Authority (PFA) in the
Presidency who fixed and announced the prices of goods to public for implementation.
Currently, there is a wide range of price variation between Nigeria and other gum arabic
producing counties, with Nigeria recorded the least price couple with the poor Naira – Dollar
exchange rate (Umar, 2006). Prior to the year 2000, African share of agricultural commodities
trade in the world was 6%, but this has since dropped to 2% since 2007 (WTO, 2007). This could
have led to poor development of agricultural marketing in Nigeria and Africa in general as
Ayoola (1997), stated that absence of a coherent policy unique for a particular economy meant
actions cannot be focused, leading to stagnation of the economy. The study therefore looked at
5
the impact of exchange rate of Naira to Dollar on the revenue generation of Nigerian gum arabic
marketers.
METHODOLOGY
Study Area: The study was carried out in Adamawa, Taraba and Yobe States of North-Eastern
Nigeria. Geographically, the states are in Semi-Arid zone with a mean annual rain fall of 160.2
mm, and temperature fluctuating between 14oC to about 44oC (Yobe State Diary, 2010). These
conditions promote the production of gum arabic (Aghughu, 2004). There are diverse ethnic
groups well over 50 different tribes found in these states with major languages spoken as Hausa,
Fulfulde, Kanuri, Kilba, Margi, Bura Bachama, Chamba and Fali among others.
Data Source and Sampling Techniques: A multistage sampling technique was used for this
study. The area of study was first stratified into a unit, that is, Adamawa, Taraba and Yobe states.
This is because these states are among the leading gum arabic producing states in Nigeria. The
first stage of sampling involved the purposive selection of one Local Government Area from
each of the three states making a total of 3 Local Government areas. The second stage involved
random selection of 3 communities/villages from each of the Local Governments making a total
of 9 communities. Finally, 20 Gum arabic marketers were randomly interviewed using the
questionnaire from each of the 9 communities making a total of 180 respondents (marketers).
The list of the total gum arabic marketers from the three states were obtained and compiled from
the Ministries of Agriculture and Environment of each state, totaling Adamawa = 47, Taraba =
50 and Yobe = 55 which is the sampling frame of this study. It is from this sampling frame that
the sample size was drawn taking cognizance of the marketers from the selected Local
Governments. However, only 150 gum arabic marketers in the study area filled the questionnaire
correctly and were used for the study. The secondary data were also collected from Central Bank
of Nigeria’s Annual report on the exchange rate of Naira to Dollar and gum Arabic
export/revenue from Nigeria during the period of study to aid in the analysis of the study.
Methods of Data Analyses: Lothains (1989) model as adopted by Okeke and Awotide (2010)
was employed to determine the effects of Naira to Dollar exchange rate on the purchasing power
parity of Nigerian gum arabic marketers at the international market. The formula is given as:
NR = ∑Pi Vi – (FC + VC) ---------------------------------------------------- (1)
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Where:
NR = Net revenue (N)
Pi = Export price/unit ($/N)
Vi = Quantity exported (Kg)
VC = Variable costs ($/N)
FC = Fixed costs ($/N)
In effect, the laws of demand and supply for the currencies manifested and hence affected the
net revenue from the gum arabic marketers in Nigeria due to the variant purchasing power parity
(PPP) of $ and N.
The level of this effect was determined using Gustav Cassell, 1920 formula as adopted by CBN
(2006) stated as
V = (Et – Nt)/ Nt. ---------------------------------------------------------- (2)
Where:
V = Magnitude of valuation of $
Nt = Nominal official exchange rate of $ to N during the period of the study.
Et = Equilibrium exchange rate of $ to N.
Note: if; V = Negative value, implies over valuation
V = Positive value, implies under valuation
V = 1, implies equilibrium.
To determine the gum arabic marketers’ price competitiveness at the international market, the
Real Exchange Rate (RER) formula as adopted by CBN (2006) was applied, thus:
RER = Ne.Pf/ Pd ------------------------------------------------------------ (3).
Where:
RER = Real exchange rate of $ to N
Ne = Nominal exchange rate of $ to N during the period of study
Pd =Price of gum arabic sold at domestic market in N value
Pf = Price of gum arabic sold at foreign market in $ value.
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RESULT AND DISCUSSION
Volume of Sales and Revenue from Gum Arabic: The total revenue obtained from the sales
of grades 2 gum arabic in the area was ₦ 392,729,630.00 (Table2). This could be due to lower
price of grade 2 gum arabic in the market base on its demand (average of ₦ 180.00/kg) while
grade 1 gum arabic, on the average was sold
₦ 350.00/kg in study area. The Acacia senegal
which produces grade 1 gum arabic seems to be scarce in Nigeria compared to other grades. The
implication of this is that only fewer buyers like Indians who are interested in Nigerian grade 2
gums will patronize the country for the produce. Also, with lower price of grade 2 gum and
having the same cost implications (except the purchasing cost) with grade 1, the marketers may
not have optimum benefit from the turnover on cash inflow. The marginal profit from grade 2
will always be lower than that of grade 1 due to its lower selling price.
Table 2: Volume of Sales of Grades 1& 2 Gum Arabic and Revenue Generated
Range
(Kg)
of
Sales Freq.
(%)
Revenue Generated (N)
Freq.
(%)
1 – 10
41
27.33
1 – 15,000
6
4.00
11 – 20
37
24.67
15,001 – 50,000
15
10.00
21 -30
18
12.00
50,001 – 85,000
18
12.00
31 -40
11
7.33
85,001 – 120,000
17
11.33
41 -50
3
2.00
120,001 – 155,000
10
6.67
51 – 60
8
5.33
155,001 190,000
8
5.33
61 -70
7
4.67
190,001 – 225,000
7
4.67
71 – 80
2
1.33
225,001 – 260,000
12
8.00
81 – 90
1
0.67
330,001 – 365,000
10
6.67
91 – 100
3
2.00
65,001 – 400,000
6
4.00
Above 100
19
12.67
Above 400,000
41
27.33
Total
150
100.00
Total
150
100.00
Source: Calculated from field survey data, 2012
8
Analysis of the Effects of Exchange Rate On the Purchasing Power of the Gum Arabic
Marketers: According to Jigawa Gum Arabic Company (JIGACO) (2008), 95% of gum arabic
produced in Nigeria are exported to France, Germany, USA and other European countries. Based
on this, it is expected that from the 626,465 Kg marketed in the North – East Nigeria, 719,591.75
Kg (95%) has been exported. Also, from the revenue generated of N392, 729,630.00 ($
2,618,195.533) it is expected that N 373, 093,148.50 ($ 2,487,287.657) (95%) was also realized
from the gum arabic export from the zone during the period. But Umar (2006) reported that a
discount rate of 30% is usually done on Nigerian gum arabic sold at the international market.
This implies that a sum of $ 1,741,101.36 (₦ 261,165,204) might be the actual revenue realized
from sales of 719,591.75 Kg of gum arabic from the zone instead of the N 373, 093,148.50 or $
2,487,287.657.
Now using the formulae for Real Exchange Rate (RER) and the current
exchange rate of N 150.00 to a $, the actual price rate of gum arabic sold from study area at the
foreign market was:
RER = Ne.Pf/Pd
Where;
RER = real exchange rate (N 45.00 ($ 0.3), as calculated in this study).
Ne = nominal exchange rate of N to $ during the period of study
Pd = domestic price of gum arabic (N)
Pf = foreign price of gum arabic at international market in N value.
But Pf = ER/QE
Where;
ER = expected revenue from sales of gum arabic at foreign market ($).
QE = expected total quantity of gum arabic exported (Kg)
But:
9
Ne = ₦ 150.00 per $1.00 (an estimate exchange rate at the time of study).
ER = $111,927,944.6.
QE = 595,141.75 Kg.
Also,
Pd = DR/QS
Where;
DR = revenue generated from sales of gum arabic at the domestic market (₦)
QS = total quantity of gum arabic sold at the domestic market (Kg).
Therefore, applying these formulae to determine the RER, we have:
Pd = DR/QS,
= N (392,729,630 ⁄626,465) = N 626.898
Pf = ER/QE,
= N (111, 927944.6 ⁄595,141.75) = N 188.069
RER = Ne.Pf/Pd, But Ne = ₦150.
Therefore,
RER = N (150X188.069/626.898) = N 44.999. Therefore, RER = N 45.00
The result of the RER, (N 45.00 or $ 0.3) implies that gum arabic from Nigeria attracted only N
45.00 ($ 0.3) per kilogramme at international market against the average price of N 350 ($ 2.33)
and N 180 ($ 1.20) per kilogram of grade 1 and grade 2 respectively at the domestic market. The
implication of this is that Nigerian gum arabic marketers are negatively affected by the exchange
rate monetary policy and consequently, their contribution to GDP (Akhar, 1997 and CBN, 1995).
This also conforms to Aliyu, (2008) and Kiptui, (2007) who reported in their studies on the
impact of real exchange rate volatility on non–oil export from Nigeria between 1999 and 2006.
Their findings revealed a speedy volatility in the value of Nigerian currency in a short-run with
little adjustment towards equilibrium path in the long-run. This could have been otherwise if
Nigerian currency is stronger than the US Dollar. It is quite unfortunate that the Nigerian
currency is suffering from real exchange rate with the world dominant currency (the US $).
The Nigerian gum arabic market have fallen victim alongside other agricultural commodities
export from the country as Adeyemi, Muhammed and Busari, (2010) reported that about 70% of
10
agricultural export from Nigeria were influenced by exchange rate policy. The question now is
when the possibility of Naira to reach equilibrium with US $. That will be the time every
Nigerian wishes to see.
CONCLUSION AND RECOMMENDATION
Government through trade policy on gum arabic should discourage the discounting of produce
from Nigeria at the international market which contributes in lowing the purchasing power and
naira - dollar exchange rate to Nigerian gum arabic marketers. Nigerian government also as a
matter of policy should put necessary measures in place to discourage importation of goods that
the country has comparative advantage in their production in order for the Naira value to
appreciate at the international market.
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