Naira Depreciation and Agriculture Financing in Nigeria (Case Study of Yobe State)
Naira Depreciation and Agriculture Financing in Nigeria (Case Study of Yobe State)
Chapter One of Naira Depreciation and Agriculture Financing in Nigeria (Case Study of Yobe State)
INTRODUCTION
Background to the Study
Agriculture has been the backbone of the Nigeria’s economy since independence in 1960 and provided employment to over 75% of the population. Agricultural sector undoubtedly provides over 70% of total food consumed in the country, all raw materials for its agro-based industry and responsible for export earnings to finance imports. Nevertheless, it has been observed that 21 years after independence, Nigeria’s agriculture was neither capable of producing enough food for the country’s fast growing population nor able to cope with the growing demands for agricultural products to sustain the country’s agro-based industries.
However, several reasons have been put forward by various authors to explain the progressive decline in the performance of the Nigerian agricultural sector. One of the key reasons pointed out by these authors was the oil boom, which is responsible for total neglect of agricultural sector by the government coupled with the exponential increase in foreign exchange earnings realized from the export of crude oil between 1972 and 1980. The monetization of oil earnings exerted an upward pressure in agricultural products coupled with a rapid growth in money supply in Nigeria. When the price of crude oil slumped during the 1st half of 1980’s, Nigeria’s crude oil, was sold at slightly above US$41 per barrel in the early 1981, and fell to less than US$9 by August, 1986. This, according to triggered off a series of development in the economy; and one example of such developments is the state of fiscal crisis as reflected in the persistent budget deficit, which culminated to approximately N17.4 billion between 1980 and 1984. Monetary policy also became highly expansionary as a large part of the deficit incurred during this period were financed through the creation of credit thus the local domestic credit to the economy recorded an average annual growth rate of 29.9% between 1980 and 1984, with most of the increase attributable to net claim by the government.
Naira depreciation is viewed in Nigeria context as the unit of naira needed to purchase one unit of another country’s currency e.g. the United States dollar, British pounds, Euro, Japanese Yen among others. Also, devaluation of home currency affects local enterprises in their payment of foreign transactions, which could lead to the reduction in the value of a currency with respect to those goods, services or other monetary unit with which the home currency can be exchanged.
Depreciation of naira currency began when currency devaluation was introduced by Nigeria government in 1986, with the institution of Structural Adjustment Programme (SAP) under the regime of General Ibrahim Babangida (the first military President in Nigeria) as a policy designed to achieve a realistic exchange rate for the naira that was over-valued. This was unhealthy for economic growth and development of the nation since overvalued currency further worsen balance of payment problem. However, the depreciation of Naira in 1986 during the structural adjustment Programme led to fall in Nigeria exchange rate with other foreign countries, thereby affecting most of the staple foods in the country. The Structural adjustment programme aimed at facilitating economic growth as a means of jump-starting the economy towards sustainable economic growth and development. Idowu, Osuntogun and Oluwasola, (2007) opined that the emergence of Structural adjustment programme in Nigeria brought about exchange rate deregulation hence, deregulation placed much emphasis on the market forces in determining the prices of goods and services and allocating the resources within the economy. The exchange rate over-valuation prior to deregulation helped to cheapen agro-based and industrial raw materials and the result was rapid expansion in the importation of these goods to the detriment of local production of similar goods (Imimole and Enoma, 2011) across the nation with Yobe State inclusive. This led to the abolition of the fixed exchange rate regime and the introduction of flexible exchange regime via the adoption of Structural adjustment programme. This new exchange rate policy helped to remove the over-valuation problem to the extent that the naira now became under-valued. This made the various stakeholders in the country not wanting to finance agriculture sector effectively. The movement away from fixed to flexible exchange rate regimes allowing significant depreciation of Naira was aimed at enhancing export by making Nigerian goods cheaper (Shittu et al., 2007).
There has not been a consensus among scholars, economic analysts and the likes, regarding the impact of currency depreciation variations and agriculture finance in Nigeria. However, the traditional view is that fluctuations in exchange rates affect the agricultural sector including relative domestic and foreign prices, causing expenditures to shift between domestic and foreign goods (Obstfeld, 2002). Several economists and policy analysts to mention a few had focused considerable research attention on Nigeria’s non-oil trade behaviours; a prominent attribute of these studies has been an inability to reach a consensus on the exchange rate suitability and deregulation as far as Nigeria is concerned.
Since the inception of Naira devaluation in Nigeria, there have been fluctuations in the value of the naira (Naira depreciation). Evidently, Naira exchange rate to the US dollars was somehow better in term of stability in 2010 (CBN, 2010). The average exchange rate of the naira at the Whole Sale Dutch Auction System (WDAS) segment of the foreign exchange market in 2010 was 150.30 per US dollars; a depreciation of 0.9 per cent compared to the level in 2009. A market driven exchange rate policy is expected to be important in determining the importation of inputs for agricultural production and also, the export of agricultural produce through its influence on prices but it is worth noting that there exists a dearth of empirical information on the relationship between exchange rate deregulation and agricultural gross domestic product in Nigeria which is in line with Petreski (2009), who posited that the relationship between exchange rate and economic growth remains blurred and requires indepth empirical investigation. This study therefore seeks to fill the gaps in research by providing empirical information on the Naira depreciation and agriculture financing in Nigeria by using Yobe State as a case study.
Statement of Research Problem
The introduction of Structural Adjustment Programme in 1986 has brought about the continuous depreciation and instability both in the official rate of Naira to Dollar in term of Naira exchange. From 1986, the Naira exchange rates to US dollars have risen from N1.55 per dollar in 1986 to N44 in 1993, N133.5 in 2002, N152 in 2010 and now N360 in 2018. This is a huge depreciation of the Nigerian currency. The causes of Naira depreciation includes; excess demand for foreign exchange inflow, inadequate funding of foreign exchange market, instability in the crude oil market, speculative activities, sharp practices of authorized dealers, expansionary monetary and fiscal policies which fuelled demand pressure in the market, fragile export base and built import dependence of the economic system, industrial sector and employment rate contribution to gross domestic product is not impressive. There is low manufacturing, low productivity and neglect of agricultural sector.
The depreciation has also led to significant increases in costs of major inputs over the last eight years, which influence costs across all the value chains in agricultural sector. Energy prices, including power and diesel, are largely driven by foreign exchange cost elements, and are a significant cost component for processors along the palm oil, cassava, and aquaculture value chains, and for some primary producers in the poultry value chain. The credit cost has also suddenly increased since the naira’s devaluation as the apex bank in Nigeria (CBN) increased interest rates to combat inflation. This has limited stakeholders in the agricultural sector as they have found it increasingly difficult to obtain credit to expand their operations. Agricultural inputs, such as fertilizers and crop protection products, which are of special interest to farmers all over the country, have also become more expensive. In addition to price increases, farmers in Nigeria, particularly, in Yobe State are seriously experiencing difficulties accessing these products as local production capacity is currently inadequate.
Moving to rice, millet and cowpea value chain, price increases for fertilizers and crop protection products have raised costs for farmers in Yobe State, while processors have faced increased energy costs. However, the depreciation has also led to higher rice demand (in which Yobe State is set to become the major producer, and therefore higher prices. Demand for rice has increased as the federal government has placed ban on imported rice in the country. Meanwhile, the farmers in the state are currently battling with finance issue as there is no enough financial backing to produce enough agricultural products for sale which could improve the economy of the state and as well increase the standard of living of the farmers. This is largely due to the depreciation of naira in the country. The government of the state too is not encouraging the farmers by supplying them the major resources needed to become a force to be reckoned with in term of agricultural products contributions to the economy of the country. It on this foundation that this study aims to investigate Naira depreciation and agriculture financing in Nigeria by using Yobe State as a case study.
Research Objectives
The study has both general objective and specific objectives. The general objective or main objective of this study is to investigate Naira depreciation and agriculture financing in Nigeria by using Yobe State as a case study. The specific objectives are:
i) To investigate the impact of naira depreciation on agricultural financing in Nigeria
ii) To determine the prevalence of agricultural financing in Yobe State
iii) To examine how naira depreciation has affected the exportation of Agricultural products in Nigeria
iv) To identify the state of agriculture financing in Nigeria by stakeholders
v) To evaluate the reasons for Naira depreciation in Nigeria
Research Questions
The following are some of the questions which this study intends to answer:
i) What are the impacts of naira depreciation on agricultural financing in Nigeria?
ii) What is the prevalence of agricultural financing in Yobe State?
iii) How has the naira depreciation affected the exportation of Agricultural products in Nigeria?
iv) What is the state of agriculture financing in Nigeria by stakeholders?
v) What are the reasons for Naira depreciation in Nigeria?
Research Hypotheses
The followings are the research hypotheses to be tested in this study:
i) There is no significant relationship between naira depreciation and agriculture financing in Yobe State.
ii) There is no significant correlation between naira depreciation and contribution of agricultural sector to the economy of Nigeria.
iii) There is no significant influence of naira depreciation on the exportation of agricultural products.
Significance of the Study
The value of a nation’s currency is not just an economic indicator. It is also a status symbol of a nation and a measure of its dignity. No wonder the British of the economic benefits of a single European currency was unwilling to give up the pound for Euro. Exchange rate is a strong economic indicator for assessing the overall performance of an economy. It is one of the micro-economic variables that reflects the strength or weakness of an economy.
A country’s currency is its symbol of strength. The underlying strength in its currency is the gross national product, which includes agriculture, mining, manufacturing, drilling and tourism etc. The sum total of what the economy produces and exports show out in a strong currency. If the Government and the privates sector properly manage the Nigeria Foreign exchange market, it will generate a reliable and stable naira rate of exchange that will encourage manufacturers and agriculturists to invest which will lead to economic development and growth. A country’s worth is dependent on its currency because of international worth in the Foreign Exchange Market (FEM). This shows that the currency of a nation is its symbol of personality. A strong currency will attract investors and this will boost the country economy.
Therefore, this research study will provide a clear cut definition of Nigeria Foreign Exchange Market problem, causes of the persistent depreciation of the naira and their solution, which will be of help to the generality of the masses and all sorts of enterprises. The study will provide the reader with an opportunity of understanding the intricate of the Foreign Exchange Management and methods of managing foreign exchange policies. It will also contribute to existing knowledge in foreign exchange rate literature, by developing an intention model that will be useful for researchers in undertaking further research on related areas of study.
Scope of the Study
This study will cover farmers from six local governments across the three senatorial districts of the state. The farmers will be from Yobe East (Bursari and Gujba local government areas), Yobe North (Jakusko and Nguru local government areas) and Yobe South (Potiskum and Fika local government areas). Variables of interest include: naira depreciation and agriculture financing.
Limitations of the Study
The researcher encountered some challenges in the course of carrying out the field work and these challenges were the constraints that worked against the optimal realization of what the researcher sets out to achieve. These challenges include:
Cost Limitation: There was a cost limitation. This means that the researcher could not offer any gift or monetary incentives for the respondents to answer the questionnaire. This might have resulted in certain prospective respondents choosing not to respond to the questionnaire. This might not have created a motivation among respondents not to take a chance to give opinions.
Time: Some farmers did not have enough time to respond to the questionnaire because they were in a hurry to go their respective farms to work and this will not allow the researcher to get the adequate information needed from the research instrument.
Communication: It was observed that some of the farmers found it difficult to interpret the questionnaire as not all of them knew how to read and write so there was need for an interpreter to conduct the survey.
Definition of Terms
The following terms were used during the cause of the study.
Agricultural sector: is that sector in Nigeria that is concerned with the production of crops and rearing of animals for the benefit of man as well as for sale to bring about economic growth and development in the country.
Depreciation: it is a reduction in value of currency in respect to those goods and services or other monetary units with which that currency can be exchanged
Dutch Auction System (DAS): is a method of exchange rate devaluation through auctions where the bidders pay according to their bid rate
Exchange rate: this is the price of one country’s currency in term of another
Foreign exchange: is a means of payment for international transactions; it is made up of currencies of other countries that are freely acceptable in setting international transactions.
Naira depreciation: it means lowering the value of naira. That is, a reduction in the purchasing power of naira currency. It is associated with freely floating exchange rate system. The authority may determine the exchange rate decree or executive flats based on their perception of macro-economic condition in the country.