CHAPTER ONE

1.1  INTRODUCTION

BACKGROUND OF THE STUDY  

The real exchange rate and Nigeria agricultural exports-one of the most dramatic events in Nigeria over the past decade was devaluation of the Nigeria naira with adoption of a structural adjustment programme (SAP) in 1986. A cardinal objective of the SAP was the restructuring of the production base of the economy with a positive bias for the production of agricultural exports.

The foreign exchange reforms that facilitated a cumulative depreciation of the effective exchange rate were expected to increase the domestic prices of agricultural exports and therefore boost domestic production significantly, this depreciation resulted in changes in the studture  and volume of Nigeria’s agricultural exports as empirically determined by many researchers (Oyejide, 1986) Ihimodu, 1993, Osuntogun  et al, 1993, world Bank 1994).

The depreciation also increased the prices of agricultural exports and studies have shown a marked increase in volume of agricultural exports over the gears. However, the volatility, Frequency and instability of the exchange rate movements since the beginning of the floating exchange rate raise a concern about the impact of such movements on agricultural treacle flows. Structural adjustment and agricultural performance among other measures, the structural adjustment programme (SAP) which starlit in 1986, abolished the commodity board, the body that since 1960 had been responsible for organization and purchase of agricultural exports. As a result farmess could sell their products directly to foreign buyers and local processtas without any intermediary, this was expected to remove the excessive taxation on formers products by the erstwhile marketing boards and leare producer prices to be determined by market forces. Giver that agricultural output is influenced by process among other factors, the depreciation of the naira and abolition of the commodity boards were expected to result in overall increase in production of exports.

There was a major increase in fire major agricultural export crops that had been on the decline since the 1970s. by 1985, only 375, of the 1970 output was achieved.

According to kwanaslice et al, (1994), the degree of fluctuation in prices is a major determinant of the changes in earnings given the trend in output over the years.

In this regard however, exchanged rate could be defined as the rate which one currency can be exchanged for another are can be regarded as the price of one currency in term of another. Furthermore, the exchange rate represents a key relative price in the economy in addition its political undertone such that policies to changer it one often the centre- piece of adjustment programs designed is improve international competitiveness and selft resources towards the production of tradable goods. As a price of a currency in terms of another, exchange rate plays a very important role in national and international economy. Moroso. An Imf (1984) study cities arguments that exchange rate variability would also tend to indue macro-economic phenomena that are undesirable, for example inflation and protectionism. Despite, more recent research explains why a positive effect could also be possible (de Grauve, 1988, Caballero and Corbo, 1989). If firms hedge against exchange rate rise, one could not expect to find a strong negative effect on trade. Hedging against risk can be done via future or forward market. Where forward markets exist, the nature of the uncertainty faced by traders is transformed. A forward market represents, in effect, a guaranted forecast of the end of the contract period.

Which a trader can take advantage of payment of a small margin around the forward rates.

Since currency uncertainty can be removed from the short-term trading transaction by payment of this margin, the cost of such uncertainty cannot be higher than the cost of purchasing insurance against it.

Moreover, successive government in Nigeria have devised and implemented a wide away of exchange rate policy that failed party or wholly to achieve their set objectives.

The real sector is here defined as consisting of the following Sectors-Agriculture, manufacturing, Building, Conduction, Mining, and Quarrying a review of financial static’s for the world Bank and the Economist reveal that the real sector of Nigerians economy has been the worse for it the stringent documentation requirements in the official market crowds out some forex demands that are ultimately met in the parallel or black market.

Thriving malpractices in the parallel market and the documentation requirements of the official market have both contrived to make patronage of the farmer increasingly attractive and profitable, further discouraging domestic production and worsening Nigeria’s balance of payment position. The statistics daming.

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