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OYINLOLA, Mutiu Abimbola
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There is a strong relationship between exchange rate movement and domestic prices in an import-dependent economy. The adoption of the Structural Adjustment Programme in Nigeria in 1986 caused a significant upward movement in the exchange rate. The official exchange rate depreciated by 56.2% annually between 1986 and 1993, and it was 31.6% during 1994-2003 period. Over the same periods, the general price level rose by 30.5% and 23.7% respectively. Specific studies on exchange rate pass-through to prices in Nigeria are scarce. This study therefore examined the extent of exchange rate pass-through to import and domestic prices in Nigeria during the period 1980-2006. A price model that recognised the developments in the tradable and non-tradable sectors of the economy was used. The tradable component drew largely on Sharma’s price transmission analysis that was predicated on the purchasing power parity doctrine. Both the Engle-Granger and the Johansen cointegration techniques were used to estimate the price model. The techniques made it possible to separate the effects of short-run exchange rate dynamics from those of the long-run. The time series properties of the variables in the model using various criteria, including the Augmented Dickey-Fuller and Phillip-Perron tests, were ascertained. A ‘general-to-specific’ methodology, which involved over-parameterised error correction specifications, was adopted. Tests statistics indicated that the models exhibited high degrees of goodness of fit. Annual data were used for the estimation. In order to capture the effect of exchange rate pass-through to import prices across product groups, import and tariff data were disaggregated according to the harmonized system of trade classification. At the aggregate level, exchange rate pass-through to import prices was found to be incomplete, while the disaggregated results showed varying degrees ranging from low to more than complete pass-through. Both the short-run and long-run effects of exchange rate pass-through were evident, but occurred with lags. All the results obtained were significant at the 5.0% level. In the short run, a 10.0% depreciation of the exchange rate led to 9.0% increase in import prices. The same percentage depreciation raised import prices by 2.5% in the long-run. The pass-through in the vegetable, and boiler and machinery products groups recorded 11.5% and 19.2% increase, respectively. By interpretation, Nigeria absorbed the full impact of any exchange rate shocks and also part of the cost of production of the exporters of these products. Comparatively, the effect of a 10.0% depreciation was correspondingly 2.8% and 8.0% in the 3 optical and paper making material products. This meant that part of the exchange rate shocks was absorbed by the exporters. The sectoral differences in exchange rate pass-through were significantly related to the product group’s share in total imports. In addition, a 10.0% depreciation raised domestic prices by 7.5%. There was a significant exchange rate pass-through to import and domestic prices in Nigeria. Commitment to supply-side policies is desirable in order to boost domestic production of goods and lessen dependence on imports. This would moderate the effect of exchange rate shocks on import and domestic prices.
International Economics
Domestic prices , Exchange rate pass-through , Exchange rate shocks , Import prices , Supply-side policies