Scholarly Journal of Business Administration, Vol. 4(3) Pp.67-72 March, 2014

Full Length Research Paper Exchange Rate and Market Policy: The Nigerian Gum Arabic Marketers’ Experience

Haliru, Y.U, Otitolaiye, J.O and Ebenuwa, C.I

1Rubber Research Institute of Nigeria, PMB 1049, Benin City, Edo State, Nigeria. 2Agricultural Economics and Extension Department, Faculty of Agriculture, Kogi State University, Nigeria.

Accepted 9 March, 2014

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 (₦) – 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 analyzed 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 ₦ 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, but using 30% discount rate for gum Arabic export from Nigeria, the actual rate of revenue obtained was $ 1,741,101.36 (₦150.00 per $), the real exchange rate(Price of gum Arabic) was sold at ₦ 45. 00/Kg as against ₦ 350 ($ 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. The study recommended Nigerian government should, as a matter of urgent policy discourages importation of goods that Nigeria has comparative in their production.

Keywords: Exchange rate, Gum Arabic Marketing, North Eastern Nigeria.

INTRODUCTION

The major factors that influence marketing of goods and all other markets are working properly.” However, Umar services are the magnitude of demand and supply forces (2006) cited Paul (1988) that, “for a large country that is of the commodity in question. With regards to able to effect the prices of foreign exporters, tariff helps to international market however,, governments also, to lower prices of import goods and hence generate some some extent, determine the flow of the market goods and terms of trade benefits’’. services among nations. This is done through some Exchange rate is one of the international governments control measures such as tariff, import/export quotas, monetary policy which serves as the instrument for the license, and exchange rate etc. This is based on the authorities to influence the control of capital/wealth flow “theory of the second best” in economics which states among countries. The ultimate objective is to achieve that “a hands-off policy is desirable in any market only if 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 *Corresponding author. E-mail: [email protected]. rate, Gross Domestic Product (GDP) contribution and Scholarly J. Bus. Admin. 68

exchange rate channels (Akhar, 1997, CBN, 1995). The policy of N - $ on the revenue from gum Arabic marketers theory of Purchasing Power Parity (PPP) assumes that in Nigeria at the international market. exchange rate of currencies between two countries move in a manner that seeks to off–set the inflation differentials Gum Arabic Production and Marketing in Nigeria between the two economies thereby maintaining the real purchasing power of either currency in the economy Didier and Chidume (2004), reported that before 1970 (Lothains, 1989). Before the First World War, the values there were only five countries producing gum Arabic in of world’s major currencies were fixed in terms of gold. Africa; namely, Senegal, Nigeria, Sudan, Mali and This was changed to US Dollar after the Second World Mauritania. Gum Arabic (Acacia species), has been an War (Umar, 1995). The stronger the value of a country’s integral part of some people in these countries especially currency is in the international market, the more it enjoys the rural people who are either nomadic collectors, the international economic transactions. A good example sedentary small scale producers or rural merchants of can be drawn to show the impact and relationship of gum Arabic. This implies that several thousands of exchange rate between two countries in an economic people depend directly or indirectly on the production and transaction, say country 1 and country 2 with their export marketing of gum Arabic for providing at least part of their products as A and B respectively. Assuming we call subsistence. country 1’s currency as dollar ($) and country 2’s In Nigeria, the Federal Department of Agriculture currency (₦), traders who wish to import product A into (2002) reported a total hectare of land under gum Arabic country 2 must convert Naira into dollar, and likewise cultivation of about 19,710.00 hectares for both private traders who wish to import product B into county 1 must and government owned gum Arabic plantations and over convert dollar to Naira. In effect, there will be demand 2,449,000 hectarage under wild production of different and supply of the currencies between the two countries. grades According to RMRDC, (2004) Borno State has the The strength of a country’s currency will thus depends on highest size of plantation (6,393.50 ha), followed by Yobe its bargaining power. State (1,700 ha) and then Jigawa (800 ha). Quantity of Over the last couple of years, agricultural producers gum Arabic produced in Nigeria between 2000 and 2008 and marketers showed more interest and sensitivity in the was 154,870 metric tons. The trend shows fluctuation and role of exchange rates in commodity prices (Kristinek and steady increase in total production quantities over the Anderson, 2002). Oyinlola, (2008) investigated the impact period of nine years. This is due to the fact that Federal of exchange movement and tariff reduction on Government of Nigeria has emphasized production and import/export prices of an open market like Nigeria. The marketing of gum Arabic as one of the diversifying result indicated that in a short – run, exchange rate had strategy of the economy. Many literatures claimed that positive impact on the import/export prices of the the gum Arabic produce is as precious as Gold since time consumers. Kiptui, (2007) also studied the impact of Real immemorial. It has been reported that when Jesus was Exchange Rate on the demand for Kenya’s export on tea, born the “Three wise men that came from the East coffee, horticulture and manufactured goods. His findings offered him Frankincense, Myrrh and Gold”. revealed a positive and significant impact of real Frankincense and Myrrh are refined and unrefined gum exchange rate in short run for coffee, tea and horticulture Arabic, respectively (www.NGARA.com). Agricultural exports but not significant for manufactured goods marketing in Nigeria have been associated with unstable exports. Aliyu (2008) assessed the impact of exchange price since the abolition of Agricultural Commodity Board rate volatility on none oil export from Nigeria between in1986 (Ayoola, 2001). 1999 and 2006. He found out a speedy volatility in the The marketing functions became grossly unreliable value of Nigerian currency in a short – run with little especially for the peasants farmers and marketers due to adjustment towards equilibrium path in the long – run. the deregulation of the market forces; hitherto, prices Adeyemi, Muhammed and Busari, (2010) also reported recommendation for every commodity were made to the that about 70% of agricultural exports are usually Price Fixing Authority (PFA) in the Presidency who fixed influenced by foreign reserves, exchange rate and price and announced the prices of goods to public for of exports of the country in question. implementation. Currently, there is a wide range of price A review of the effect of exchange rate on gum Arabic variation between Nigeria and other gum Arabic export in Nigeria is shown in Table 1. The Table 1 depicts producing counties, with Nigeria recorded the least price that a higher Naira–Dollar exchange rate affected couple with the poor Naira – Dollar exchange rate (Umar, negatively the volume of sales and revenue in gum 2006). Prior to the year 2000, African share of agricultural Arabic from Nigeria. Osuntogun (1993) reported that the commodities trade in the world was 6%, but this has large importation of food items into the country led to the since dropped to 2% since 2007 (WTO, 2007). This could high exchange rate of Naira to foreign currencies have led to poor development of agricultural marketing in especially the US dollar, and thus reduced the Nigerian Nigeria and Africa in general as Ayoola (1997), stated agricultural export volume by 1,333 units in 1990. The that absence of a coherent policy unique for a particular study therefore examined the effect of exchange rate economy meant actions cannot be focused, leading to Haliru et al. 69

Table1: Effect of Exchange Rate on Gum arabic Export in Nigeria

Year Exchange Gum Arabic Revenue ($) % change % change in quantity Rate(N/$) exported (MT) in Revenue 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 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) stagnation of the economy. The study therefore looked at each of the Local Governments making a total of 9 the impact of exchange rate of Naira to Dollar on the communities. Finally, 20 Gum Arabic marketers were revenue generation of Nigerian gum Arabic marketers. 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 METHODOLOGY from the three states were obtained and compiled by the Ministries of Agriculture and Environment of each state, Study Area: The study was carried out in Adamawa, totaling Adamawa = 47, Taraba = 50 and Yobe = 55 Taraba and Yobe States of North-Eastern Nigeria. which is the sampling frame of this study. It is from this Geographically, the states are in Semi-Arid zone with a sampling frame that the sample size was drawn taking mean annual rain fall of 160.2 mm, and temperature cognizance of the marketers from the selected Local fluctuating between 14oC to about 44oC (Yobe State Governments. However, only 150 gum Arabic marketers Diary, 2010). These conditions promote the production of in the study area filled the questionnaire correctly and gum Arabic (Aghughu, 2004). There are diverse ethnic were used for the study. The secondary data were also groups well over 50 different tribes found in these states collected from Central Bank of Nigeria’s Annual report on with major languages spoken as Hausa, Fulfulde, Kanuri, the exchange rate of Naira to Dollar and gum Arabic Kilba, Margi, Bura Bachama, Chamba and Fali among export/revenue from Nigeria from 1991-2012 to aid in the others. analysis of the study.

Data Source and Sampling Techniques Methods of Data Analyses

A multistage sampling technique was used for this study. Lothains (1989) model as adopted by Okeke and Awotide The area of study was first stratified into a unit, that is, (2010) was employed to determine the effects of Naira to Adamawa, Taraba and Yobe states. This is because Dollar exchange rate on the purchasing power parity of these states are among the leading gum Arabic Nigerian gum Arabic marketers at the international producing states in Nigeria. The first stage of sampling market. The formula is given as: involved the purposive selection of one Local Government Area from each of the three states making a NR = ∑Pi Vi – (FC + VC) (1) total of 3 Local Government areas. The second stage involved random selection of 3 communities/villages from Where: Scholarly J. Bus. Admin. 70

Table 2: Volume of Sales of Grades 1& 2 Gum Arabic and Revenue Generated

Grade Quantity sold (Kg) % quantity Revenue Generated (₦) % revenue 1 219,262.75 35.00 261,819,754.00 66.67 2 407,202.25 65.00 130,909,876.00 33.33 Total 626,465.00 100.00 392,729,630.00 100.00 Source: Calculated from field survey data, 2012.

NR = Net revenue (₦) (Table2). Pi = Export price/unit ($/₦) This could be due to lower price of grade 2 gum Arabic Vi = Quantity exported (Kg) in the market based on its demand (average of ₦ VC = Variable costs ($/₦) 180.00/kg) while grade 1 gum Arabic, on the average FC = Fixed costs ($/₦) was sold ₦ 350.00/kg in study area. The Acacia Senegal which produces grade 1 gum Arabic seems to be scarce In effect, the laws of demand and supply for the in Nigeria compared to other grades. The implication of manifested and hence affected the net revenue from the this is that only fewer buyers like Indians who are gum Arabic marketers in Nigeria due to the variant interested in Nigerian grade 2 gums will patronize the purchasing power parity (PPP) of $ and N. The level of country for the produce. Also, with lower price of grade 2 this effect was determined using Gustav Cassell, 1920 gums and having the same cost implications (except the formula as adopted by CBN (2006) stated as purchasing cost) with grade 1, the marketers may not have optimum benefit from the turnover on cash inflow. V = (Et – Nt)/ Nt. (2) The marginal profit from grade 2 will always be lower than that of grade 1 due to its lower selling price. Where: Analysis of the Effects of Exchange Rate on the V = Magnitude of valuation of $ Purchasing Power of the Gum Arabic Marketers Nt = Nominal official exchange rate of $ to ₦ during the period of the study. According to Jigawa Gum Arabic Company (JIGACO) Et = Equilibrium exchange rate of $ to ₦ (2008), 95% of gum Arabic produced in Nigeria is Note: if; V = Negative value, implies over valuation exported to France, Germany, USA and other European V = Positive value, implies under valuation countries. Based on this, it is expected that from the V = 1, implies equilibrium. 626,465 Kg marketed in the North–East Nigeria, 719,591.75 Kg (95%) has been exported. Also, from the To determine the gum Arabic marketers’ price revenue generated of N392, 729,630.00 ($ competitiveness at the international market, the Real 2,618,195.533) it is expected that ₦ 373, 093,148.50 ($ Exchange Rate (RER) formula as adopted by CBN 2,487,287.657) (95%) was also realized from the gum (2006) was applied, thus: Arabic export from the zone during the period. But Umar (2006) reported that a discount rate of 30% is usually RER = Ne.Pf/ Pd (3) done on Nigerian gum Arabic sold at the international market. This implies that a sum of $ 1,741,101.36 (₦ Where: 261,165,204) might be the actual revenue realized from sales of 719,591.75 Kg of gum Arabic from the zone RER = Real exchange rate of $ to ₦ instead of the ₦ 373, 093,148.50 or $ 2,487,287.657. Ne = Nominal exchange rate of $ to ₦ during the period Now using the formulae for Real Exchange Rate (RER) of study and the current exchange rate of ₦ 150.00 to a $, the Pd =Price of gum Arabic sold at domestic market in ₦ actual price rate of gum Arabic sold from study area at value the foreign market was: Pf = Price of gum Arabic sold at foreign market in $ value. RER = Ne.Pf/Pd

RESULT AND DISCUSSION Where;

Volume of Sales and Revenue from Gum Arabic RER = real exchange rate (₦ 45.00 ($ 0.3), as calculated in this study). The total revenue obtained from the sales of grades 1 Ne = nominal exchange rate of ₦ to $ during the period of and 2 gum Arabic in the area was ₦ 392,729,630.00 study Haliru et al. 71

Pd = domestic price of gum Arabic (₦) currency is suffering from real exchange rate with the Pf = foreign price of gum Arabic at international market in world dominant currency (the US $). ₦ value. The Nigerian gum Arabic market have fallen victim But Pf = ER/QE alongside other agricultural commodities export from the country as Adeyemi, Muhammed and Busari, (2010) Where; reported that about 70% of agricultural export from Nigeria were influenced by exchange rate policy. The ER = expected revenue from sales of gum Arabic at question now is when the possibility of Naira to reach foreign market ($). equilibrium with US $. That will be the time every QE = expected total quantity of gum Arabic exported (Kg) Nigerian wishes to see.

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