CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
For clarity, it is pertinent that we start by defining the subject of this work. Exchange rate is the price of one currency in terms of another currency. It is the price of one foreign currency in terms of the domestic currency. It sends signals that affect consumption and investment decisions and therefore influences both the composition and value of aggregate demand and supply (CBN: Contemporary Economic Policy issues, 2003).
Exchange rate stability is therefore commitment of the government to allow the macro-economic policies to control the balance of payment. The government may fix the exchange rate policies either by legislation or by intervention in the Nigerian currency market.
According to Johnson (1984), the case for exchange rate stability is part of a more general argument for National Economic Policies conducive to international economic integration.
From a broader perspective, for exchange rate to be stable is to encourage international trade by making price of goods involved in trade more predicable and to promote economic integration. At the
individual level, such decisions are usually taken in order to improve future consumption prospects, investment and because exchange rate involves an increase in wealth of a nation which is desirable, it then influences the society. The Agricultural sector in the Nigeria context embraces all the sub-sector of primary industry, they include; farming (which include livestock, application of modern implements such as tractors and chemical), Anyanwu, (1997). Before independence, the reliance of this economy on agricultural income led to the establishment of marketing boards with monopolist powers to buy these crops from farmers and sell them overseas. The role of marketing board was very important especially in stabilizing farm incomes and generating funds for executions of development projects in the country.
The exchange rate stability has a lot of contributions to the volume of export and the level of the domestic production. Although given that agricultural output is influenced by prices among other factors, the depreciation of the naira and the abolition of the commodity boards were expected to result in an overall increase in production of exports. According to Kwanashie 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. But the exchange rate when applied in conjunction with other macro-economic policies was expended to lead to the achievement of the goals of price stability, improved and sustained economic growth, reduced unemployment, balance of payment stability and increased agricultural exports. A stable exchange rate system would help
in meeting these goals, but in case when it is unstable, these achievements become difficult and often impossible.