An Analysis of the Effects of Disaggregated Agricultural Output on Foreign Reserves in Nigeria

Abstract

Agriculture as the largest sector in Nigeria has potentials of providing the country the desired foreign exchange earnings. This study therefore examined the effects of disaggregated agricultural output on foreign reserve in Nigeria for a 39-year time period spanning from 1981 to 2019. Time series data on foreign reserves, crop production, livestock, forestry, fishery and exchange rate were sourced from the Central Bank of Nigeria (CBN) statistical bulletin. The study adopted the econometric techniques of co-integration, error correction mechanism (ECM) technique and granger causality test to analyze the time series data. The Augmented Dickey Fuller stationarity test showed that the variables were stationary at first difference and second difference. The Johansen co-integration test results revealed the existence of a longrun relationship among the variables. The error correction model showed that crop production, livestock, forestry and fishery did not impact significantly on foreign reserve in Nigeria. The coefficient of ECM, which was rightly signed and significant, showed that in the event of shock or disequilibrium, the situation would go back to normal at the speed of 0.23 percent per annum. The granger causality test revealed that crop production and exchange rate had bi-directional causal relationships with foreign reserves while there was a uni-directional relationship between fishing and foreign reserves. The stability tests using the plots of the cumulative sum of recursive residuals (CUSUM) and cumulative sum of squares of recursive residual (CUSUMSQ) confirmed the stability of the model and as such can produce a reliable forecast. Based on these findings, the study recommends amongst others that the federal government should channel part of its ownership of foreign reserve in form of recoveries, grants and bilateral cooperation to crop production in Nigeria as this has potentials of improving the reserve in the economy.