Investigating the Exchange Rate Regimes, Agricultural Output, and Economic Growth in Nigeria: A Transmission Approach

Abstract

Persistent calls for economic diversification in Nigeria underscore the need to reduce reliance on oil revenues and explore alternative sources of income. The agricultural sector emerges as a critical driver in this diversification strategy, offering opportunities for revenue generation, employment creation, and the development of value-added chains. However, Nigeria’s heavy dependence on imports renders the agricultural sector susceptible to exchange rate volatility. This study examines the impact of exchange rate regimes on agricultural output and economic growth in Nigeria through a transmission mechanism framework over the period 1970Q1 to 2023Q4. Utilizing secondary quarterly data obtained from the World Bank, this study investigates the direct and indirect effects of exchange rates on economic growth via agricultural output using Structural Vector Autoregression (SVAR), impulse response functions, and variance decomposition. Findings indicate that higher exchange rates negatively affect agricultural output. In low exchange rate regimes, increased agricultural output contributes modestly to economic growth due to limited domestic processing. Conversely, in high exchange rate regimes, agricultural output tends to reduce economic growth, primarily due to the export of unprocessed goods. The study recommends maintaining a stable and low exchange rate, investing in processing facilities, and strengthening institutional support to enhance the agricultural sector’s role in long-term economic growth.