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University of Nigeria Research Publication
Au
thor
OGBUAKANNE, M. U.
PG/M.Sc/98/25589
Title
Structural Adjustment in Nigeria and
Ghana: A Relative Efficiency Analysis
Facu
lty
Social Sciences
Depa
rtmen
t
Economics
Date
July, 2003
Sign
atur
e
STRUCTURAL ADJUSTMENT IN NIGERIA AND GHANA: A RELATIVE EFFICIENCY ANALYSIS
OGBUAKANNE, M.U. (MRS.)
(REG. NO:)
PG/MSc/98/25589
SUPERVISOR: PROF F.E. ONAH
DEPARTMENT OF ECONOMICS UNIVERSITY OF NIGERIA, NSUKKA
JULY, 2003.
STRUCTURAL ADJUSTMENT IN NIGERIA AND GHANA: A RELATIVE EFFICIENCY ANALYSIS
MISC RESEARCH REPORT SUBMITTED TO THE DEPARTMENT OF ECONOMICS, UNIVERSITY OF
NIGERIA, NSUKKA.
OGBUAKANNE, M.U. (MRS.)
(REG. NO:)
PG/MSc/98/25589
SUPERVISOR: PROF F.E. ONAH
S'I'IIUC'I'UIIAI~ A1)JUSTMISN'T IN NIGERIA AND GHANA: A RELATIVE ISFFICllSNCY ANAI,YSlS
A I'KOJEC'I' SUIZMI'TTEI) TO THE SCHOOL O F POST ClIADUA'rE S'TUDlNS, IJNIVEKSU'Y OF NLGELIIA, NSUKKA.
OGIZUAKANNE MARY-ANN UCHE IWM.Sc./98/25589
JULY, 2003
APPROVAL PAGE
THIS PROJECT HAS BEEN APPROVED BY TI-IE DEPAR'FMEN'T OF ECONOMICS, IJNIVERSITY OF NIGERIA, NSlJKKA
iii
DEDICATION
'I'his work is joyfi~lly dcdicalcc! to my husband Sr. M.C. Ogbuiikan~x, my
~)rothcr Mr. P.O. tinanah, my children and all thc uzembcrs of illy h n i l y I'or thcir
c ~ r ~ o u r a g e n ~ c n l and support
PREFACE
SAP was in many Aliaican countries, there have bcen mixed rcsi~lts from d i f t r en t
countrics regarding i ~ s implementation and effects. l'hc a ~ ~ t h o r was motivated to lind
0111 the determinants 1hc1ors behind such discrepancies in the outcomes of
implcmenlalion of SAP.
'This work has live chapters. ( ' h a p w one serves as introduction to the work.
I-!cre background to the history of thc Ghanaian and Nigerian countries in terms of
comparative studies on tlic outconic ol'thc structural relimn program ol'the counlries in
clue:;!ion. Also discusscd here include the problcm .statement, objectives and
!~ypotheses l'ornlulatcd. Chapter two discusscd the review o f rclcvant literi~turcs. In this
chapter both the theoritical and a wide rangc of empirical literati~re were reviewed.
Chapter thrcc introduced the mcthodology used in the work. 'l'hc methodology
W ~ I S si~bdivided into L\YO scction. The first part deals with the foreign exchange market
clliciency test a d covers the institution of foreign exchange market. The second part
cleats wlrh money supply ( a d allicd vnriublcs) and covers the cl'fccls of monelury
i~lsritu~ions on GI)!' and other nicasures of economic growlh. Chapter four discussed
(lic rcsulls ol' [he data collected lkom time scries.
I-.inally, chapter five discussed wnlmary and policy implications.
ACKNOWI,I<I)GlCMli:N'I'
'1'0 God be the glory! I thank God for the gift o f life 01' mine. My academic
pursuit to this point in time, has made me remained indebted to the being beyond and
w i t h . llcnce, my gratitude goes first and forcmost to God. I want to cxprcss my
in11ncn:;c gratitude to I-lim for I lis guidance of the lilk oSmy I lusband and my children.
1 wish to itcknowlcdgc the el'fort of' my brother Patrick Unanah and my Ilusband
~ l n d all my family mcrnbcrs in their sustained couragc and commitment towards my
irait?ing. I can hardly csprcss my thmlts and niy prayer is for the Almighty God to
i ~ l c s s ~ t h e ~ n and give 11s good l i l i : to cnjoy the I'ruit ol'our endeavour.
I will not tail to thank licv. I:r. 1I.E. Ichok~i, I'rof. Okoroafor, Prof. Okore,
Chukwuma, U k w ~ ~ e z c for their inspiration, advicc and encouragement. May God bless
I;inully, I wish to thank my supervisor, Prof. F.E. Onah, Tor his devotion and
encouragcmcnt. I lc gavc necessary odvicc whcn consulted. His relationship can be
expl>incd as a paternal one. May God bless him
Ogbuankanne M.U.(Mrs) July, 2003.
LIS'I' 01' TABI. KS
Pages
Table 4.1 ~milront tests . Ghanian Macroecononiic Data 1970 . 2000 ..... 23
.......... I'ablc 4.2 unitroot lcsts Nigerian Macroeconomic Data 1970-2000 24
'l'ublc 4.3 L.i.uc11aug.c ralc cflkiency lcsls in Nigeria .............................. 26
7'A121,15 OF CONTENT
vi i
1 . I I 'I'licol-clical I'ra~~~cworlc: I:ornis of' Markc[ EI'licic~~cy------------------------- I 0
4.3 Moncy supply and Economic Growth:
Appendix I : Exchangc r;!k cflicicncy tcsls i n Nigcsia
CHAPTER ONE
INTRODUCTION
1 Background of the Study:
At the inception of SAP it was clearly stated that " the objective of
Government is to evolve a realistic and sustainable market determined exchange
rate for the Naira, so as to reduce the demand for foreign exchange to available
supply and to reduce the pressure on the balance of payments" (CBN Annual
R'eport 1986, Obadan 1993~377) " --- The package of adjustment measures
adopted from 1986 placed a heavy burden on monetary policy for containing
domestic and external sector instability " (Akatu 1993 : 321 ) .
The above x-rays some of the major projections shared by governments
and people of many Sub- Saharan African countries on the prospects of the
IMFNVorld Bank initiated structural adjustment programme introduced in the
1980s. The objectives of SAP include inter aha:
I Strengthening the Balance of payments position.
2. Reduction in domestic financial imbalances, including less government
deficit financing.
3. Elimination of price distortions in various sectors of the economy.
4. Promotion of domestic savings in public and private sectors.
5. Increasing trade liberalization.
6 . Revival of orderly relationships with trading partners and creditors.
7. Mobilization of additional external resources. (Tarp 1993: 2). Exchange
rate and Money supply were instruments judged important in the
reallsation of the above objectives of SAP
2
Whereas Ghana initiated reform programmes in 1983 (with the advent of
the Rawlings administration in 1982), Nigeria waited three more years before
joining the queue (by the Babangida administration in 1986). The deregulation of
the exchange rate in both economies (an automatic requirement of the structural
adjustment) led to the use of external reserve in the management of monetary
policy. Before adjustment, inflation rate in Ghana stood at 116% (1977 rate) and
peaked at only 39% in Nigeria (1984 rate). With the introduction of SAP however
the situation changed for both counties. By 1991 it stood at a single digit for
Ghana and 13% for Nigeria (the latter having risen to.an earlier 50.4% in 1989)
(Faruqee 1993: 280, Leechor 1993: 161).
On the exchange rate front, the Ghanaian cedi was devalued from C2.75
per' dollar in 1983 to C90 per dollar in 1986. Even at that though, the parallel
market rate was still about twice the official rate. This led to the introduction of
the foreign retail auction in 1986, which covered most trade transactions with the
exception of cocoa, petroleum and other essential imports. The foreign
exchange market thereafter functioned smoothly as the exchange rate adjusted
to changing market conditions and the overvaluation of the cedi was virtually
aliminated (Leechor 1993: 161).
The situation in Nigeria however, was not as smooth. The phasing of the
transition to deregulated rates and the introduction of different tiers of foreign
t?xchange raised some practical problems. The first-tier foreign exchange which
applied to official transactions was pegged at a rate far above the market
determined second-tier rate. This placed a large premium on rent-seeking
activities, which increased greatly, and introduced further distortions in the
economy. Even after the merger of the two tiers in 1987, two separate rates still
existed - the official and inter-bank rates. The rapid expansions of money
3
supply (from N3.8 billion in 1985 to N52.7 billion in 1988) helped accelerate the
growth of the margin between the official auction rate and the market determined
inter-bank rate (Faruqee 1993: 280; he Economist 1988: 8).
These factors-coupled with different levels of national governments'
commitment to the reform processes and institutional /cultural constraints- led to
d~vergent outcomes in the reform attempts of the two countries. A closer
examination therefore of these key factors as they obtained in the two countries
may yet be of importance to the counties in the Sub Saharan Africa (SSA) region
in their struggles for economic realization.
1.2 Statement of the Problem;
It is obvious that the question of macroeconomic adjustment has
generated immense interests among policy makers - and that rightly so. It is
now common to characterize economic policy regimes in many African countries
as pre-SAP, SAP or post-SAP. The success or failure of SAP has also meant the
success or failure of many economic units in these countries.
However, despite the milestone that SAP was in many countries, there
have been mixed results from different countries regarding its implementation
'
and effects. (World Bank 2001: 1). For example, while Ghana had been hailed
as a successful reformer, Nigeria has passed for a non-reformer. (World Bank
2001:1, Herbst and Soludo 2001; Husain and Faruqee: 1996: 1-8). A big
question then arises vizr Given that initial conditions in most of these countries
were identical, what are the determinant factors behind such discrepancies in
outcomes of implementation of SAP?
Several answers can be (and have actually been) given. But a large
amount of such answers are based on sentimental approach(es), which examine
only the sociopolitical reactions attendant upon the implementation of SAP (e.g.
Ejiogu 1989; Ashwe 1988: 19 - 20 among others). There have been some
critical analysis based on the performance of certain macroeconomic variables,
for example, the balance of payments, in the reforming country (e.g. Okorunmu
1986 for Nigeria). While these approaches may have certain utilitarian uses, they
have the underlying assumption that the implementation procedure and the
institutional composition of the reforming countries were adequate, and that only
the policy effects needed examination. But given the insight proffered by
Englebert and Hoffman (1 996: 16), cross-country analysis of implementation '
procedures and institutions have a lot to offer in attending to the puzzle of the
performance of SAP in Sub-Saharan Africa.
One such instrument and institution that may require assessment is the
exchange rate. Doubtless, it was one of the most pervasive instruments used for
structural adjustment in many African countries. Yet there has been very little
examination of the efficiency of the exchange rate in many African countries.
Few (like Aron and Ayogu 1995:150-192) that handled such did so on an
individual country basis and did not relate their work to SAP. Besides, the effects
of changes in monetary variables on the performance of output growth before
and after SAP have received little attention. In view of that, there is the need to
examine the relative efficiency of the foreign exchange market in Nigeria and
Ghana and compare the outcome relating the findings to the performance of
both economies in the implementation of structural adjustment. There is also the
need to examine the relative importance of money supply in both countries and
assess their impacts on output growth with an eye to finding the underlying
5
reasons for the differences in final outcome of the implementation of the
structural adjustment programmes in the two countries.
1.3 Objectives of the Study:
In view of the above, the broad objective of this work is to assess the
relative efficiency of some institutions 1 instruments crucial to the success of the
IMF programme in sub Saharan Africa. This we shall undertake in two sub-
objectives viz:
1. To assess the relative efficiency of the foreign exchange market
(institutions of SAP) in Nigeria and Ghana.
2. To examine the significance or otherwise of monetary movements on
economic performance in the two countries.
The findings under both Sub-objective shall be related to general policies
and performance of the two economies during SAP and after SAP
1.4 Statement of Hypotheses;
This study shall therefore be guided by the following hypotheses.
1 The foreign exchange markets in both countries are efficient, and so are
not
responsible for the differences in outcome of SAP implementation.
2. Money supply in both economies are not relevant to the changes in
output
growths in both countries and so have no effects on outcome of SAP
policies.
1.5 SIGNIFICANCE OF THE STUDY:
One of the importances of this study is the understanding that reform is
not a one -off affair, i.e. the effectiveness of the institution or the avenue for the
transmission of macroeconomic policy could be important as the policy itself.
Another way of saying it, while a " right" policy is important, it is also important
that the institutions for the implementation of the policy be right.
Another significance of this study is that, it will help to re-design the
structure of the next generation of reform in most of these countries.
1.6 Limitations of the Study:
This study shall pay more attention to price level and monetary variables
influences on the outcome of structural adjustment. Evidently, a whole host of
other variables (especially real variables like government expenditure, taxation
and subsidles) played important parts in the final outcome of structural reform
programmes of different countries. However this study shall not take
comprehensive assessment of the effects of these other variables on SAP. Their
relative influences, especially as they affect the variables under consideration,
may be examined; but such investigations shall be limited to only comparative
studies and shall not be in-depth. Exhaustive studies on the effects of these real
variables may be a viable option for future research. It is also common
knowledge that data can often be a major problem in such assessments as the
one being undertaken here. We shall explore several sources of data, but then
d~screpancies may arise as to entries from different sources. While we shall
compare such varying entries in light of various publications, the study is
constrained to the use of such secondary sources.
CHAPTER TWO
LITERATURE REVIEW
2.1 Theories of Adjustment
Theoretical foundations of adjustment are laid upon growth and resource
gap models. The earliest of these are the well-known Harrod-Domar
specifications (Branson 1985: Tarp 1993: 82). In its simplest sense, the model
views growth as a relationship between savings level (which is automatically
identical to investment) and output growth i.e.
g = Aklk =Ay/y =s/k . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Where Ak is the capital stock, y is output and s is total savings and g is the
output growth rate. A Savings gap is then said to exist when domestic savings
are lower than the investment required for achieving the output growth target.
increase in real output Ay*
is the exogenously fixed
* is fixed, it follows that y is
determined as well since y =y-I + Ay*. Combining that knowledge with the
fam~liar external balance identity i.e,.
S-I = ANFA + AR and
- ANFA = ANFB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
We arrive at
ANFB = k Ay* - sy + A R
= (AR - sy.1) + (k -s) Ay* .. . .
Smce Ayly = Aklk, and Ak = I, it follows that a target
can be expressed as follows Ay* = IIK Where Ay*
desired output growth rate. The moment then that Ay
8
Where NFB stands for net foreign borrowing, NFA is the Net foreign assets, R is
external reserves, and other variables remain as earlier defined. The above "
resource gap equation" establishes the additional foreign borrowing needed to
close a "savings gap". (Tarp 1993: 86). Chenery and Stout (1966: 86) modified
the model and introduced the concept of savings constraint within the economy.
This model had however been highly criticized on various grounds. The
most weighty criticism came from Easterly in his paper " The Ghost of financing
gaps" who argued that after forty years of non -workability of lending practices
(especially to African States) based upon the financing gap model, that it is time
to lay to rest the ghost of the financing gap. His very forceful argument was
predicated upon the performance of African economies in the face of massive
external capital inflow into the continent. Again at the heart of this model is the
assumption of structural rigidities prevalent in the economy. Tarp (1993: 85)
however argued that the "Savings1' and " trade- gaps are identical ex post as the
necessary adjustment in macroeconomic variables will take place one way or the
other. A trade gap can, (given due considerations for restriction on international
reserves), be estimated in much the same way as the " Savings gap"
As an adjustment to the resource gap growth models, the World Bank
. produced the Revised Minimum Standard Model (RMSM). As in the earlier
specified RGMS, the RMSM targets real output growth Ay*. However imports in
the model are assumed to be a stable function of output ie M =my. The core of
the models then goes as follows
AY* = Ay as in the previous model
1 =kAyY
-
X = x and
M =mY ................................................... 4
The models treatment of consumption however raises a number of conceptual
and practical issues especially as it assumes that whereas government inspect
of consumption is exogenously determined, private consumption is merely a
residual of the other aspects of the national income. This undoubtedly amounts
to a single trade gap treatment of the entire resource gap problem.
Khan, Montiel and Haque (1986, 1990) tried to remedy for this by
endogenising private consumption and making it a function of both the ratio of
the difference between aggregate income and savings and the disposable
income. The model rather advocates the introduction of government
consumption and tax as additional policy instruments while change in reserves
becomes another target variable. Total net capital inflow into the ec'onomy
(whether as current account deficits arising from changes in the rate of interest
or as official development assistance) is then treated as exogenous. This takes
us to the final form of the presentation viz
AR* = X-- M +A/#' ......................................... 6
--
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cp = (I-S) (Y-T) =Y- I -A' + m.. .7
Substituting the endogenous import function (4) into equation (6) gives
Where F is the capital inflow, C, in private consumption subscript e is the
exchange rate and all other variables remain as earlier defined.
Thus given a target output, the change in reserves and balance of
payments targets are obtained by the manipulation of the exchange rate. Down
to the introduction in the 1980's of the structural adjustment programme into the
10
continent, RMSM was the benchmark model for the determination of targets,
conditionality and the assessment of performance of reforming countries. The
target output is then obtained by re- arranging the equation above to get.
AY* = 1IK-S-M [(S+M) y-1 +(I- S) T- Cg + X- Me].
Given that import itself is a function of the growing (target) variable, GDP, the
major policy instrument used in both influencing the volume of imports and the
changes in the other target variables become our little subscript e (the exchange
rate).
The monetary theory assumes that monetary account of the balance of
payments of a country is influenced directly by the country's monetary policy.
However, in the framework of the monetary approach, relative prices play a little
role as they affect only the composition rather than the aggregate expenditure.
The monetary approach places less emphasis on the distinction between
exports, imports and non- traded goods. It concentrates on the balance of
payment deficits and surpluses (Nyberg et al 1976: 337; Obioma, 2000: 9).
The monetary approach views external payments and internal
disequilibria as transitory and self-correcting in the long- run. The approach is
said to apply equally to fixed and floating exchange rate regimes, but the
. adjustment process differs between the two regimes. In all cases, however,
reserve growth and external balance are negatively related to the groivth of the
domestic money supply (Komiya, 1969: 38). Monetary approach simply regards
the consequences of balance of payments disequilibria from the viewpoint of the
monetary account. Thus, there is no prejudgment that monetary factors are the
causes of BOP disequilibria. The approach analyses any disturbance in
monetary terms such that a deficit by definition must mean MS> MD, While
adjustment to equilibrium must ' involve the restoration of money market
equilibrium (Dennis, 1981 : 223 Tsiang 1977: 328)
According to Swoboda (1976); CBN Briefs (1977:l) and Shone (1980). a
county's external reserves are the financial assets available to the monetary
authorities to meet temporary imbalances in the external payments position and
to pursue other policy objectives. External reserve management is the
techniques of optimizing the nation's external resources to meet its economic
needs. Hence, external reserves are kept and carefully managed to facilitate
.. business and diplomatic transactions among other.things. The management of
the reserves affects the conduct of monetary policy and ultimately the
performance of the nation's economy. This is because the changes in net foreign
assets influence the total money supply.
Krugman et al (1995: 376) posits that an increase in the money supply
lowers the interest rate, while a fall in the money supply raises the interest rate
' given the price level and output. Ordinarily, a rise in the interest rate causes
each individual in the economy to reduce her demand for money. All things
being equal aggregate money demand, therefore falls when the interest rate
rises. The increase in the demand for money is therefore determined
exogenously by the increase in price, which in turn, is determined by world
inflation and output. Any increase in domestic credit that is not matched by the
Increase in the demand for money is then reflected only in the movements of
international reserves (Aghevli et al 1979: 784).
As a policy instrument, exchange rate should for example, raised against
the domestic currency to stimulate external investment, encourage export and
discourage import thus ensuring balance of payment viability .It is assumed that
less dependent on the external economy the country is the less will be the
L ~ ~ G U L ~ V ~ ~ ~ ~ S S JOU d e s ~ f a ~ ~ l ~ ~ y of exchange rate as an instrument of achieving
macroeconomic objective. Hence, exchange rate policy is wholly inapplicable to
a totally closed economy (Afolabi, 1991 :3O5).
Lastly, Mundell posits that monetary policy is more effective than fiscal'
policy in attaining external balance basically because monetary policy improves
both the current and capital accounts of the balance of payments (Nwaobi,
2.2 Empirical Literature.
The last two decades saw the emergence of very massive literature on
the subject of macroeconomic adjustment. The African experience attracted an
attention that is as vast and varied as the experiences of the countries. Below,
we review a few of the core empirical works in this area with an aim to uncover
the hole that requires closing up in the area of research.
The Multimod, a prototype model upon which framework of the RMSM
model of adjustment was built, stated in the international accounts and exchange
rate section that "...the level of exchange rate is thus strongly influenced by the
monetary forces that affect the short term interest rate. However, exchange rate
expectations-, which is made to be consistent with the models solution for the
exchange rate next period-, also reflects the general equilibrium of the model.
Therefore, the exchange rate is the result of more than just monetary factors,
and In particular is affected by fiscal policy variables, the price of oil, and
productivity differences." (Masson, Symansky, and Meredith 1990:6)
To a large extent, that summarizes the major motivation for the inclination
of this model to investigate the efficiency of this "expectations" upon which the
modelling of exchange rate and the consequent external balance was based.
The issue of the degree of expectedness of changes in the major exchange rate
and monetary inflation rate markets is a major concern. No doubt, a lot is also
hinged on fiscal policy but then, the degree of structural impact of these policy
variables varies a lot.
The postulations of the Multimod, good as they were however has one
very weak point. The weak point however is merely a rational consequence of
the coverage of the model. Being a global model restricted the model to "
regionalizing and aggregating" country indicators. Such an aggregation exercise
can be very misleading especially in the analyses of what and what affects
exchange rates and monetary policy. For one, while countries may be identical in
level of development, and even in the appearance of some key indicators, there
is often a deep- seated difference in what drives the economy. such an
aggregation as presented in the Multimod however take only into account the
published variables, which at the very best are merely the manifestation of the
"effects" of other complex workings of the economy, thereby leaving the "
causes" untouched.
Herbst and Soludo (2001) took an assessment of the structural
adjustment in Nigeria. Under the same study, an assessment of the Ghanaian
adjustment was also undertaken. However, whereas the latter passed for a re-
former, the former was nailed. The Nigerian assessment involved diverse
aspects of the macroeconomy. The conclusion from the assessment (which took
a polit~cal economy viewpoint) was that the structural adjustment failed, not 1
because of lack of ideas but because of what may generally be construed as an
" ownership problem" Here we. pause to note that most reform programmes in
the continent are basically donor-driven. Given that for the greater part, the
14
Nigerian populace had been wrongly tickled with austerity (a Brother programme
of SAP) by the civilian administrator of Shehu Shagari, there was some bracing
up by the masses against any form of reform. That will entail further hardship. As
such the president Babangida had the option of either "greasing" his way through
acceptance of the reform by key officials of Government or abandoning the
programme. The oil windfall of 1990 and the large inflow of foreign aid around
the same time waned the impetus for the reform in the face of mass rejection
and hostility. By 1992, it became clear to all that the programme had been
jettisoned. The study went for ward to identify political maneouvering as the
major dog in the wheel of SAP and acknowledged that the only way forward lies
in developing ideas about the workings of Nigerian politics - how it works and
how it should work-, which is squarely at the onus of Nigerians themselves.
While the work must be commended for both the freshness of the
approach and the coverage it gave to the economy, it has to be noted that the
methodology applied did not go beyond the general descriptives. As such,
attempts were made to analyze the status of the indications as they are (or were)
but did not go further to empirically establish a cause- and - effect relationship
using quantitative variables. Also the conclusion resembles a passing of the tuck
of analysis of economic problems on the shoulders of the politician, who himself
is not trained to handle that effectively
Aron and Ayogu (1 995: 150-1 92) handled an efficiency assessment test of
the economies of five African countries using the cointegration methodology. The
two-men applied the enquiry on the economies of Nigeria, Ghana, South Africa,
Uganda and Zambia. Their finding for Nigeria appeared to be different from that
of the rest of the countries under survey. For Nigeria, they found that "--- it
appears on the face of it that the monthly rate of change in the nominal
15
exchange rate is unpredictable, with the possible expectation of a constant
monthly rate of devaluation". This is at variance with the findings on the other
countries where they found exchange rate returns to be predictable by past
values of the exchange rate. For one, that raises a whole series of questions on
what the distinguishing factor could be that gave Nigeria a result different from
the rest. They however would not rest the responsibility for such predictability of
the returns for exchange rate on the uncovered interest parity or unbiased of the
forward premium. They rather blamed the outcome on methodology and real /
,. monetary determinants for excess currency reforms to be applied to the
exchange rate of the major trading partners of these countries. One key question
therefore ra~sed by the conclusions of the above empirical work is the extent of
influence of these " real and monetary determinants". In other words, what is the
extent of structural 1 policy influences involved in the determination of the
predictability of such returns on foreign exchange? In saying that however, we
take account of the mention of methodology - and that may be where this
particular work may have a value added contribution to make.
In general, the works reviewed suffered from one problem, which in some
cases were acknowledged by the researchers themselves. That aspect is that of
methodology. No doubt the Aron and Ayogu work was complex and deep in
methodology, but it yet left lapses in its analysis (and made it clear that those
lapses crated avenues for future research). Another problem of the models were
either the depth of particularity and desegregations, which help country-specific
analyses, or in the very broad approach that did not allow for cause - and -
effect tests. These together form the openings that the present research intends
to fill.
CHAPTER THREE
METHODOLOGY
3.1 Introduction
Given that there are two objectives in the present work, we shall subdivide
this methodology sect~on into two. The first part deals with the foreign exchange
market efficiency tests and covers the institution of the foreign exchange market.
The second deals with money supply (and allied variables) and covers the
effects of monetary institution (s) on GDP and other measures of economic
growth.
3.1 .1 Theoretical Framework: Forms of Market Efficiency
Markets have been characterized in the literature according to the extent of
effect of available information on the value of stocks and the ease with which
such information is relayed in the market. Three distinct forms of market
efficiency have thus been marked out in the literature viz: weak form market
efficiency, semi-strong form efficiency and strong form efficiency. The market
moves from being characterized as weak to strong depending on the speed and
ease with which privileged information is reflected in share stock priceslvalues
such that it cannot be utilized to generate abnormal profits by those that possess
them Thus, weak form efficiency depicts markets where past price and volume
of trading information are instantaneously incorporated into current prices. Thus,
knowledge of past price and volume of information does not enhance prediction
of future price changes. In the main, weak form market efficiency is often taken
as a short-term market phenomenon. Tests for weak form market efficiency often
follow the random walk hypothesis in which case, the best information/models
cannot pred~ct the market better than a random walk analysis. The semi-strong
form market efficiency goes further to incorporate non-price information like
earnings and dividends for stocks and interest rate determinants for bonds.
However, empirically testing for semi-strong form market efficiency raises
problems especially in respect of choosing the model for the determinants of
security prices and distinguishing between anticipated information necessary for
establishmg the existence of semi-strong efficiency. Strong form market
efficiency goes further to incorporate privileged information available to special
groups of investors like professional money managers, 'market letters'
(investment advisors), and several corporate insiders. However, as in the semi-
strong form market efficiency, incorporating such insider information and
pr~v~leged activity in models could be difficult. Besides, trading in most
developing countries are still at infantry stages such that the effects of such
factors as give rise to strong form efficiency are not often well documented. As
sdch this work will be concerned only with the first form of efficiency i.e. the weak
form of market efficiency.
3.1.2 Foreign Exchange Market Efficiency Tests:
We follow Fama (1970: 383 - 417) to define an efficient market as one
where prices fully reflect the information available in the market thus precluding
the opportunity for arbitrage. Decisions therefore, taken on the basis of these
prices will promote the efficient allocation of resources (Levich 1985, Aron and
Ayogu 1995:l 50-192) In that case, excess returns (RI) can be defined to be:
- R = ~ e ~ + ~ - E kt) ... ... .. . .. . ... ... ... . .. . .. ... . .. ... .. . .. . . (1)
18
Where Ael+l is the one period percentage change in spot price of the commodity
involved and At represents the available information set at time t. Efficiency
under such conditions obtains when the series Rt+l is a " fair game" (ie has an
expected zero value) and is unforecastable given the information set At. (see
Aron and Ayogu 1995: 150-192)
The above implies not only that equilibrium (or expected) returns are
assumed to be some function of information set but also that actual returns differ
from their expected values only randomly. This situation has been termed the
joint hypothesis problem. A potential problem of the joint hypothesis system is
that tests for efficiency go beyond testing for the approximation of actual returns
to expected returns to issues about the nature of the model connecting expected
returns to the information set available in the market. Given uncovered interest
parity, efficient arbitrage will result in
7 E (L~C~+IIAI)= (1-1 t + S t ................................................................... (2)
Where r and r* represent domestic and international interest rates respectively
m d 8, !s a risk premium. Assuming a zero risk premium and rational
expectations, variations in the expected price and current price can be proxied
by the random term ILL+, (which has a zero mean and is independent of the
~nforrnation set Such that
/\el,,= (r-r"),+ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3)
Equatlor~ 3 above is the testable condition for efficiency. However certain
modifications have been made on the above efficiency model on account of the
poblem of joint hypothesis. For one, evidence has shown that the uncovered
interest parity hardly holds in practice and the endogeneity of the interest
19
differential which itself could be a policy tool to hedge exchange rate variations.
R~ l t because there are not too many plausibie alternatives, we hold to the above.'
3.1.3 Market Efficiency and Co integration:
For our exchange rate efficiency tests, the basic framework for the
empirical analysis shall be the cointegration methodology. The intuition stems
from the Engel Granger representation (Engel and Granger 1987: 251 - 276)
which posits that if series are cointegrated, then the equation can both be
mterpreted as a long run equilibrium, and also be consistent with a dynamic error
correction model. The implication is that cointegration implies predictability
between variables in a system. Thus assuming our spot exchange rate el and an
explanatory variable (e.g. the forward exchange rate) are stationary i.e.
int.?grated of the same order, then
W.~erc~ f l ,, the forward rate and pt IS a white nolse error term. In that case, the
e r~ cr correct~on representation w~l l be
( \ e l = tr.0 ( bo + bl fl 1 -el-, ) +x /h Aft k + x y + FLl --...---..
k-1
'Thr, co-effic~ent (r measures the deviation from long run equilibrium with a speed
of adjustment given by -1 .= a < 0 while short run effects of temporary change in
el and !I are measured by 6, and Yk in the second and third terms. 11, is a white
nwbn error term.
The argument for the use of the above methodology in measuring
e f lciency stems from the postulations of Granger (1 986:213-228) who posits that
two price series determined in efficient markets could not be co integrated. Thus,
20
the presence of co integration automatically implies the rejection of the efficiency
hypothesis. Three approaches exi$t for the co integration tests. The first
approach uses various international spot rates insisting that efficiency requires
no co integrating vectors. That claim however may be rendered invalid i f interest
rate differentials actually matter (Richards 1995:631-654, Engel 1996:657-660
and Baffes 1994:273-280). The second approach tests for co integration
between the spot rate and the forward rate. The presence of an unstructured
error process validates the use of co integration to establish efficiency. The basic
problem with this second approach is that the outcomes of the tests are quite
sensitive to the estimation procedures. The third approach finds a long run
equilibrium relationship with a range of macroeconomic variables and uses the
error correction model (ECM) to show predictability of future excess returns
using both the lagged long run and short-run terms (Aron and Ayogu 1995: 159 -
160). The present work shall use the third approach. We shall however, also
examine possible outcomes using any or both of the earlier methods outlined.
The choice of variables shall include interest rate (and its differentials if
ava~lable), fiscal deficit, money supply and foreign reserves. Thus we reproduce
equation (5) again as underneath
k=l
F, now represents the vector of relevant variables as outlined above. We shall
restrict our tests to weak form efficiency tests, which make use of lagged values
(of the relevant variables.
2 1
3.3 Sources of Data:
The major source of most of the data that shall be used for this work is the
World Tables. Supplementary data shall be obtained from national account
publications of both Nigeria and Ghana. Estimatim shall be done with the PC
Give econometric software and the SPSS. Sample period covers 1970 to 1998,
which may (as requ~red) be subdivided into regime periods.
CHAPTER 4
ANALYSIS OF RESULTS
4.1 Time Series Characteristics of the Data Set
Two sets of data were used for the two countries in the analysis. For one,
attempts were made to synchronize the data set and harmonize the scales of
measurement to ensure that the outputs of the analysis from the two countries
are directly comparable. In this respect, the data used for the Ghanaian analysis
included real GDP (RGDP), real exchange rate index (REER, 1987 base year),
interest rate (INTRATE), GDP Deflator (GDP Def), real interest rate (RIR),
Money supply (MS), Trade balance (TB), current account balance, (CAB),
growth rates of money supply and GDP (MS and GDP growths), nominal
exchange rate (NER), post transfer balance of government, inflation,
'Government expenditure as a ratio of GDP (Gexplgdp). Table 4.1 below shows
the outcome of the tests for unit roots conducted on the variables before they are
applied in the regression models.
2.3
Table 4.1: Unit root tests- Ghanaian Macroeconomic Data 1970-2000
variable 1 - C a c u i ate
1 d ADF
. - -. - . - - MS_ growth 1 -4.8454
Growth I
S td
Error
65.336
80.727
32.484 ..- -
'I 20.34
- -- 5.4685
290.14
437.99 -
176.32
Critical
ADF
-3.675
- -. - --
-3.675
-2.963 -+----
-3.666
-- -3.675
-2.975
-2.963
-3.675
Level of
significance
Order of
integration
Table 4.2: Unit root tests-Niqerian.Macroeconomic Data 1970-2000 - - - - -.
Varmble calculate
-5.337 1
- - . - .- -- - . Inflation 1 -3.1091
significance integration
Tables 1 and 2 above are summary presentations of the time series
characteristics of the data used for the analyses that follow. Nominal Interest
rate, GDP deflator, trade balance, growth of money supply, and GDP growth
svzre all stationary at the level form (i.e. they were integrated of order zero).
Others had unit roots. A number of the variables like real GDP (in 1987 constant
prices), the real exchange rate (1987=100), the real interest rate, current
account balance, and government expenditure were integrated of order 1. The '
25
rest like nominal exchange rate, and money supply needed to be differenced
more than once to make them stationary. Money supply, unarguably the most
non-mean reverting variable needed to be differenced thrice before it became
stationary.
The situation in the Nigerian data is not much different. GDP growth,
inflation, real interest rate, and the growth of money supply were stationary at the
zero levels. With the exception of GDP at current prices and the price variables
(CPl and GDP deflators), which needed to be differenced twice for them to be
stationary, every other variable was integrated of order 1. However, original
money supply was integrated of order 4. This research however, opted to make
use of the real money supply, which is the money supply from which the
influences of price increases have been removed.
' 4.2 Efficiency Tests in Nigeria and Ghana
Using the Fama specification, the next section proceeds to test for
efficiency of the exchange rate in the Nigerian and Ghanaian economies. To do
this, we specified an autoregressive model of the exchange rate using annual
data series. The lags were extended to four (there is no specific econometric rule
used in the choice of the lag structure and length of the variables used in this
case. However, we also tried alternative specifications and also conducted tests
of the lag structure of the variables used in order to ensure that the included lags
made sense.
Tests. for co integration of the variables used in the model were
conducted. However, before discussing that, we note that the relevant tests for
the significance of the lags showed that only the first lag was significant. Later
2 6
tests conducted on models with more than four-year lag length also confirmed
the above as only the first, fifth and sixth years were significant. These are
presented in the appendix section. Underneath, we present the summary of the
co integration tests on the variables of the model
Table 4.3: Exchange rate efficiency tests in Nigeria
Description
--
NER AR
. . -. -- - NER AR
I -- , NER AR
Lag length-
4
-- 6
3 - 4
T-ADF
I. 8057
-- - - -- - 1.2262
-- 1.2262
-0.6897
Critical
Value
.
-1.954
-2.971
-- -2.971 -- -1.954
length
Where NER AR is a representation of autoregressive equations of the nominal
exchange rate, ADL is the auto distributed lag models of the exchange rate. Note
that the ADL in this case is defined to include other variables of interest. In this
case, the particular variables of interest are basically the monetary variables
(even though given its strategic nature, real output was included in the final
model)
From the table above, it could be easily observed that the foreign
exchange market given the annual data in Nigeria was efficient within sample.
For all the models estimated, different lag distribution were simulated with. As
said earlier though, the lag lengths that were proven very significant using the
structural tests for significance of lag distribution showed only the first, fifth and
s~xth lags to be significant. However, with the addition of the other fundamental ,
determinants of exchange rate, i.e. other macroeconomic variables that matter in
an economy especially the monetary variables, it was found out that the relevant
lag length included the fourth, as well as the first and second (see appendix for
more on that). Even with the inclusion of these macroeconomic variables, there
was little change in the conclusion that could be arrived at given the performance
of the models. For one, the tests for co integration within sample remained as
earlier posited (and as shown in the table above). In reality, the above does not
seem out of place with the observed procedures for the determination of the
exchange rate in Nigeria. Given the analytical model of this work, efficiency is
proven if the information contained in the variables of the equation is enough to
predict the movements of the independent variable. Over the sample period in
Nigeria, exchange rate determination for the greater part of the time was either
by administrative fiat or followed a predetermined, crawling trend. As such, the
ra,te at any period of time to a large extent determined subsequent rate(s). For
the greater part of the 1970s for example, the determination of the exchange rate
followed official declarations which itself was a function of the policy of
government to maintain a 'respectable' value for the Naira. Thus movements in
the value of the national currency inched up by bits and could literally be
predicted given the information set of the value in previous years and current
year, and other macroeconomic variables like inflation rate etc. in the 1980s, with
the introduction of SAP, the rates were market determined. However, this period
was short lived before the reintroduction of the official pegging. This latter
pegging was even more severe than the previous ones as movements in the
rates over the period were almost zero. Thus, it is not economically implausible
to imagine that the years of pegging and official determination 'crowded out' the
28
years ~f market determination of the rates within sample and so our tests
showed efficiency.
4.4: Exchange rate efficiency tests in Ghana
I Model 1 . -. - - .- -- -. -
Max Lag [ T-ADF
length / 1 length
I. 1 ~1 . -- L L
~ h e h a n a i a n data displayed a slight difference from the Nigerian data. The
tests showed efficiency if all the information set is made up of the exchange rate
values within sample. In other words, in the information set, et-I, et-2, ..., et-n,
we could prove efficiency as co integration was not proven. However, the
introduction of other macroeconomic determinants of exchange rate, especially
the rnonetary variables as was the case in Nigeria changed the conclusions
dramatically. Here, we established co integration and so we reject the efficiency
hypothesis. This is quite a revealing piece of information. This means that the
information set obtainable from the distributed lag functions of the exchange rate
over the sample period is enough for prediction of the spot price of the exchange
rate, in this case given by the annual exchange rate data. However, when other
rnacroeconomic variables were included in the model, such predictability
vanishes and the decision variable becomes difficult to predict. This implies that
these macroeconomic variables contained more information for the prediction of
the exchange rate variable than just a casual look at the lag distribution of the
2 9
d?pendent variable. For the greater part for example, it is easier to predict the
exchange rate with a given government deficit to GDP ratio for example than
w ~ t h just the previous values of the exchange rate. Part of the implication of this
is that the Ghanaian nominal exchange rate was not dependent on itself alone
as much as it depended on other macroeconomic variables. This is much at
variance with the observation1 conclusion reached using the Nigerian data given
that In the former, i t was not possible to establish co integration even with the
macroeconomic data available.
4.3 Money Supply and Economic Growth: Pre- and Post-Sap
Periods
Earlier in this work, the aim was to divide within-sample period into three
clelineated by the major macroeconomic reform that the country had undertaken
oyer the period - the Structural Adjustment Programme. Thus, we intended to
end up with three periods viz; Pre-SAP, SAP and Post-SAP periods. However, in
the course of the work, it was realized that there would be problems of degrees
of freedom in the estimation of such models. The SAP period for the two
countr-ies, particularly were too small for the large number of monetary variables
In the original version of the model specification..Thus, hereafter, we made do
with only two delineations, pre- and post-SAP periods. Underneath, the outcome
of the model specifications in the analysis of the influence of monetary variables
in the determination of economic growth and performance is analyzed. The
proxy used for economic growth in the Nigerian case is the growth rate of real
GDP. However, this data could not be obtained for Ghana over the same length
of sample. As such, the analysis of the Ghanaian performance is restrictea to the
use of real output (RGDP).
30
Equation 4.3.1:Monetary policy instruments and economic growth in
Nigeria: Pre-SAP
E cln 8 Modelling RGDP-Growth by OLS
The present sample is: 1974 to 1985
Vanable Coefficient Std.Error t-value t-prob PartRy
Constant 31.259 21.871 1.429 0.1867 0.1850
Int.-Rate -3.0245 2.4078 -1.256 0.2407 0.1492
M2LGrowt-4 -0.19395 0.15716 -1.234 0.2484 0.1447
Ry - 0.227406 F(2, 9) = 1.3245 [O.3132] a = 10.5136 DW = 2.35
RSS = 994.8267735 for 3 variables and 12 observations
The est~mat~on given above shows the key monetary variables used for
th~s estimation as not significant in the determination of output growth in the pre-
SAP period. Several variables like exchange rate, inflation, and interest rate
among others were tried with. Many of them, however, were not significant or
were wrongly signed. The implication is that the use of monetary policy
iristruments for active macroeconomic management was either not well
developed or the instruments were not as potent as postulated by theory. The
3 1
final model above has only inter3st rate and the growth rate of broad money.
However, we note also that the models for both the pre- and post-SAP periods
were long run models and this could imply that the monetary variables mattered
but only so in the short -run. This, we may not prove as it is outside the purview
of this research. All the monetary variables used in the models affected output
growth negatively. The rate of interest and negative output growth is
understandable given that as the cost of capital, increases in interest rate
discourage investment and therefore economic growth and performance.
Equation 4.3.2:Monetary policy instruments and economic growth in Nigeria: Post-SAP EQ(17) Modelling RGDP-Growth by OLS
.. - i he present sample is: 1988 to 2000
Variable Coefficient Std.Error t-value t-prob PartRy
~on'stant 10.516 4.0706 2.583 0.0273 0.4003
Int.-_Rate -0.21 131 0.1751 1 -1.207 0.2553 0.1271
MS(rn2) -6.0394e-006 2.7021e-006 -2.235 0.0494 0.3331
R\j = 0.346081 F(2, 10) - 2.6462 [0.1196] a = 2.32754 DW = 0.988
RSS - 54.17451663 for 3 variables and 13 observations
A R l - l F ( 1 , 9)= 1.846[0.2073].
ARCH 1 F( 1, 8) = 0.56874 [0.4724]
Normality Chly(2)- 1.1741 [0.5560]
Xiy F( 4, 5) = 0.45676 [0.7661]
Xi*Xj F( 5, 4) = 0.30166 [0.8895] .
RESET F( 1, 9) = 9.937 [0.0117] *
In the post SAP period, the variables that turned out significant are the
same as the ones that turned out significant in the pre-SAP estimation. The.
signs were also the same indicating that the growth in money supply and interest
rate d~scourages investment. However, the growth of broad money was more
significant in the post SAP period than in the pre-SAP period. As in the first case,
interest rate affected output growth negatively but this was not significant at
either the 5% or 10% levels. Part of the implication of this is that money supply
grew and became non-negligible in economic growth in the post SAP period.
This line of thought is consistent with the experience of the country. Following
the collapse of SAP, the monetization of fiscal deficits of governments at both
the center and the states, begun during the oil boom, became more rampant with
its negative consequences on economic growth. Thus, growth of money
var~abies became a key factor in determining the movements of other key
economrc factors.
3 3
Equation 4.3.3: Monetary policy instruments and economic growth in
Ghana: Pre-SAP
EQ(24.) Modelling RGDP-(Cb) by OLS
The present sample is: 1972 to 1982
Variable Coefficient Std.Error t-value 1-prob PartRq
Constant 1532.2 207.37 7.389 0.0002 0.8864
MS--(Cb)-I -1 2.239 13.61 7 -0.936 0.3807 0.1 I I I
INTRATE-1 0.37701 0.7981 8 0.472 0.651 1 0.0309
RGDP-(Cb-2 0.061 744 0.15029 0.41 1 0.6935 0.0235
Ry := 0.151545 F(3, 7) = 0.41676 [0.7466] a = 55.1491 DW = 1.43
RSS = 21289.97307 for 4 variables and I I observations
AR 1- 1 F( 1, 6) = 0.87648 [0.3853]
ARCH 1 F( 1, 5) = 0.018071 l0.89831
Normality Chiy(2)= 1.8681 [0.3930]
RESET F( 1, 6) = 0.23819 [0.6428]
As mentioned earlier, the analysis of the effects of monetary variables on
the Ghanaian output performance, unlike in the Nigerian case, was done using
the real output and not output growth rate as this researcher could not obtain
enough data points on output growth rate for the proposed sample size.
In the estimated models of the determination of the output 'performance of
Ghanaian economy over the Pre SAP period, money supply, interest rate and a
one-year period lag of output itself among others were used. As in the Nigerian
case, however, most of the variables used showed up insignificant. This means
3 4
also that as in the case of Nigeria, most of the determinants of output and
productivity in pre-SAP Ghana were real variables (which we eventually did not
include in the models). Thus it could safely be concluded that the objectives of
ih? str~~ctural adjustment programme which was to re-align the fundamentals of
production in both economies with particular reference to the addressing supply
bottlenecks existing in the economies were in order and could have yielded
cl~vtdends of increased productivity were they religiously adhered to, However, it
IS now common knowledge that owing to political pressure, Nigerian abandoned
the programme midway. Ghana however, had more success in the programme.
Equation 4.3.4: Monetary policy instruments and economic growth in
Ghana: Post-SAP
EQ (31) Modeling RGDP-(Cb) by OLS
.The present sample is: 1972 to 1987
V ~ r ~ a b ! e Coefficient Std.Error t-value t-prob PartRy
Cc rlstant 92.489 50.439 1.834 0.0897 0.2055
RGDP-(Cb-1 0 99426 0.029299 33.935 0.0000 0.9888
NE.K 0.01 7472 0.014230 1.228 0.2413 0.1039
Ry =: 0.999296 F(2, 13) = 9228.5 [0.0000] a = 13.3826 DW = 2.93
RSS = 2328.22331 5 for 3 variables and 16 observations
AR 1 - 1 F( 1 , 12) = 4.034 [0.0676]
ARCH 1 F( 1, 11) = 0.67837 [0.4276]
Normality Chiy(2)= 0.026893 [0.9866]
XI^ I-( 4, 8) =: 1.6464 [0.2540]
N , 'X j F( 5, 7) = 1.153 [0.4159]
RESET I-'( 1, 12) = 0.078514 [0.7841]
In post-SAP Ghana, both broad money and interest rate could also not be
proven to affect economic growth. The nominal exchange rate, which was
excluded in the pre-SAP analysis on account of its incorrect sign showed a more
promising value in the post-SAP analysis. The lag of real output was also
important in the determination of overall output performance unlike in the pre-
SAP analysis where it was not significant. Overall, the conclusions seem to
remain the same-that monetary variables were not really the hub of
macroeconomic non-performance that characterized the countries of SSA and
which led to the adoption of the structural adjustment programme. Real output
performance in both countries seemed to have had more to do with structural
bottlenecks in supply and demand than with monetary growth. Likewise, the
correction of the problems, at least in the short run, will have to go beyond
monetary adjustments and interest rate manipulations.
CHAPTER FIVE
SUMMARY AND POLICY IMPLICATIONS AND
RECOMMENDATION:
5.1 Summary and Conclusion:
This work set out to find the relative efficiency of the exchange rate
market in Nigeria and Ghana with a view to finding out if differences in these
could be used to account for the differences in performance of the two countries
in the implementation of the structural adjustment programme.
Using the proposed analytical model, the foreign exchange market was
found to be efficient in both countries. However, when a full analysis is
conducted with the Ghanaian data on other macroeconomic 'determinants of
exchange rate, the Ghanaian foreign exchange market was proven to be
aineff~cient. This implied that there was less executive interference in the
management of the Ghanaian foreign exchange rates than in the Nigerian case.
Prediction of the values of the exchange rate given the information contained in
the 'whole basket of macroeconomic determinants' of exchange rate was far less
difficult in Ghana. This could easily account for better macro management of the
exchange rate over the sample period and the better performance of policy
making in SAP, which relied on the movements of the exchange rate. Such
policymaking using the foreign exchange market needed not rely only on the
previous values of the exchange rate but also on several other macroeconomic
variables to make a projection of the rate of exchange in future. This however,
was not applicable to Nigeria given the efficient and unpredictable movements of
the exchange rate.
37
This work is however, not exhaustive. For one, it is the hunch here that
the choice of the macroeconomic variables to include in the models matter a lot
In defining the level of efficiency to attribute to the foreign exchange rate market.
'This could increase or decrease with successive variables, and even the
direction could alter if.the variables in question are real variables.
There was also analysis of the impacts of monetary variables in the
determination of economic performance in the pre- and post-SAP periods. The
alm was to investigate the impact of monetary policy instruments in the
management of economic growth in the two countries. Such insights are
expected to help see the relative weights attachable to monetary instruments as
dist~nct from fiscal policy instruments/real variables. This, in a way, is supposed
to be another examination of the potency of the objectives of SAP and of the
macroeconomic instruments used in their realization. The findings are that the
monetary policy instruments were not potent in determining overall output
performance. Whether in the pre- or post-SAP periods, these variables were
weak in defining output growth in both countries. As such, it could be concluded
that the setting of the objectives of SAP to involve supply side management were
quite in order. Besides, most changes in monetary policy instruments were seen
to affect output growth negatively. This calls for more caution in the increase of
money supply, for instance.
5.2 Policy Implications:
One of the major motivations of this research is the understanding that
reform is not a one-off affair, especially in most of SSA where development has
remained slow and the need for macroeconomic adjustment stares policymakers
in the face daily. Of what use is the information contained in this piece then? For
one, the effectiveness of the institution or the avenue for the transmission of
macroeconomic policy could be as important as the policy itself. That is another
way of saying that while a 'right' policy is important, it is also important that the
institutions for the implementation of the policy be right. The limited success of
the structural adjustment programme in SSA has been a source of concern to
the operators in the internationa1,financial industry. This is the more so given the
need to design the structure of the next generation of reform in most of these
countries.
The exercise of this work could have been more revealing if the data used
were the autonomous/parallel market exchange rates, which were more market-
determined than the official rates. However, constrained by data, we limited the
scope of this work to the official rates and found that the official de termination of
the rates led to the establishment of efficiency in these markets. We have also
taken a cautious approach to the definition of the implications of this finding
given that such established efficiency could be 'synthetic'.
This efficiency apparently made it difficult for abnormal arbitrage benefits
in the official markets. This could have beer; a plus in the attempt to reform. But
a parallel market quickly grew in both countries. Post-SAP Ghana was not as
affected as post SAP Nigeria as the inculcation of some major macroeconomic
variables reduced this tendency in Ghana. So while arbitrage was difficult at the
of f~c~al rates, the parallel markets watered down the benefits that could have
been obtained given policy developments at such official rates.
5.3 POLICY RECOMMENDATION:
Ghanaian foreign exchange market was proven to be inefficient while
Nigeria was proven to be efficient. This implies that there was less
execut~ve interference in the management of the Ghanaian foreign
exchange rates than in the Nigerian case. 1.e. is to say that prediction of ,
the values of the exchange rat in Ghana was very difficult. The prediction
of exchange rate was left in the hand of forces of demand and supply,
from this point we advising the government of Nigeria to do as the
Ghanaian government do so that they will have a better performance of
policymaking in SAP. The Nigeria government should also not only rely on
the previous values of the exchange rate but also on several other
macroeconomic variables to make a projection of the rate of exchange in
future.
Another policy recommendation is that from our findings, we found that
monetary policy instrument were not good in determining overall output
performance both in pre- SAP or post -SAP, As such, the government of
both countries should calls for more caution in the increase of money
supply, ie is to say that the government of Nigeria Ghana should know
how to pump money into the economy in order to avoid inflation.
References
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Aghevli, B. B., Khan, M. S, Narvekar P. R, Short 0. K (1979) Monetary policy in Selected Asian Countries Washington DC: IMF Staff papers Vol. 26.
Akatu, Patrick A. (1993) " The challenges of monetary policy since 1986" In Central Bank of Nigeria Economic and Financial Review vol 31 No 4 December 1 993.
Aron, Janine and Ayogu, Melvin 1995 " Foreign exchange Market Efficiency Test in sub-Sahara Africa AERC plenazy session, Journal of Africa Economics Supplement to volume 6 No 3 PP 150 - 192; Nairobi
Ashwe, Chiichii (1988) " SAP'S Harrowing Experience" in The Niqerian Economist Vol No 2 June 7-20 1988.
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Appendix
Appendix 1: Exchange rate efficiency tests in Nigeria
A. Efficiency tests using Four,year lag distribution EQ (1) Modell~ng NER by OLS
The present sample is. 1975 to 2001
Variable Coefficient Std.Error t-value t-prob PartRy Constant 0.26569 3.2258 0.082 0.9351 0.0003 NEFI-1 0.82906 0.20519 4.040 0.0005 0.4260 NER-2 0.018847 1.7034 0.01 1 0.9913 0.0000 N E R-3 -1.4140 2.9704 -0.476 0.6387 0.0102 NER-4 2.5318 1.8683 1.355 0.1891 0.0770
Ry = 0.787609 F(4, 22) = 20.396 [0.0000] a = 12.7886 DW = 2.23 RSS = 3598.0741 39 for 5 variables and 27 observations
Tests on the significance of each lag Lag F(num, denom) Value Probability
1 F( 1, 22) = 16.325 [0.0005] ** 2 F( 1, 22) = 0.00012243 [0.9913] 3 F( 1, 22) = 0.22661 [0.6387] 4 F( 1. 22) = 1.8363 [0.1891]
Co integration tests o f the exchange rate equation Unrt root tests 1974 to 2001 Cr!t~cal values. 5°/~=-1.954 1%--2 649
T-adf A lag t-lag t-prob ECMNER 2.8071 12.489 2 -1.3357 0.1937 E C M ~ E R 2.4365 12.675 1 -1.7422 0.0933 ECMNER 1.8057 13.144 0
B. Efficiency tests using lags of more than 4 EL!( 2) Mociellmg NER by OLS
The present sample is: 1977 to 2001
Variable Coefficient Constant 0.1 1508 NER.-I 0.35186 PJER-,% 1.9 172 NEH-3 -3.8998 NER-4 3.6753 :d 1-F .r - 1-3 -6.4385 NEH-5 7.8774
Std.Error t-value 1-prob PartRy 2.1410 0.054 0.9577 0.0002 0.14870 2.366 0.0294 0.2373 1 1720 1.687 0.1089 0.1365 2.2076 -1.767 0.0943 0.1478 2.3660 1.553 0.1377 0.1182 2.2774 -2.827 0.01 12 0.3075 1.4660 5.373 0.0000 0.6160
Ry = 0.931245 F(6, 18) = 40.633 [0.0000] B = 7.94682 DW = 2.75 U S S = 11 36.735372 for 7 variables and 25 observations
Tests on the significance of each lag Lay F(num, denom) Value Probability
1 I I 18) = 5.5992 [0.0294] * 2 F( 1, 18) = 2.8459 [0.1089] 3 F( ? , 18) = 3.1207 [0.0943] 4 F( 1. 18) = 2.4131 [0.1377] 5 F( 1, 18) = 7.9926 [0.0112] ' . 6 F( 1, 18) = 28.873 [O.OOOO] '*
Co integration tests o f the exchange rate equation
l lnit root tests 1974 to 2001 Zritical values 5%=-2.971 1 O/0=-3 685; Constant ~ncluded
t-adf 5 lag 1-lag t-prob ECMRER6 2.3537 12.746 2 -1.2987 0.2064 ECMRER6 1.9868 12.920 1 -1.5898 0.1244 ECMREHG 1.2262 13.294 0
C. Efficiency tests using less than 4-period lag distribution
EQ( 3) Modellmg NER by OLS The present sample is: 1974 to 2001
Variable Coeffic~ent Std.Error t-value t-prob PartRy Constant 0.23079 3.1236 0.074 0.9417 0.0002 NER-1 0.89902 0.19794 4.542 0.0001 0.4622 NER-2 -1 .I 556 1.4551 -0.794 0.4349 0.0256 d ~ ~ - 3 2.01 10 1.5484 1.299 0.2064 0.0657
Ry = 0.772274 F(3, 24) = 27.13 [0.0000] B = 12.746 DW = 2.12 RSS = 3899.080027 for 4 variables and 28 observations
Tests on the significance of each lag Lag F(num,denom) Value Probability
1 F( 1, 24) = 20.628 [0.0001) ** 2 F( 1, 24) = 0.63066 [0.4349] 3 F( 1, 24) = 1,6867 [0.2064]
Co integration tests of the exchange rate equation
Unit root tests 1974 to 2001 Cr~tical values: 5%=-2.971 I%=-3.685; Constant inciuded
t-adf 21 lag t-lag t-prob ECMNER3 2.3537 12.746 2 -1.2987 0.2064 ECMNER3 1.9868 12.920 1 -1.5898 0.1244 ECMNER3 1.2262 13.294 0
D. Efficiency tests including other macroeconomic determinants of exchange rate EO( 1) Modelling NER by OLS
The present sample IS: 1975 to 2001
Var~able Coefficient Std.Error t-value t-prob PartRy Constant -4.1 21 1 18.677 -0.221 0.8282 0.0030 NEH-1 -1.11 24 0.25996 -4.279 0.0006 0.5337 N E R-2 -1.0844 1,0808 -1.003 0.3306 0,0592 NER-3 0.35973 1.5183 0.237 0.0157 0.0035 NER-4 -3.8588 1.3212 -2.921 0.0100 0.3477 Inflation -0.060698 0.10700 -0.567 0.5784 0.0197 Int Rate 0.34294 0.32754 1.047 0.31 06 0.0641 REEf<,-'i 990 -0.01 5331 0.017029 -0.900 0.3813 0.0482 MS(m2) 0.00031927 4.0015e-005 7.979 0.0000 0.7992 M2-Growth 0.074200 0.10028 0.740 0.4701 0.0331 RGUP 6.2992e-005 0.00019949 0.316 0.7563 0.0062
Ry - 0 060788 F(10,16) = 39.203 [0.0000] a = 6.44345 DW = 2.84 HSS = 664.2881085 for 11 variables and 27 observations AR 1- 21'( 2, 14) = 10.039 [0.0020] '*
ARCH 1 F( 1, 14) = 0.60356 [0.4501] Normality Chiy(2)= 15.524 [0.0004) '* RESET F( 1, 15) = 49.703 [0.0000] * *
7'ests on the significance of each lag Lag F (num, denom) Value Probability
1 F (1, 16) = 18.31 [0.0006] *' 2 F (1, 16) = 1.0060 (0.33061 3 F (1, 16) = 0.056132 [0.8157] 4 F (1, 16) = 8.5302 [0.0100] *
Co integration tests of the exchange rate equation Unit root tests 1974 to 2001 Critical values: 5%-1.954 1 %=-2.649
t-adf 8 lag t-lag t-prob ECMNER 0.22238 12.177 2 -1.8756 0.0724 ECMNER -0.14762 12.753 1 -0.060544 0.9522 ECMNER -0.68970 12.516 0
Appendix 2: Exchange rate efficiency tests in Ghana
A. Efficiency tests using Four-year lag distribution
EQ( 2) Modelling NER by OLS The present sample is: 1974 to 2000
Ry = 0.98983 F(4. 22) = 535.31 [0.0000] a = 96.9205 DW = 1.93 KSS = 206658.9062 for 5 variables and 27 observations
Tests o n the significance o f each variable vtlrlable F(num, denom) Value Probabihty Unit Root t-test
NER F (4, 22) = 535.31 [0.0000] ** 0.82851 Constant F (1, 22) = 1.3226 [0.2625] 1.15
Tests on the significance of each lag Lag F(num,denom) Value Probability
I F( 1, 22) = 41 476 [O.OOOO] ** 2 F( 1, 22) = 0.10501 [0.7490] 3 F( 1, 22) = 5.0187 [0.0355] * 4 F( 1, 22) = 1.412 [0.2474]
Tests on the significance of all lags up to 4 . Lag F (num, denom) Value Probabil~ry 1 -4 F ( 4 , 2 2 ) = 535.31[0.0000]** 2- 4 F (3, 22) = 5 0356 [0.0083] ** 3- 4 F (2, 22) = 4.1 375 [0.0298] * 4- 4 F (1, 22) = 1.412 [0.2474]
Co integration tests o f the exchange rate equation Unit root tests 1973 to 2000 Crltical values: 5%=-2.971 I%=-3.685; Constant included
1-adf A lag 1-lag t-prob ECMghana2 -1.1299 95.880 2 2.6545 0.0139 ECMghana2 0.70944 106.85 1 2.3886 0.0248 ECMghana2 3.3234 116.11 0
B. Efficiency tests using lags of more than 4
EQ( 2) Modelling NER by OLS The present sample is: 1976 to 2000
Variable Coefficient Std.Error t-value t-prob PartRy Constant 29.136 21.698 1.343 0.1960 0.0911 NER-1 1.921 1 0.25046 7.670 0.0000 0.7657 NEH-2 -1.1 188 0.53576 -2.088 0.0513 0.1950 NER-3 -0.7501 8 0.50275 -1.492 0.1530 0.1101 NER-4 1.9576 0.91462 2.140 0.0463 0.2029
Ry = 0.993243 F(6, 18) = 440.99 [0.0000] a = 85 5028 DW = 2 45 RSS - 131593.0663 for 7 var~ables and 25 observations AFI 1- 2F( 2, 16) = 1.7221 [0.2102] ARCH 1 F( 1, 16) = 0.87819 [0.3626] Normality Ch1y(2)= 4 9668 [0.0835] X1y F(12, 5) = 3 2371 [0.1018] IIESET F( 1, 17) = 12.237 [O.OC)28] * *
Tests on the significance of each lag Lag F(num,denom) Value Probability
1 F( 1, 18) = 58.833 [O.OOOO] ** 2 F( 1, 18) = 4.3604 [0.0513] 3 F( 1, 18) = 2 2265 [O. 15301
. 4 F I 18) = 4 5813 [0.0463] * 5 F( 1, 18) = 7.0819 [0.0159] * 6 F( 1, 18) = 9.8925 [0.0056] **
Tests on the sign~ficance of all lags up to 6 Lag F(nurn,denom) Value Probability
1- 6 F( 6, 18) = 440.99 [O.OOOO] ** 2- G F( 5, 18) = 5 8075 [0.0023] ** 3- 6 F( 4, 18) = 5 1422 [0.0061] ** 4- 6 F( 3, 18) = 3.9481 [0.0251] * 5- 6 F( 2, 18) = 5.0222 [0.0185] * 6- 6 F( 1, 18) = 9.8925 [0.0056] **
Co integration tests o f the exchange rate equation , Unit root tests 1973 to 2000
Cr~tical values: 5%=-2.971 I%=-3.685; Constant included
t-adf a lag 1-lag 1-prob tCIvl6 -1.1299 95.880 2 2.6545 0.0139 tCCM6 0.70944 106.85 1 2.3886 0.0248 ECM6 3.3234 116.11 0
C. Efficiency tests using less than 4-period lag distribution
EQ( 1) Modelling NER by OLS The present sample is: 1973 to 2000
Variable Coefficient Std.Error 1-value t-prob PartRy Constant 26.219 22.251 1.178 0.2502 0.0547 NER-1 1.3981 0.1 8378 7.607 0.0000 0.7069 NER-2 0.17160 0.32892 0.522 0.6067 0.01 12 NER-3 -0.62054 0.23377 -2.655 0.01 39 0.2270
Ry = 0.98934 F(3, 24) = 742.5 [0.0000] a = 95.8801 DW = 1.88 RSS - 220631.6477 for 4 variables and 28 observations
Tests on the significance of each variable variable F(num,denom) Value Probability Unit Root t-test
NER F( 3, 24) = 742.5 [0.0000] ** -1 . I299 Constant F( 1, 24) = 1.3884 [0.2502] 1.1783
Tests on the significance of each lag La!) F(rium,denom) Value Probability
Tests on the significance of all lags up to 3 Lag F(num,denom) Value Probability
1- 3 F( 3, 24) = 742.5 [O.OOOO] ** 2- 3 F( 2, 24) = 7.0658 [0.0039] ** 3- 3 F( 1, 24) = 7.0464 [0.0139] *
Co integration tests of the exchange rate equation Un~t root tests 1973 to 2000 Cr~t~cal values: 5%=-2.971 I%=-3.685: Constant included
t-adf 3 lag t-lag t-prob ECM3 -1.1299 95.880 2 2.6545 0.0139 ECM3 0.70944 106.85 1 2.38860.0248 ECM3 3.3234 116.11 0
D. Efficiency tests including other macroeconomic determinants of exchange rate EQ( 1) Modelling NER by OLS
The present sample is: 1974 to 2000
Var~able Coefficient Std.Error t-value 1-prob PartRy Constant -516.52 290.82 -1.776 0.0926 0.1491 NI-Z X--.I 1.0609 0.27338 3.881 0.001 1 0.4555 ?.I ii. K--2 0.27708 0.40061 0.692 0.4980 0.0259 NER-3 -0.65543 0.50124 -1.308 0.2075 0.0868 NIZR-4 0.15569 0.68678 0.227 0.8232 0.0028 MS-,growth 1. I849 1.1744 1 .O09 0.3264 0.0535 a r 2.4415 3.1 140 0.784 0.4432 0.0330 INTRATE -2 0481 3.1680 -0.64'7 0.5261 0.0227 F1GD13-(Cb) 0 30546 0.15043 2.031 0.0573 0.1864
Fiy = 0 993533 F(8, 18) = 345.69 [O.OOOO] a = 85.4422 DW = 2.15 RSS = 131406.589 for 9 var~ables and 27 observations
Tests on the significance of each variable var~able F(num,denom) Value Probability Unit Root t-test
NEfi F (4, 18) = 31.105 [0.0000] ** -0.91931 Constant F (1, 18) = 3.1545 [0.0926] -1.7761 MS-growth F (1, 18) = 1.018 (0.32643 1.0089 lnflatlon F (1, 18) = 0.61473 [0.4432] 0.78405 INTKAS'E F (1. 18) = 0.41797 [0.5261] -0.6465 RGDP-(Cb) F (1, 18) = 4.1235 [0.0573] 2.0306
Tests on the significance of each lag L.ag F (num, denom) Value Probability
1 F (1, 18) = 15.06 [0.0011] ** 2 F (1, 18) = 0.47836 [0.4980] 3 F ( I 18) = 1.7098 [0.2075] 4 F (1, 18) = 0.051389 [0.8232]
'Tests c!n the slgn~f~cance of all lags up to 4 1.. a g F(nurn,denom) Value Probability
1 . 4 F( 4, 18) = 31.105 [O.OOOO] ** 2- 4 F( 3, 18) = 2.8674 [0.0653] 3- 11 F( 2 , 18) = 3.4242 [0.0549] 4- 4 F( 1, 18) = 0 051 389 [0.8232]
Co integration tests of the exchange rate equation
Un~t root tests 1973 to 2000 C n t m l valiles 5%=-1 954 I%=-2.649
1-adf fi lag t-lag t-prob ECMghana -1.3633 255.28 2 -0.67548 0.5056 ECMghana -1.5393 252.60 1 -1.1971 0.2421 ECMghana -2.1241* 254.62 0
