Effect Of Exchange Rate On Food Prices In Nigeria (1986-2024)

Abstract

Nigeria is endowed with enormous agricultural potential, yet food prices have continued to rise amid increasing exchange rate volatility and persistent macroeconomic challenges. The combination of currency instability, growing dependence on imported food and agricultural inputs, and recurring economic imbalances has heightened concerns about food security and price stability in the country. Against this backdrop, this study examined the effect of exchange rate fluctuations on food prices in Nigeria. Specifically, the study investigated the long-run and short-run relationships between exchange rate movements and food prices over the period 1984–2024, while accounting for the influence of oil revenue, interest rate, and agricultural output as key determinants of food price dynamics. The study employed the Vector Error Correction Model (VECM) following confirmation that all variables are integrated of order one, I(1), and cointegrated based on the Johansen test. The long-run results reveal that exchange rate has a positive and statistically significant effect on food prices (β = 1.110, t = 4.460), confirming strong exchange rate pass-through. Oil revenue exerts a significant negative longrun effect (β = –20.761, |t| = 5.641), while interest rate (β = –23.167, |t| = 5.132) and agricultural output (β = –17.954, |t| = 4.627) significantly reduce food prices in the long run. In the short run, exchange rate effects are transmitted with a lag (β = 0.154, t = 2.528), oil revenue increases food prices temporarily (β = 0.916, t = 2.587), and agricultural output reduces food prices (β = –0.789, t = –2.651). The error correction term (–0.496, t = –5.204) indicates that approximately 49.6% of disequilibrium is corrected annually. The study concludes that exchange rate instability remains a major driver of food price inflation in Nigeria, while sustained agricultural expansion and prudent macroeconomic management can mitigate inflationary pressures. It recommends exchange rate stabilization, strengthened agricultural productivity, disciplined monetary policy, and strategic use of oil revenue to ensure sustainable food price stability.