Exchange Rate Depreciation and the Structure of Sectoral Prices in Nigeria under an Alternative Pricing Regime, 1986—89

"In this study, the impact of exchange rate depreciation witnessed in Nigeria between 1986 and 1989 on the structure of sectoral prices under alternative pricing regimes was investigated. To this end, a model useful in simulating these impacts was developed, analysed and empirically applied. The model was simulated under three different mark-up pricing regimes: a fixed mark-up pricing regime; a flexible pricing with rational expectation; and a mixed mark-up pricing regime. Exchange rate reform is the centre-piece of Nigeria's Structural Adjustment Programme (SAP). It is expected to 'work' by altering the structure of relative prices, thereby eliciting the necessary responses from maximizing producers and consumers to shift resources so as to minimize dependence on imports, diversify the export base away from oil and put the economy back on the path of sustainable non-inflationary growth. The efficacy of exchange rate depreciation since the 1986 SAP, in terms of altering the structure of relative prices, is therefore of paramount importance to the overall success of the programme. The effectiveness of exchange rate depreciation in altering the structure of relative prices varies with the prevailing pricing regime. This is so especially in an economy like Nigeria's, where production in all sectors depends directly or indirectly on imported inputs. Moreover, the prevailing pricing policy can be quite sensitive to public policy."