Interpretation of the VECM Results and Discussion

i) Interpretation of Short-run Dynamics and Discussion

The short-run coefficients of the VECM have expected signs for all the variables.

(Table 13). As equation (2) is specified in log form, therefore the coefficients are elasticities.

The log of nominal exchange rate has the expected sign (+) and is significant. It can be projected that a 1% depreciation in nominal exchange rate (or 1% increase in the value of the USD) will increase export earnings by 2.30% in the short-run. Although quite elastic, this finding is in line with Diakosavvas et al. (1990). Allaro (2011) also found positive and significant short-run effect of nominal exchange rate on oilseed exports in Ethiopia. Similarly, log of producer average price has expected sign (+) and is statistically significant. For producer price, a 1% increase in farm gate price will increase export

earnings by 0.58% in the short-run. Allaro (2011) found also a significant short-run effect of producer price but negative on oilseed exports in Ethiopia. At the same time, the production of sesame seed is positively associated with export performance. A 1% in the production of sesame seed increases export earnings by 0.1%; however, the effect is statistically insignificant.

The log of export price (foreign price) of sesame has expected sign (+), statistically significant and quite elastic. Based on the findings, a 1% increase in world price of sesame seed increases export earnings of BFA by 1.30% in the short-run. This result is in line with Boansi et al. (2014) which found that, in short-run; world price causes cotton exports performance in Mali. This result also reinforces supply theory of which a higher price causes higher supply, and therefore will cause higher gain ceterus paribus. According to the principles of trade theory, an inverse association is usually expected between prices and world exports volume (proxy of world demand for commodity under study). Thereby, whenever prices in the international market increase, international consumers are expected to demand less, while exporting countries on the other hand are expected to export more. Having stated all factors constant, an elastic, positive and significant effect of world demand of sesame seed on the performance of sesame exports is observed in this study. This is an indicator of the country short-run competiveness in sesame exports. A 1% increase in world demand of sesame seed will increase export earnings of BFA by 2.11% in the short-run. Once again, this confirms the undying world demand of sesame seed and relatively higher demand for exports from BFA; and the finding is in line with Boansi et al. (2014) and Anwar et al. (2010) which found positive and significant effect of world demand (of the product under study) on exports performance, respectively in Mali and in Pakistan. The outcome also reinforces the international trade theory for which, and without any inefficiency in the supply side, an increasing international demand or

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trade volume for a specific product presents an opportunity to increase export earnings for the exporting countries. In other words, the positive effect of world demand on export earnings reflects a good standing of the commodity involved in the international market as pointed out by Kumar et al. (2008). However, BFA should work efficiently and effectively in developing the sesame sector while addressing principally the existing inefficiencies both in the production (mostly related to yield) and in export side (norms and quality) in order to keep its competiveness, attracting higher prices and expand more its tentacles in the world sesame markets. Ultimately, the performance of sesame seed in BFA is affected in the short-run by external factors i.e. world demand, international price and the exchange rate, and by internal factors i.e. the production and producers average price.

The structural changes are captured by the dummy variables, which are treated as exogenous variables in the VECM. The results indicate that none of them is statistically significant. The most important change occurred in BFA over the period is the devaluation, which happened in 1994. This structural change is represented by the dummy variable “d1” is negative and statically insignificant. The others break point time (2007 and 2008) observed world export price and world demand of sesame seed could be attributed to the financial crisis of 2008, which affected international demand and prices.

Based on the adjusted R-squared figure, about 50.78% of the variation in export earnings is explained by the dynamic of the included explanatory variables. In addition, the P-value of the Fisher statistic (0.000) is less than 1%, which indicates that all short-run coefficients jointly are statistically significant at 1% critical level and best explain export earnings. Moreover, the Error Correction Term (ECT) of the VECM is negative and significant, confirming the existence of long-run equilibrium relationship and causality between the system’s variables. The ECT induces positive change in the export earnings

back toward the equilibrium, and will act to correct any shocks from the long-run by 36.86% within a year or last-period's deviation from the long-run equilibrium is fully adjusted in 33 months.

ii) Interpretation of Long-run Results and Discussion

The long-run coefficients of the VECM have expected signs for the most part with the exception of the world price variable (Table 14).

The log of nominal exchange rate has expected sign (+) in the long-run and is significant. A 1% depreciation in nominal exchange rate (or 1% increase in the value of the USD) will increase the export earnings by 1.13%. In terms of magnitude, the long-run effect of nominal exchange rate on sesame export earnings is less elastic than in the short-run (2.30%). This finding supports the economic theory of which a country’s currency depreciation/devaluation can have beneficial long-run effects on its exports, however can have less impact compared at the early stage of the devaluation. Allaro (2011) found also positive and significant effect of nominal exchange rate on oilseed exports performance in Ethiopia. Likewise, the short-run effect was greater compared to the long-run.

In the long-run, the log of production is positively significant. A 1% increase in the production of sesame seed leads to an increase in BFA’s performance for sesame seed exports by 1.43%. This finding is in line with Ball et al. (1966) and Bertil (1968) who reported that production is a key supply side determinant of exports, thus increased production stimulates exports expansion and performance. Given the openness of BFA’s economy, and where sesame is principally for exports, increased production facilitates effective meeting of international demand. However, to increase sesame seed production in BFA pertain principally to increase yield per hectare in order to enhance export

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performance. As mentioned in chapter 2, yield per hectare is low in BFA. The average yield per hectare in BFA nears 600kg, while this average reaches 800kg in Nigeria, Ethiopia and 900kg in Tanzania between 2008 and 2017. Strengthening the productive capacities through a strong improvement in yields per hectare is essential for the sesame sector to maintain its competitiveness, and to provide consequent income to farmers in the long-run.

The effect of producer price on export earnings, in the long-run, has expected sign (+) and is statistically insignificant. In the long-run, a 1% percent increase in producer price increases export earnings of sesame by 0.20%. In BFA and on individual level, sesame seed is channeled from producers, collectors, traders before it reaches the importers. Therefore, because of that, prices are rigid and it takes time for farm’s prices to respond to the trend of international prices. This result is in line with Okoruwa et al.

(2003) who reported that an increase in producer’s price of rubber will lead to an increase in export of rubber in Nigeria. For the case of BFA, strengthening producers’ associations in general with training on price negotiation, providing relevant and timely information on foreign prices could be beneficial in increasing the effects of domestic price on producer’s revenue. This also will incentivized producers to increase production, thereby boost exports volume and competitiveness.

Unlike to the short-run, world export price of sesame seed has a negative unexpected sign and is significant. In the long-run, a 1% increase in world export price decreases export earnings by 1.14%. Exporters are motivated to export more and to expect higher gain when there is positive response in price increments. However, in equilibrium they are hindered in doing so by the downward pressure on world prices, which makes sesame seed in the international market and other sources cheaper than the one offered by BFA.

In the long-run, as longer as others important exporting countries may induce downward

pressure on prices in the world market along with distortionary measures to protect their domestic industries, these implications largely affect lower market shareholders like BFA.

Moreover, a positive association is observed between increasing international trade of sesame seed or world demand and performance of BFA in sesame exports in the long-run. A 1% increase in world demand of sesame seed induces an increase in export earnings by 0.05%; however, this effect is small and statistically insignificant. For the case of BFA, it implies that the exports dimension of BFA’s sesame sector could be in a disadvantageous standing in the long-run since the effect is small and insignificant. It clearly indicates the decrease in competiveness that the sesame sector will face in the long-run if the existing short-run inefficiencies (in the production and export supply side) are not properly addressed. For instance, inefficiencies related to the supply side and both producers and exporter’s lack of knowledge or expertise on market requirements and quality standards, lack of traceability that does not meet international standards may hinder the responsiveness of the domestic supply to meet world demand in the long-run.

These inefficiencies could lower export earnings of the sector in the long-run. Therefore, it is already opportune to critically identify all relevant inefficiencies in both the production and exports side while addressing them effectively. Ultimately, this will help anticipatively to place the sector in a competitive position to exploit sesame trade opportunities in the long-run. Ultimately, nominal exchange rate, production, producer price and international trade of sesame seed affect positively the performance of sesame exports in the long-run, while world price affects negatively that performance.