IMPACT OF EXCHANGE RATE FLUCTUATION ON ECONOMIC GROWTH IN NIGERIA (2000-2015)

IMPACT OF EXCHANGE RATE FLUCTUATION ON ECONOMIC GROWTH IN NIGERIA (2000-2015)

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Abstract:

This research work is centered on the impact of exchange rate fluctuation on the Nigeria’s economic growth from 1986 to 2015. The main type of data used in this study is secondary; sourced from Central Bank of Nigeria Statistical Bulletin of various issues. From 1986 being the year the Nigerian monetary authority changed from fixed exchange rate system to flexible exchange rate system. The correlation and regression analysis of the ordinary least square (OLS) were used to analyze the data. The result revealed that exchange rate has positive impact but not significant with (co-efficient =0.01275, t = 1.35) this is affirms previous studies that developing countries are relatively better off in the choice of flexible exchange rate regimes. The result also indicated that interest rate has positive impact but not significant with (co-efficient =0.1353, t = 0.26) while rate of inflation have negative impact on economic growth but not significant with (co-efficient = -0.1363, t = -0.69). Therefore, the paper recommended that government should encourage the export promotion strategies in order to maintain a surplus balance of trade and also conducive environment, adequate security, effective fiscal and monetary policies, as well as infrastructural facilities should be provided so that foreign investors will be attracted to invest in Nigeria

Keywords: Nigeria’s economic growth, exchange rate, interest rate, inflation rate

Chapter One

INTRODUCTION

In Nigeria, exchange rate has changed within the time frame from regulated to deregulated regimes. 2016, Nigeria witness another period in exchange rate after a long wait, the Monetary Policy Committee of the Central Bank of Nigeria has bowed to pressure, thus, directing its management to switch to a flexible exchange rate policy, Aflexible exchange-rate system is a monetary system that allows the exchange rate to be determined by supply and demand. Every currency area must decide what type of exchange rate arrangement to maintain. Between permanently fixed and completely flexible however, are heterogeneous approaches. It was revealed that the CBN, as part of the new policy, will allow market forces determine the exchange rate of the naira and other currencies but may retain a small intervention window to allow it moderate in some instances considered “critical” to the nation’s economic growth and will apply foreign exchange at an adjustable rate between N230 and N250 depending on the rate at the parallel market (CBN Bulletin June, 2016). The naira was officially devalued in June 2016, but an economist, the Chief Executive Officer, Cowry Asset Management Limited, Johnson Chukwu, said a dual exchange-rate policy could be prone to abuse, saying the country had practiced such in the past without much success (CBN Bulletin June, 2016). He believes that a largely market-determined single exchange rate system is the best for the country. The Dual exchange-rate system is a way forward but it is not the end, it was practiced before but we had to abandon it.

Exchange rate regime and interest rate remain important issues of discourse in the International finance as well as in developing nations, with more economies embracing trade liberalization as a requisite for economic growth (Obansa, Okoroafor, Aluko & Millicent, 2013). Exchange rate is the price of one country’s currency expressed in terms of some other currency. It determines the relative prices of domestic and foreign goods, as well as the strength of external sector participation in the international trade. The exchange rate of an economy has a crucial role to play as it directly affect all the macroeconomic variables such as: domestic price indicator, profitability of traded goods and services, allocation of resources and investment decisions, which explains why the monetary authorities and private sectors seek stability in these variables (Ajakaiye, 2001). As a matter of fact, exchange rate fluctuations are now the bedrock for all economic activities globally, portraying exchange rate management as a major determinant of many countries economic policies (Todaro, 2004). Exchange rate is an essential macroeconomic variable for formulating economic policies in general and of economic reform programmes in particular in which these policies help accelerate the achievement of set macroeconomic goals. In Nigeria, these objectives include achieving and upholding price stability, balance of payment equilibrium, full employment, even distribution of income, economic growth and development. Economic growth connotes a sustained increase in a country’s national income (Jhingan, 1997). When the GNP rises eventually, it depicts a growth in the economy. Conversely, economic development refers to the structural and purposeful conversion of all the economic indicators from a low to a high level (Siyan, 2000). Exchange rate being the core of this current study may be described as the price of one currency in terms of another currency as buttressed by Fagbemi (2006), this rate is an exceptional price which governments is interested in. Ewa, (2011) agreed that the exchange rate of the naira was relatively stable between 1973 and 1979 during the oil boom era and when agricultural products accounted for more than 70% of the nation’s gross domestic products (GDP). In 1986 when Federal government adopted Structural Adjustment Policy (SAP) the country moved from a peg regime to a flexible exchange rate regime where exchange rate is left completely to be determined by market forces but rather the prevailing system is the managed float whereby monetary authorities intervene periodically in the foreign exchange market in order to attain some strategic objectives (Mordi, 2006). This inconsistency in policies and lack of continuity in exchange rate policies aggregated unstable nature of the naira rate (Gbosi, 2005). Recently, there is much debate regarding the policies needed to sustain rapid growth and promote productivity in the industrial sector in Nigeria. Questions about external competitiveness, exchange rate fluctuations, and the appropriate exchange rate policy have featured prominently in this debate.

Exchange rate fluctuations can have significant effects, for at least two reasons; first, even short-term real exchange rate volatility can impose large welfare costs (Jongbo, 2014). Especially in a bbconstraints, such volatility reduces the level of international trade, affects investment decision, and hinders growth possibilities. Second, such welfare costs are magnified in the case of prolonged and sustained exchange rate fluctuation, which can badly distort resource allocation. It is therefore critical both to understand the main determinants of the real exchange rate and to distinguish between short and long term real exchange rate movements in Nigeria. Macroeconomic policies can then be used to smooth “excessive” short-term changes and to bcorrect any emerging misalignment (Jongbo, 2014). Benson and Victor, (2012) and Aliyu, (2011) noted that despite various efforts by the government to maintain a stable exchange rate, the naira has depreciated throughout the 80’s to date. In a view of this background, this research study proposes to examine the impact of exchange rate on economic growth in Nigeria over a period of 30 years (1986 – 2015).

Objectives of the Study

The main objective of the study is to show the impact of exchange rate on gross domestic product and hence how these impacts influence the economic growth of Nigerian. Economy identifying the impacts of the unstable exchange rate of the naira on these major macro-economic variables would however, depend on the conditions prevailing in the economy at a given time.

The specific objectives are as follows:

1. To determine the impact exchange rate on economic growth in Nigeria.

2. To evaluate the impact of interest rate on economic growth in Nigeria.

3. To examine the impact of inflation rate on economic growth in Nigeria.

Research questions

The researcher’s aim in current study is to find the answer to the following three questions:

1. Does fluctuation exchange rate in Nigeria has any significant impact on economic growth?

2. Is there any significant impact relationship between interest rate and Nigeria’s economic growth?

3. Does inflation rate has any significant impact on Nigeria’s economic growth?

Hypotheses

Based on the objectives of the study, the following hypotheses were formulated.

H1: Exchange rate of Nigeria has significant impact on Nigeria’s economic growth (GDP).

H2: Interest rate has significant impact on Nigeria’s economic growth (GDP).

H3: Inflation rate has significant impact on Nigeria’s economic growth (GDP).

Scope of the Study

This study on the impact of exchange rate on economic growth in Nigeria over a period of 30 years, the main type of data used in this study is secondary; sourced from Central Bank of Nigeria Statistical Bulletin of various issues. From 1986 being the year the monetary authority change from fixed exchange rate system to flexible exchange rate system. The models used in this study are estimated using annual Nigeria data on some macro-economic indicators, which includes: Gross Domestic Products (GDP); Exchange Rate (ENRT); Interest Rate (INRT) and Inflation Rate (INFRT) for the period 1986 – 2015.

Significance of the Study

The significance of this research work lies in the fact that if the cause of the unstable exchange rate of the naira is identified and corrected, the economy will rapidly grow and develop into an advance one. This is so because if the unstable exchange rate of naira is proved to be affecting the macro-economy major variables badly, including Real exchange rate, Real interest rate, inflation rate, gross domestic product and trade openness of the country, attempts should be made to stabilize the exchange rate. This is because these variables are estimate for the measurement of growth of any economy. Importantly, this study would help the government and the Central Bank of Nigeria (CBN) to identify the strength and weakness of each foreign exchange system and hence adopt the policy that suits the economy best. This will definitely enhance growth of the economy; the study will also serve as a guide to future researchers on this subject. Next, section 2 is on literature review, section 3 describes research methodology, section 4 discusses the results, and finally Section 5 concludes the paper.


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