The Impact of Exchange Rate Fluctuation on Nigeria’s Economic Growth

The Impact of Exchange Rate Fluctuation on Nigeria’s Economic Growth

ABSTRACT

This research work is centred on the impact of exchange rate fluctuation on Nigeria’s economic growth, emphasizing the purchasing power of average Nigeria and the level of international trade transactions. Without an exchange rate, trading partners’ exchange of goods and services will face many problems, which may virtually narrow it down to trade by barter. This exchange is also used to determine the country’s output growth level. Hence, the rate at which exchange fluctuates calls for much attention. However, with existing exchange rate policies, a constant exchange rate has not been attained. The rate by which the exchange rate fluctuates brings about uncertainty in the trade transaction, and also, the rate of the naira has been unleashed and continues to depreciate. This has resulted in declines in the standard of living of the population increase in costs of production (this is because most of the raw materials needed by industries are usually imported), which resulted in cost-push inflation. We used many tests, like the t-statistics table, f-statistic table, chi-square, etc. When we found out real exchange rate has a positive effect on the GDP.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

the exchange rate is perhaps one of Nigeria’s most widely discussed topics today. This is not surprising given its macro-economic importance, especially in a highly import-dependent economy like Nigeria (Olisadebe, 1995:20). Macroeconomic policy formulation is a process by which the agencies responsible for economic policies manipulate a set of instrumental variables to achieve some desired objectives.

In Nigeria, these objectives include achievements of domestic price stability, the balance of payment equilibrium, efficiency, equitable distribution of income, and economic growth and development. Economic growth refers to the continuous increase in a country’s national income or the total volume of goods and services. A good indicator of economic growth is the increase in Gross National Product (GNP) over a long time. Economic development on the overhead implies both structural and functional transformation of all the economic indexes from a low to a high state (Siyan, 2000:150). One of the macroeconomic variables of importance is the exchange rate policy country.

The exchange rate policy involves choosing where foreign transactions will occur (Obadan, 1996). Therefore, exchange rate policy is a component of macroeconomic management policies the monetary authorities in any given economy uses to achieve internal balance in the medium run. Specifically, internal balance means the level of economic activity consistent with the satisfactory control of inflation. On the contrary, external or sustainable current account deficit is financed on a lasting basis of expected capital inflow.

It is essential to know that economic objectives are usually the primary consideration in determining exchange control. For instance, from 1982 – to 1983, the Nigerian currency was pegged to the British pound sterling on a 1.1 ratio. Before then, the Nigerian naira had been devalued by 10%. Apart from the policy measures discussed above, the Central Bank of Nigeria (CBN) applied the basket of currencies approach from 1979 as the guide in determining the exchange rate was determined by the relative strength of the currencies of the country’s trading partner and the volume of trade with such countries. Specifically, weights were attached to these countries with the American dollar and British pound sterling on the exchange rate mechanism (CBN, 1994). One of the various macroeconomic policies adopted under the structural adjustment program (SPA) in July 1986 was establishing a realistic and sustainable exchange rate for the naira; this policy was recommended in 1986 by the International Monetary Fund (IMF). An exchange mechanism was adopted in 1986.

The critical element of the structural adjustment programme (SAP) was the free market determination of the naira exchange rate through an auction system.

This was the beginning of the unstable exchange rate; the government had to establish the foreign exchange market (FEM) to stabilize the exchange rate depending on the state of balance of payments, inflation rate, Domestic liquidity, and employment. Between 1986 and 2003, the federal government experimented with different exchange rate policies without allowing them to make a remarkable impact on the economy before it was changed. This inconsistency in policies and lack of continuity in exchange rate policies aggregated the unstable nature of the naira rate. (Gbosi, 1994:70).

1.2 STATEMENT OF THE PROBLEM

The naira exchange rate was relatively stable between 1973 and 1979 during the oil boomer (regulatory requirements). This was the situation before 1990 when agricultural products accounted for more than 70% of the nation’s gross domestic products (GDP) (Ewa, 2011:78).

However, as a result of the development in the petroleum oil sector, in the 1970s, the share of agriculture in total exports declined significantly while that of oil increased. However, from 1981 the world oil market started to deteriorate, and an economic crisis emerged in Nigeria because of the country’s dependence on oil sales for her export earnings. To underline the importance of oil export to the Nigerian economy, the gross national product (GNP) fell from $76 billion in 1980 to $40 billion in 1996. Several economic growths became negative due to the adoption of the structural adjustment programme (SAP).

This major problem that this study is designed to solve is whether the exchange rate has any bearing on Nigerians’ economic growth and development. While some Economist disputes the ability of change in the real exchange rate to improve the trade balance of developing countries (Hinkle, 1999:21) because of the elasticity of their low export, others believe that structural policies could, however, change the long-term trends in terms of trade and the prospects for export-led growth. Instabilities of the foreign exchange rate are also a problem for the economy.

1.3 OBJECTIVE OF THE STUDY

the objective of the study is to show the impact of the exchange rate on gross domestic product and hence how this affects the growth and development of the Nigerian economy. Identifying the impacts of the unstable exchange rate of the naira on these significant macro-economic variables would depend on the conditions prevailing in the economy at a given time.

The main objectives of the exchange rate policy in Nigeria are:

(1) To present the value of the domestic currency.

(2) To maintain favourable external reserve position.

(3) To ensure price stability and price stability and price levels consistent with those of our trading partners.

(4) To have a real exchange rate that will remove the existing distortions and distortions and disequilibrium in the economy’s external sector.

(5) To have a stable and realistic exchange rate that aligns with other macroeconomic fundamentals.

1.4 FORMULATION OF THE RESEARCH HYPOTHESIS

Based on the objectives of the study, the following hypothesis was formulated.

Ho: Exchange rate fluctuation has no significant impact on Nigeria’s economic growth and development.

Hi: Exchange rate fluctuation significantly impacts Nigerians’ economic growth and development.

1.5 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 advanced one. This is so because if the unstable exchange rate of the naira is proven to affect the macroeconomy significant 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 gauges for measuring the growth and development of any economy. Significantly, this study would help the government and the central bank of Nigeria (CBN) identify the strength and weaknesses of each foreign exchange system and adopt the policy that best suits the economy. This will enhance the growth and development of the economy; the study will also serve as a guide to future researchers on this subject.

1.6 LIMITATIONS OF THE STUDY

The study is structured to evaluate the Nigeria exchange rate as the pilot of economic growth and development. Therefore, the study is limited to the core economic growth in Nigeria and not the socio-political factors of the foreign exchange rate.

1.7 THE SCOPE OF THE STUDY

This research work is designed to cover the period 1980-2009, a period of thirty years. The scope consists of the period of the regulatory and deregulatory exchange rate, i.e., the fixed exchange rate and the floating exchange rate. The study is based on the core macro-economic performance of Nigeria between 1980-2010. It rests can core economic growth and development in Nigeria for thirty-one years.

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