The research examines the impact of exchange rate fluctuation on economic growth in Nigeria. The main objective of this research is to investigate the impact of exchange rate volatility on economic growth in Nigeria. This research work made use of secondary data which were collected from the central bank Nigeria Statistical Bulletin (2018). The data were collected for a period of thirty four years (i.e. 1985-2018).
The study employed secondary method. The Study establishes the order of integration of individual time series through the unit root test and also subjected all the variable to stationary test, however, haven test the stationarity for each time series, test for co-integration was conducted between the variables and thereafter an error correction mechanism or model (ECM) was conducted on the model.
The result of the Error Correction Mechanism reveals that: exchange rate has no statistical relationship with growth rate of gross domestic product. Exchange rate, interest rate and inflation rate were able to explain 5.81% of the total variation in growth rate of gross domestic product.
This research work concluded that the impact of exchange rate fluctuation on economic growth in Nigeria. The research further recommends that: Foreign exchange policy should be seen as an important policy instrument by the government. Government should make sure exchange rate of the Nigerian Naira is comparatively stable throughout the oil boom era and agricultural should be pushed to produce seventy percent of the nation’s gross domestic product (GDP). Government should support the CBN in avoiding to have different exchange rate. Government should always try to know the causes of fluctuation since its going to affect interest rate and economic growth. Government should rectify all that can affect price level and economic growth.
1.1 BACKGROUND TO THE STUDY
The theory of exchange rates has been the focus of academic research since the seventies of the 19th century. Indeed, many studies have been carried out with the aim, on the one hand, of determining the main powers of control in the foreign exchange markets, which explains the sharp fluctuations in exchange rate regimes.St anlake (2000) asserts that rate of exchange is the rate at which a country’s currency is changed for the currencies of different countries.
The exchange rate can also be used as an instrument of monetary policy. Frequency changes in the currency’s exchange rate would adversely affect investment because of the associated uncertainty. Osiegbu and Onuorah (2012) posit that rate of exchange plays a key role in international economic transactions as a result no nation will stay in isolation. The outcome of exchange rate fluctuation on economic process varies in several countries. In Nigeria, exchange rates and its constant movement is of importance to the public as a result of the processes and direction of its fluctuation and its effect on the economy to attain optimal productive capacity.
Exchange rate regime remains a topical issue in International finance and also in developing nations, with a lot of economic challenge with trade liberalisation as a requisite for economic growth (Obansa, Okoroafor, Aluko and Millicent, 2013). Movements in the exchange rate have ripple effects on other economic variables such as interest rate, inflation rate, import, export, output, etc.
These facts underscore the importance of rate of exchange to the economic well-being of each country that opens its doors to international change merchandise and services.
The importance of rate of exchange derives from the actual fact that it connects the value systems of two independent countries by gearing to achieve international trade to establish direct comparison of traded goods. In a nutshell, it links domestic prices with international prices.
Through its effects on the amount of imports and exports is very enormous. Exchange rate exerts a powerful influence on a country’s balance of payments position.
The Naira rate of exchange has witnessed some level of relative stability since the implementation of the Structural Adjustment Programme (SAP) in 1986, its continued depreciation, however, mars the economic performance of the country.
The challenge of the joint result of a rise in crude price and rate of exchange instabilities on political economy stability and economic process for oil manufacturing nations like Nigeria is basically huge. According to Usman and Adeare (2012), huge inflow of oil revenues in Nigeria are more often associated with expansion in the level of Government spending while periods of dwindling oil revenues are usually accompanied by budget deficits.
1.2 STATEMENT OF THE PROBLEM
According to Ozturk (2006), exchange rate volatility is defined as the risk associated with unexpected movements in the exchange rate. Economic fundamentals such as the inflation rate, interest rate, money supply, and the balance of payments, which have become more volatile in the 1980s and early 1990s, by themselves, are sources of exchange rate volatility.
More recently, increase cross-border flows that have been facilitated by the trend towards liberalization of the capital account, the advancement in technology, and currency speculation have also caused the exchange rate to fluctuate (Hook and Boon, 2000).
In any country, foreign exchange policy is an important policy instrument. Up to the time of SAP, it appeared that Nigerian’s exchange rate policy tended to encourage over-valuation of the Naira, because in 1981, it was 0.90cents to N1.00. This, in turn, encouraged imports, and discourages non-oil export and over dependence on imported inputs. Nigeria’s exchange rate has been more volatile in the post-SAP period due to its excessive exposure to external shocks.
In Nigeria, rate of exchange has modified at intervals overtime from regulated to deregulated regimes. Ewa, (2011) explained that the exchange rate of the Nigerian Naira was comparatively stable between 1973 and 1979 throughout the oil boom era, while prior to oil, agricultural produce accounted for seventy percent of the nation’s gross domestic product (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 economic processes, however rather the prevailing system is to manage float whereby financial authorities intervene sporadically within the interchange market so as to realize some strategic objectives (Mordi, 2006).This inconsistency in policies and lack of continuity in rate of exchange policies brought about the unstable nature of the Nigeria exchange rate (Gbosi, 2005).
The result of the recent world economic meltdown on Nigerian rate of exchange was because the Nigerian Naira vis-à-vis the dollar rose astronomically from concerning N120/$ to quite N180/$ (about 50% increase) between 2008 and 2009. This is owing to the sharp decline in foreign earnings of the government as a result of the persistent fall of crude oil price, which plunged from an all-time high of US$147 per barrel in July 2007 to a low of US$45 per barrel in December 2008 (CBN, 2017). Although various factors have been adduced to the poor economic performance of Nigeria, it is necessary to examine the growth process of Nigeria under the various exchange regimes that had been adopted in the country, the effect of inflation and interest rate and impact of trade. Nigeria’s over dependent on importation and less emphasis in manufacturing local goods and services depreciated the value of the naira. Benson and Victor, (2012) and Aliyu, (2011) noted that despite various efforts by the government to achieve a stable rate of exchange, the Nigerian Naira has depreciated throughout the 80’s so far.
1.3 RESEARCH QUESTIONS
- Does the fluctuation in the Exchange rate affect economic growth?
- What are the causes of fluctuation in interest rate and how does it affect economic growth?
- What are the impact of fluctuation in price level on economic growth?
1.4. OBJECTIVE OF THE STUDY
The broad objective of the study is to examine the effect of exchange rate fluctuations on economic growth in Nigeria. While the specific objective is;
- To examine the impact of exchange rate on economic growth
- To examine the impact of interest rate on economic growth
- To examine the impact of inflation rate on economic growth
1.5 STATEMENT OF HYPOTHESIS
- H0: Exchange rate fluctuation has no significance impact on economic growth in Nigeria
H1: Exchange rate fluctuation has significance impact on economic growth in Nigeria
- H0: Interest rate has no significance impact on economic growth in Nigeria
H1: Interest rate has significance impact on economic growth in Nigeria
- H0: Inflation rate has no significance impact on economic growth in Nigeria
H1: Inflation rate has significance impact on economic growth in Nigeria
1.6 SIGNIFICANCE OF THE STUDY
This study is essentially to help clarify how the insecurity in the conversion standard of an economy's cash can either influence the monetary development of that economy or not. In Nigeria, the exchange rate policy has undergone transformation from the immediate post-independence period, and the period when the country maintained a fixed parity with the British pound, through the oil boom of the Seventies, to the floating of the currency in 1986, following the close to collapse of the economy between 1982 and 1985.
In every of these periods, the exchange economic and political concerns underpinning the rate policy had necessary repercussions for the structural evolution of the economy, inflation, the balance of payments and real income.
There could not be a better time to research into this line of interest as there has never been a time in the history of Nigeria that Naira fell to the tone of N358 to 1 dollar in the official market. Hence, the focus of this research is to examine the effect of exchange rate fluctuation on economic growth in Nigeria.
1.7 RESEARCH METHODOLOGY
The study willl establish the order of integration of individual time series through the unit root test and later subject the variables to stationary test. However, haven test the stationarity for each time series, test for co-integration will be conducted between the variables and thereafter an error correction mechanism or model (ECM) would be conducted on the model.
The analysis that will be made in this study shall be based on time series data. The data for this study would be obtained mainly from secondary sources; particularly from central bank of Nigeria (CBN) publications such as the central bank of Nigeria Statistical Bulletin, central bank of Nigeria Annual Reports and Statements of Accounts, central bank of Nigeria Economic and Financial Review Bullion and National Bureau of Statistics publications.
The model shall seek to investigate the effect of Exchange rate, Interest rate and Inflation rate on Gross domestic product growth rate. This is a follow up on the objectives of the study stated earlier.
1.8 SCOPE OF THE STUDY
The economy is a large component with lot of diverse and sometimes complex parts; this research work will only look at a particular part of the economy; Exchange Rate. The empirical analysis and estimation will cover the period between 1985 and 2018.
1.9 LIMITATIONS OF THE STUDY
Sourcing for external data and historical data for proper comparism between period of stability and fluctuations in exchange rate may pose limitations to this research. The time allotted for the completion of this research is not adequate based on recent and contemporary happening with respect to the impact of exchange rate fluctuation and economic growth in Nigeria.
1.10 JUSTIFICATION OF THE STUDY
The justification of this study is based on the score that among the research works conducted on the effect of exchange rate fluctuation on economic of Nigeria (Felix 2015, Akinmulegun et al, 2018) and others examined, the impact of volatility of the Naira on economic growth. This work will give an in-depth knowledge on the workings in the exchange rate market and its transmission mechanism into other sectors of the economy especially its impact on growth.
This research will assist the government in designing an exchange rate policy framework that will ensure the reduction in uncertainties in the exchange rate market to enhance the flow of trade and investment most especially capital inflow to facilitate economic growth and increase the welfare of the people. Also, investors and other stakeholders in the economy such as industries that rely mostly on imported inputs will benefit from the information that will be revealed in this work so as to adopt the necessary measures and techniques to ensure stable profit margins which may be affected without proper understanding on the exchange rate market (hedging will help). Equally this work could set off the mark for further research into the effect of exchange rate volatility on other macroeconomic variables or on this same variable to bring to light other factors that may be in play.
The study will help exporting companies to have a clear understanding of how variations in the aforesaid determinants of exchange rates affect their financial performance. The study will make multiple contributions to the literature on export earnings through investigation of factors affecting exchange rates. Students interested in finance as a subject will find it useful and build on the existing body of knowledge. Finally, the study will be useful to the government as a regulator in its quest to enhancing a stable exchange rate to impact on the exporting sector bearing in mind that the economy as whole will benefit greatly on how the exporting sector performs
1.10 ORGANIZATION OF THE STUDY
This study shall be divided into five chapters. The first chapter will provide the background of the subject matter justifying the need for the study. Chapter two will present related literature concerning exchange rate and economic growth in Nigeria. Theoretical framework and research methodology, which includes the theoretical framework, sources of data, model formulation, estimation techniques etc. will be stated in chapter three while data presentation, analysis and interpretation of regression result would be made in chapter four. Concluding comments in chapter five reflects on the summary, conclusion, recommendations and suggestion for further studies based on the findings of the study.
1.11 DEFINITION OF TERMS
Exchange rate: is the value of one currency for the conversion to another foreign used to send money on international transfers. It is the rate at which one country's currency may be converted into another.
Economic growth: is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. It can be measured
Economic development is a broader concept than economic growth. Development reflects social and economic progress and requires economic growth. Growth is a vital and necessary condition for development, but it is not a sufficient condition as it cannot guarantee development.