THE IMPACT OF EXCHANGE RATE FLUCTUATIONS ON ECONOMIC GROWTH IN NIGERIA

ABSTRACT

This study evaluates the relationship between exchange rate fluctuations and its impact on the Nigerian economic growth. This study made use of secondary annual data from the Central Bank of Nigeria (CBN)’s statistical bulletin & publications from the National Bureau of statistics (NBS). This study adopted the classical least regression model and ordinary least square method (OLS) to analyze the data. This study has been able to demonstrate that exchange rate fluctuations is pivotal to the economic growth of Nigeria, other economic variables used in this study ((EXR) exchange rate, (INT) interest rate, (INF) inflation rate and (TB) trade) may result in a direct impact on the Nigerian economic growth. The study concludes that Since exchange rate fluctuation has a direct impact on the economy. There is need to develop an effective exchange rate regime. An efficient exchange rate would help to curtail inflation, improve Nigeria’s balance of trade, and boost Nigeria’s production capacity which are key indicators of positive economic growth.

CHAPTER ONE

INTRODUCTION 

1.0 BACKGROUND OF THE STUDY

Nigeria aims to become one of the leading developed economies in the world by the year 2050 (Obi et al, 2016). A crucial strategy towardsobtaining this aspirationis the development of a well-structured exchange rate policy.

Exchange rate refers to the amount units of aeconomy’s currency (the home country) when it comes to another economy’s currency. It is the recommended number of denominations of a currency that can purchase one or more units of another country’s currency. Hence, exchange rate is bestexplained as the value of one currency in respect of another (Mordi 2006).

Ngerebo–a and Ibe (2013) define exchange rate as the portion of a unit of one medium of exchange to the unit of another medium of exchange at a specific time. It decides the general cost of homegrown and externalmerchandise, including the quality of foreign sector involvement in global trade.

Hossain (2002) states that the exchange rate assist to link the value structure of two dissimilarnations by providing a global platform for trade, which directly influences the magnitude of imports and exports, and a nation’s balance of payment positions.

Exchange rate can therefore be considered as the global price meter for the competitiveness of a country’spublic enterprise.Animportant aim of public sector policy is the rapid growth of the economy, and a key statistic of economic growth is a rise in the quantity of merchandizes and services manufactured in the country. Therefore, growth is taking placewhen a nation’s abilityto produce is on the rise (Akpan, 2008).The manufacturing of commodities and services refers to the volume of both domesticand exported goods of a country, on the one hand, in comparison to the volume of merchandise and services being brought into the country.

The volume of transactions carried out as result of these two forms of products involves transactions in foreign exchange, and hence the need for an effective exchange rate policy by the country.

Historical Analysis.

Development of exchange rate policy in Nigeria.

An exchange rate policy is designed to determine a stable andappropriate value of

exchange between the home country’s medium of exchange and the

overseasmedium of exchange involved in trade negotiations. In Nigeria, efforts have been made over the years to achieve this objective, through various techniques and options.

Figure1: patterns of Exchange rate showing the different Exchange rate regimes

Source: CBN Statistical Bulletin (2015)

Column A represents the fixed exchange rate period in Nigeria (1962 -1986). During this period the financial destination have been a significantthought in determining the conversion scale. Between 1962 and 1973, the Nigerian money was stuck to the pound Sterling on a proportion of 1:1 butwas afterwardsdepreciated by tenpercent until the early 1980s.

The system was changed in September 1986 to an adaptable conversion scale component showed in column B where the market powers generally control the pace of trade which is presented with the coasting of the Naira in the second – level unfamiliar trade market (SFEM).

Leading up to the disappointments of the variations of the adaptable exchange rate scale – AFEM presented in 1995 and IFEM presented in 1999, to guarantee conversion standard soundness – the Dutch Auction System (DAS) was once again introduced in 2002 with the primary objectives to decreasealigned market premium, preserve diminishing external reservoir, and obtain a practical exchange rate for the Naira.

The Dutch Auction System achieved these objectives. The Central Bank introduced the Wholesale Dutch Auction System (WDAS) in 2006, to merge the profit of the Dutch

Auction System and further stimulate a liberalized exchange market. Under the Wholesale Dutch Auction System (WDAS), The approved sellers were allowed tobargain in unfamiliar trade on their own records available to be purchased to clients.

These conversion scalesystems have had implications on economic performance.

The trend analysis above (fig.1) shows that with the shift from the fixed system to flexible/floating system, Nigeria’s exchange rate rose upwards continuously. However, the conversion scaleencountered an exceptional decrease in two postSAP periods in 1998 and 2008. During this time, the conversion scale was cash driven which led in the CBN involvement in 2008 to curb the continuous exchange rate decline.

Trend Analysis of exchange rate, money supply and Gross Domestic Product.

The graph below shows the exchange rate movement in relation to money supply (M2) and economic growth (RGDP)

As the exchange rate rose, the real economic increase was moving upwards, but at a diminishing level from 1981 to 1992. The economyhowever adjusted and sprung at an alarming rate from year 1992 to2013, as shown below. There was also an increase in broad money supply (M2) during this period, however it is crucial to knowthat the naira experienceddepreciation in value along with the increase in money supply.

Figure 2: movement of exchange rate, supply of money & Gross domestic product

Source: CBN Statistical Bulletin (2015)

Nigeria’s economy has experienced numerous oscillations, most of which has been

ascribed to the continuous exchange rate fluctuations of the Naira.

One important explanation ascribed to thiscontinuous cycle is the fact that the Nigerian economy is largely reliant on a single productexport – Crude oil, – whichleaves the system vulnerable to marketfluctuations within the International oil market. In the graph

below, Nigeria’s external reserves stood underneath US$11 billion from 1981 to 2002 anyway rose distinctly from about US$7.5 billion of each 2003 to US$51.3 billion preceding the completion of 2007.This ascent is clarified by the three-timeincrement in the cost of unrefined petroleum from US$31 per barrel in 2003 to US$95 per barrel before the completion of 2007 (World Bank Data, 2014).Despite this improvement in the country’s external reserve as an outcomeof increased earnings from petroleum exports, the economy as a whole continued to struggle.

Figure 3: movement of exchange rate and External Reserve (Source: CBN Statistical Bulletin (2015)

The pattern examination of Nigeria’s conversion standard development likewise proposes a causal connection between the swapping scale development and full-scale monetary factors, for example, expansion, GDP development and financial shortage/GDP

proportion.

The exchange rate movement during the 90s, moved with the swelling rate. During times of high expansion, exchange instability was high. For example, while expansion rate moved from 7.5% in 1990 to 57.2% in 1993 and 72.8% in 1995 separately, the swapping scale moved from N8.04: $1 (1990), to N22.05: $1 (1993) and N81.65: $1 (1995) in a similar period. In this manner during the swelling amountfell from 72.8% in 1995, to 29.3% in 1996 and 8.5% in 1997, and increased from that point to 10.0% in 1998, and arrived at the midpoint of 12.5% inside the period 2000 – 2009, the exchange scale moved a similar way. A comparative pattern was watched for monetary shortage/GDP

Ratio and GDP development rate.

Figure 4: movement showing Exchange Rate and SpecificMacroeconomic Indicators in Nigeria (1980-2010) 

Source: Underlying information from Central Bank of Nigeria Statistical Bulletin Various Years

These constant fluctuations whether positive or negative rise indanger and uncertainty in the domestic and global transactions, thus discouraging investment and trade.

Economic growth can be explained as an enlargement in the making of monetary merchandise and businesses, compared from one timeframe with another. It is approximated in ostensible or trustworthy (balanced for inflation) terms. Moreover, the total monetary extension is approximated as far as Gross National Product (GNP) or Gross Domestic Product (GDP)

Nigeria’s exchange rate policy has passed through numerous adjustments, starting from the fixed exchange rate regime during the post–independence period to the pegged regime during the oil boom within the early 1970s and the mid-1980s; and to the variations of the gliding trade system from 1986, as a result of the near cave in of the economy in the middle of 1982 and 1985 (Akpan & Atan, 2012 paraphrased) and the use of the Structural Adjustment Program (SAP) and subsequent deregulation of the Naira.

This controlledafloat exchange rate system has been the most principal floating system. However, its progress is still marred by weak commitments to defending any particular parity.

1.2 STATEMENT OF THE PROBLEM

In the course of the most recent decades a few developing countries utilized rigid trade controls to secure their domestic businesses. Today numerous financial experts have ascribed the monetary plungein some to these equivalent protectionist strategies. Ewa (2013) concluded that the exchange rate of the Naira was relatively stable during the post-independence period when agricultural merchandisereckoned for greater than 70% of the nation’s GDP, and during the oil boom era between 1973 and 1979, when crude oil became the country’s major export.

This resulted in a major decline in the volume of agricultural productsin overall exports while crude oil increased, as a result of its higher revenue margins. This marked the beginning of the Nigeria’s dependence on oil exports and the subsequent volatility of its exchange rate.

Although the government has implemented different measures pointed toward enhancing the fare base, for example, impetuses to advance fare of semi – prepared and handled products so as to increment unfamiliar trade profit, by means of the private area, the significant level of importation to address homegrown issues continues to put a strain on the economy.

This major goal of this study is to ascertain if the fluctuations of the exchange rate has a directeffect on Nigeria’s economic growth.

Exchange rate is an important macroeconomic policy instrument. It therefore becomes necessary to evaluate thestrength of its effect on the performance of macroeconomic variables in Nigeria, map out strategies to develop an effective long-term exchange rate policy.

1.3 OBJECTIVE OF THE STUDY

The Objective of this study is to decide if exchange rate changes significantly affect the total national output and whether this influences the development of Nigeria’s economy. Distinguishing the effects of the precarious swapping scale of the naira on these significant full-scale financial factors would, be that as it may, rely upon the conditions winning in the society at a given time.

The major aim of exchange rate policy in Nigeria are:

• To strengthen the worth of the home currency.

• To sustaina favorable exterior reservoirlocality.

• To guarantee price strength and price levels reliable with those of the country’s trade partners.
• To develop           a          relatable          exchange         rate      that      will      flush             out       the

presentirregularitiesand imbalance in the external sector of the economy.

1.4 FORMULATION OF THE RESEARCH HYPOTHESIS

Considering the goals of this study, the following hypothesis was generated:

Ho: Exchange rate fluctuation has no directinfluence on Nigeria’seconomic growth.

Hi: Exchange rate fluctuation has a direct influence on Nigeria’s economic growth.

1.5 SIGNIFICANCE OF THE STUDY.

There could be no better time to investigate this subject matter given the prolonged decline of the naira in the foreign exchange market, and the continuous rising cost of living.

The importance of this research work is the fact that it will provide better insight into the factors responsible for the continuous exchange rate fluctuations and the best measures to manage them effectively and stabilize the exchange rate. Significantly, this investigation would help the administration and the national bank of Nigeria (CBN) to call attention to the advantages and disadvantages of each conversion scale system and thus develop an effective exchange regime conditioned to the specific nature of the Nigerian economy, both in the short term and long term. This will contribute to a sustainable economic growth.

The study will also set out as a reference to researchers in the coming years on this subject.

                    1.6        LIMITATIONS OF THE STUDY

The study is created to assess the Nigerian exchange rate policy as the driver of economic sustenance. The examination is accordingly restricted to the Nigerian growth rate of the economy and not associated with the socio-political components of the unfamiliar conversion standard.

1.7 THE SCOPE OF THE STUDY

This work of research is intended to review the time frame of 1980-2018, a time frame of 38 years. The degree comprises of the administrative and self-regulating exchange period for example the fixed swapping scale and the skimming conversion standard period. The examination depends on center full scale monetary execution of Nigeria somewhere in the range of 1980 and 2018.

THE IMPACT OF EXCHANGE RATE FLUCTUATIONS ON ECONOMIC GROWTH IN NIGERIA