EFFECTS OF EXCHANGE RATE FLUCTUATION ON ECONOMIC GROWTH IN NIGERIA
chapter One
Foreword
1.1 Research background
Exchange rates are usually very important for any country. This is because exchange rates contribute to a country’s economic development by influencing the level of foreign exchange reserves and the level of imports a country can tolerate. The issue of exchange rate volatility arises in Nigeria and is a hot topic as the goal of all economies is to stabilize exchange rates with trading partners. Nigeria started devaluing the Naira and passed the Structural Adjustment Program (SAP) in 1986 because of the constantly fluctuating exchange rate, but this goal never materialized. SAP’s goal was to restructure the economy’s production base with an active focus on producing agricultural exports. Monetary reforms that allowed cumulative depreciation of the effective exchange rate were expected to raise domestic prices for agricultural exports, thereby stimulating domestic production.
Empirically, a number of researchers, such as Oyejide (1986), Ihimodu (1993), and World Bank (1994), have analyzed the impact of cumulative depreciation of the effective exchange rate on changes in the structure and value of Nigerian exports. did. Depreciation increased the export price of agricultural commodities, resulting in a substantial increase in agricultural export volumes over the years. However, it has had little success in stabilizing the exchange rate. As a result, Nigeria’s exchange rate fluctuation problems persist to this day. Attrition is a major obstacle to economic development, making planning more difficult and investment more risky. For example, exchange rate fluctuations may reduce activity for potential investors in Nigeria. This is due to the increased uncertainty of return on a particular investment. Potential investors invest in foreign locations only if the expected return is high enough to cover the currency risk (Gerado, 2002). Risks in international trade in commodities usually arise from two main sources. Changes in world market prices or exchange rate fluctuations. Therefore, understanding exchange rate movements is very important for many reasons. First, the relationship between a country’s exchange rate and trade-driven economic growth is an important issue from both a descriptive and policy perspective. As Edwards (1994; 61) argues. “It is no exaggeration to say that the issue of real exchange rate movements is now at the center of policy evaluation and policymaking.” The behavior of a country’s exchange rate is an important determinant of export growth. , serves as a measure of international competitiveness (Bath and Amusa, 2003). Chukwu (2007) observed exchange rate volatility as a determinant of trade in Nigeria. It has a positive and sometimes negative impact on export trade. This indicates erratic changes in value, which will affect exports and economic growth in the long run. The study aims to determine the impact of changes in the Naira exchange rate on Nigeria’s export performance.
1.2 Problem Description
Despite the existing literature on the impact of exchange rate fluctuations on Nigeria’s economic growth, theoretical and empirical research on this topic has yet to reach consensus. Two major trends in his literature review suggest this. The first argues that exchange rate fluctuations represent uncertainty, impose costs on risk-averse economic agents, and respond by slightly boosting domestic and international trade. In other words, it can impede the growth of international trade (Chowdhury, 1993, Cushiman, 1983, 1988, Kenen and Rodrik, 1986). His second strand of literature argues that if agents take enough risks, a rise in the exchange rate increases the expected marginal utility of export earnings, thus requiring them to maximize their earnings. Claims to encourage exports. Fluctuations in exchange rates can therefore actually facilitate trade flows (De Grauwe:
1988, IMF:
1984 Small:
1990 and Chambers, R. G. and Just, R.E. (1991). Few attempts have been made to examine them for developing countries, including Nigeria, due to the lack of reliable time-series data. Available instances include Virgil (2002) in Turkey and Bar and
For South Africa he AMUSA (2003) and Takendesa (2005), for Nigeria Ajayi (1988), Adubi, A.A. and Okunmadewa, F. (1999), Osagie (1985).
This study carefully examines exchange rate fluctuations in economic growth in both the oil and non-oil sectors. Previous studies have only assessed the impact of exchange rate changes on oil exports, ignoring non-oil exports, or only non-oil exports, excluding oil exports. They were unable to identify impacts on exports from both oil and non-oil sectors (such as agriculture and manufacturing). An analysis of oil or non-oil exports alone may not really provide value judgments and conclusions about the impact of exchange rate fluctuations and export performance in Nigeria. In addition, this study delves into the relationship that exists between exchange rate fluctuations and Nigeria’s economic growth. Considering the above issues, the following research questions arise.
1. How will the Nigerian economy react to exchange rate fluctuations?
2. How will the manufacturing company react to exchange rate fluctuations?
3. How do agricultural exports react to exchange rate fluctuations?
1.3 Purpose of the survey
The main purpose of this study is to examine the impact of exchange rate fluctuations on Nigeria’s economic growth. Specifically, this research should address the following sub-goals:
i) Track how the Nigerian economy reacts to exchange rate fluctuations.
ii) Understand how manufacturers react to exchange rate fluctuations.
iii) track how agricultural exports respond to changes in exchange rates;
iv) Determine whether there is a material relationship between the exchange rate and the Nigerian economy.
1.4 Research hypothesis
Based on the research question and goals, the following null and alternative hypotheses were formulated by the researchers.
Ho:
The exchange rate has not had a significant positive impact on Nigeria’s economic growth.
H1:
The exchange rate has a large positive impact on Nigeria’s economic growth.
Ho:
There is no causal relationship between Nigeria’s exchange rate and export growth.
H2:
There is a causal relationship between Nigeria’s exchange rate and export growth.
1.5 Importance of research
By the end of this study, the findings are expected to serve as future guidance for policy makers in developing better and more efficient policy options to deal with exchange rate volatility in Nigeria. It has been. The study highlights the actions that monetary authorities can take to maintain exchange rate stability, and the significant impact exchange rates have on export growth, consumption, resource allocation, employment and individual livelihoods, and foreign investment. It will also be of great help to the broader economy as it enables. , as studies have shown. Most importantly, it provides relevant information that complements the existing literature and guides further researchers on this topic.
1.6 Research scope and limitations
This study aims to examine Nigeria’s export performance and exchange rate fluctuations. This study covers the period from 1982 to 2015. This range was chosen to ensure sufficient degrees of freedom to ensure reliable estimation. Researchers encountered several limitations during the course of their research. Lack of time and funding limited researchers’ ability to produce complete and specific research materials. This is due to the time and financial constraints available to researchers, on the one hand, to the reluctance and hectic schedules of bank officials who have delayed the research. To provide more appeal cases and their valuable opinions.
However, we had to convince interviewees that the name of our study would not be published and that the materials would only be used for the purpose of this study.
Finally, insufficient pre-study was performed on this study, creating a uniform workload for researchers and increasing the originally estimated time to complete the research study.
1.7 Definition of terms
Exchange rate:
In finance, a bilateral exchange rate is the rate at which one currency is exchanged for another. It is also considered the value of a country’s currency relative to another currency.
Fluctuation:
Price volatility is the upward or downward movement in the price of a product in an economy. Price volatility is a common phenomenon in the business world, especially among agricultural producers.
economic growth:
Economic growth is the increase over time in the inflation-adjusted market value of the goods and services produced by the economy. Traditionally, it is usually measured as the rate of increase in real gross domestic product or real GDP per capita. Nigerian capital market:
The Nigerian Stock Exchange (NSE) was established in 1960 as the Lagos Stock Exchange. In 1977 the name of the Lagos Stock Exchange was changed to the Nigerian Stock Exchange. As of March 7, 2017, there are 176 listed companies with a market capitalization of approximately N8.5 trillion. All listings are included in the All Stocks Index of the Nigerian Stock Exchange. The Nigerian Stock Exchange is his third largest stock exchange in Africa in terms of market capitalization. Stock index:
A stock index, or stock market index, is a measure of the value of a part of the stock market. Calculated from the prices of selected stocks (usually a weighted average). It is a tool used by investors and financial managers to describe the market and compare returns on specific investments.
Market capitalization:
This refers to the market capitalization of a listed company’s stock. It also refers to the value of all listed securities based on market prices.
1.8 Basis of research
The impact of exchange rates on economic growth and development in Nigeria is not an uncommon topic as there has been a considerable number of studies on the subject. We did not use the longer term and the latest estimation methods. For example, Udegbunam (2002) used annual time series data covering the period 1970 to 1997 in his study and used ordinary least squares (OLS) as the estimation technique to obtain We examined the impact of openness, stock market development, and industrial growth. In another study, Oke (2012) used annual time series data for the period 1999 to 2009 to estimate the impact of capital market activity on the development of the Nigerian oil industry using cointegration and error correction methods. Looked under Mechanisms. On the other hand, Victor, Kenechukwu, and Richard (2013) used data from 1980 to 2008 with descriptive statistical methods to analyze the impact of capital markets on the development of Nigeria’s industrial sector. Although this study contributes to the current debate, it is notable for its use of relatively long time periods and recent data to analyze the impact of exchange rate fluctuations on Nigeria’s economic growth. Research is different.
1.9 Curriculum
The research is divided into five chapters. Chapter 1 consists of an introduction to the research, divided into his nine headings such as research background, problem description, and research hypotheses. Chapter 2 is a literature review containing conceptual, empirical, and theoretical frameworks. Chapter 3 is research methodology, which mainly deals with study design, data collection methods, sample sizes, sampling techniques, data analysis methods, and decision rules. The penultimate chapter, Chapter 4, contains the presentation and analysis of the study data, and the final chapter, Chapter 5, is the study summary, conclusions, and recommendations.
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