IMPACT OF EXCHANGE RATE FLUCTUATION ON ECONOMIC GROWTH IN NIGERIA (2000-2015)
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The exchange rate is becoming increasingly important in any economy because it directly affects domestic price levels, the profitability of traded goods and services, resource allocation, and investment decisions. The exchange rate’s stability is now a formidable bedrock of all economic activities. Since the implementation of the Structural Adjustment Programme (SAP) in 1986, Nigeria has transitioned from fixed/pegged exchange rate regimes to various types of floating regimes. Because of the responsiveness of the rates to the foreign exchange market, floating exchange rates have been shown to be preferable to fixed arrangements (Otuori, 2013).
Following the liberalization of the exchange rate regime in 1986, various techniques for determining the
The most appropriate method for achieving an acceptable Naira exchange rate. The monetary authorities’ determined efforts to combat the unabating depreciation and instability of the Naira exchange rate inform the frequency with which these measures were introduced and charged.
According to Ngereboa and Ibe (2013), an exchange rate is the ratio of one currency unit to the amount of another currency for which that unit can be exchanged at a given time. Currency exchange rates are the link between domestic and foreign prices of goods and services. Furthermore, the exchange rate can either appreciate or depreciate. Exchange rate appreciation occurs when less domestic currency is exchanged for a unit of foreign currency, whereas exchange rate depreciation occurs when more domestic currency is exchanged for a unit of foreign currency.
A rate occurs when more domestic currency units are exchanged for a unit of foreign currency.
Since 1986, numerous variants of market determined rates have been adopted in an ongoing effort to stabilize the exchange rate and ensure a single exchange rate for the Naira. The Second-tier Foreign Exchange Market (SFEM) was established in 1986, while the First and Second tier markets were merged to form the enlarged Foreign Exchange Market (FEM) in 1987, which was later renamed the Inter-Bank Foreign Exchange Market (IFEM) in January 1989. This new system enabled bureau de change to source their foreign exchange needs from the IFEM. This was later modified in 1995 by the Autonomous Foreign Exchange Market (AFEM), which allows the Central Bank to purchase foreign currency.
oil companies’ exchange (Taiwo and Adesola, 2013).
Despite these policies, the Naira’s exchange rate has remained volatile since the period of deregulation. It is critical for the economy to investigate the impact of fluctuating exchange rates on the financial performance of the banking industry. For an import-dependent country, the stability of its exchange rate is critical for credit allocation (Adebiyi, 2006). It is therefore critical to investigate how the level of exchange rate volatility affects economic growth in Nigeria.
The impact of exchange rate fluctuations on economic growth in Nigeria remains a source of contention because there is no agreement on whether the impact is negative or positive, as evidenced by previous studies’ findings. As a result, this research will fill a knowledge gap by investigating the impact of exchange rate fluctuations on economic growth in Nigeria from 2000 to 2015.
1.2 Statement of the Problem
The volatile exchange rate of Nigeria’s domestic currency (Naira), which is denominated in US dollars, has caused negative returns on investment in some cases, discouraging investment in the country. According to Osinubi and Amaghionyeodiwe (2009), the Naira/US Dollar exchange rate has been declining in all segments of the foreign exchange market (that is official bureau de change and parallel markets). It has gradually depreciated in the official exchange market, creating a risky operating environment and explaining why Nigeria has not only been unable to attract foreign investment to its full potential, but has also had limited domestic investment. Despite the country’s numerous investment opportunities, many would-be investors are hesitant.
Because of high exchange rate volatility in Nigeria, there are uncertainties in the investment climate.
A historical examination of foreign exchange movement in Nigeria reveals a significant level of volatility, necessitating the need to determine its impact on Nigerian economic growth. As a result, the purpose of this study is to investigate the impact of exchange rate fluctuations on economic growth in Nigeria from 2000 to 2015.
1.3 Objectives of the Study
The following goals will be pursued by the study:
i. To investigate the impact of exchange rate fluctuations on Nigeria’s gross domestic product.
ii. To investigate the effect of currency volatility on foreign direct investment in Nigeria.
iii. Determine the relationship between exchange rate fluctuations and manufacturing sector output.
1.4 Research Questions
The following research questions will guide this study:
i. What effect does exchange rate volatility have on Nigeria’s gross domestic product?
ii. Does exchange rate volatility affect foreign direct investment in Nigeria?
iii. What is the relationship between exchange rate fluctuations and output in the manufacturing sector?
1.5 Research Hypothesis
The following hypotheses will be tested by the researcher:
1st Hypothesis:
In Nigeria, there is no significant relationship between exchange rate fluctuations and GDP.
HI:
In Nigeria, there is a significant relationship between exchange rate fluctuations and gross domestic product.
Hypothesis number two:
Ho: Currency volatility has no effect on foreign direct investment in Nigeria.
HI: Exchange rate volatility affects foreign direct investment in Nigeria.
3rd Hypothesis:
Ho: There is no statistically significant relationship between exchange rate fluctuations and output in the manufacturing sector.
HI: There is a strong link between exchange rate fluctuations and manufacturing sector output.
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