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THE IMPACT OF EXCHANGE RATE ON THE NIGERIA ECONOMIC GROWTH

ABSTRACT

Exchange rate is the price of one currency in terms of another currency.Exchange rate s This exchange rate is also used to determine the level of output growth of the country. Over the years, Nigeria has adopted various exchange rate regime ranging research work is centered on the impact of exchange rate on the Nigeria economic growth with special emphasis on the purchasing power of the average Nigeria and the level of international trade transaction. To do this, the classical linear regression model is applied and the ordinary least square econometric technique is also used to estimate the impact of exchange rate on economic growth. The variables used are GDP and non-oil export as the dependent variables, real exchange rates interest rates, inflation rate and degree of trade openness as the independent variables. Economic test shows the a priori criteria of the parameters used to determine if it conforms to the economic theory. The statistical criteria employed are the F test, T-test and R2 which test the significance of the parameters. The econometric (second order test) used are the Durbin Watson test, which test for autocorrelation and the randomness of the residuals. The Jarque-Bera criteria is used to test for normality of the residuals .the multicollinearity test which is used to test for a perfect linear relationship among the explanatory variables. From the analysis of the result, it shows that there is a relationship between GDP, EXPT and real exchange rate in Nigeria. Exchange rate stability has a positive and significant affection export and growth. An increase in exchange rate stability motivate firms to invest in export based industries.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The exchange rate is perhaps one of the most widely discussed topics in Nigeria today. Macroeconomic policy formulation is a process by which the agencies responsible for the conduct of economic policies manipulate a set of instrumental variables in order to achieve some desired objectives. In Nigeria, these objectives include achievements of domestic price stabilit6y, 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 period of time. Economic development on the other hand implies both structural and functional transformation of all the economic indexes from a low to a high state.

After several years of exchange rate floating among countries exchange rate arrangement in Nigeria have undergone significant changes over the past four decades. It shifted from a fixed regime in the 1960’s to a pegged arrangement  between the 1970’s and the med 1980’s and finally to the various types of the floating regime since 1936, following the adoption of the structural adjustment programme (SAP). A regime of managed float, without any strong commitment to defending any particular patty has been the predominant characteristics of the floating regime in Nigeria since 1986. The fixed exchange rate regime induced an overvaluation of the naira and was supported by exchange control regulations that engendered significant distortions in the economy. This gave rise to massive importation of finished good with the adverse consequences for domestic production, balance of payments position and the nation’s external reserves level. Moreover, the period was bedeviled by sharp practices perpetrated by dealers and end users of foreign exchange.

The floating exchange rate regime implies that the forces of demand and supply will determine the exchange rate. This regime assumes the absence of any visible hand in the foreign exchange market and that the exchange rate adjusts automatically to clear any deflect or supply of market. Consequently, changes in the demand and supply of foreign exchange can outer exchange rates but not the countries international reserves. In this arrangement, the exchange rate serves as a “buffer” for external shocks thus, allowing the monetary authorit9ies full discretion in the conduct of monetary policy. The disadvantages of the freely floating regime have been documented.

It is important to know that economic objectives are usually the main consideration in determining the exchange control for instance from 1982-1983, the Nigeria currency was pegged to the British pound sterling on a 1.1 ratio. Before then, the Nigerian naira has been devalued by 10%. Apart from this policy measures discussed above, the central bank of Nigeria (CBN) applied the basket of currencies approach from 1979 as the guide in determination of the exchange rate which was determined by the relative strength of the currencies approach from 1979 as the guide in determination of the exchange rate which 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 with such countries with the American dollars and British pound sterling on the exchange rate mechanism (CBN, 1994). One of the objective of the various macro-economic policies adopted under the structural adjustment programme (SAP) in July, 1986, was to establish a realistic and sustainable exchange rate for the naira, this policy was recommended in 1986 by the international monetary fund (IMF). One exchange rate mechanism was adopted in 1986. the key element of structural adjustment programme (SAP) was the freely 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, the rate of inflation, domestic liquidity and employment. Between 1986 and 2003, the federal government experimented with different exchange rate policies without allowing any of them make remarkable impact in the economy before it was changed. This consistency in policies and lack of continuity in ex-change rate policies aggravated the instability nature of the naira exchange rate (Gbosi, 1994).

1.2 STATEMENT OF THE PROBLEM

The exchange rate of the naira was relatively stable between 1973 and 1979 during the oil boom era (regulating require). This was also the situation prior to 1990 when agricultural products accounted for more than 70% of the nations gross domestic products (GDP) (Ewa, 2011). However, as a result of the development in the petroleum oil sector in 1970’s, 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 with its economic crises emerged in Nigeria because of the country’s dependence on oil sales for her export earnings. To underline the importance of oil export to Nigerian economy, the gross national product (GNP) fell from $76 billion in 1930 to $40 billion in 1996, a number of policy measures to revive and strengthen the economy. The real rate of economic growth became negative as a result of the adoption of structural adjustment programme (SAP).

Hinkle, (1999) stated that “while some economist dispute the ability to change in the real exchange rate to improve the trade balance of developing countries because of elasticity of their low export, others believe that structural policies could however, change the long –term trends in the trade and prospects for exported growth. Instabilities of the foreign exchange rate is also a problem to the economy.

1.3 OBJECTIVES OF THE STUDY

The objectives of the study is to show the impact of exchange rate on gross domestic product and hence how this affect the growth of the country. The sub-objectives are

1. To determine the impact of exchange rate fluctuations on Nigeria’s growth.

2. To ascertain the effect of exchange rate on Nigerian export.

1.4 RESEARCH QUESTIONS

1. To what extent does exchange rate fluctuation impacts on the volume of Nigeria’s economic growth?

2. What is the effect of exchange rate on Nigeria’s export?

1.5 RESEARCH HYPOTHESIS

Base on the objectives of the study, the following hypothesis were formulated.

1. HO: exchange rate has no significant impact on Nigeria’s economic growth

2. HO: exchange rate has no significant impact on export in Nigeria.

1.6 SCOPE OF THE STUDY

This research work is designed to cover the period 1980-2010, a period of thirty one years. The general overview of the profile of Nigerians exchange rate over the years shall be discussed. The scope consist of the regulatory and deregulatory exchange rate period that is the fixed exchange rate and the floating exchange rate period. The study is based on core macro-economic performance of Nigeria between 1980-2010.

1.7 SIGNIFICANCE OF THE STUDY

The significance of this research work lies in the fact that if the causes 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 proved to be affecting badly the macro-economic major variables, 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 gauge for the importantly measurement of growth and development of any economy. Importantly, this study would help the government and the central bank of Nigeria (CBN) to identify the strength and weakness of each foreign exchange system and hence adopts the policy that suits the economy best this will definitely enhance growth and development of the economy, the study will also serve as a guide to future researchers on this subject.

1.8 LIMITATIONS OF THE STUDY

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

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