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AN ASSESSMENT OF THE IMPACT OF EXCHANGE RATE FLUCTUATIONS ON ECONOMIC GROWTH IN NIGERIA

ABSTRACT

This study investigates on “An assessment of the impact of exchange rate fluctuations on economic growth in Nigeria”. 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 motivates 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.

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