Exchange Rate Fluctuations and the Industrial Sector in Nigeria
Chapter One
OBJECTIVE OF THE STUDY
The objectives of the study are;
- To ascertain the impact of exchange rate fluctuation on the Nigerian manufacturing sector
- To ascertain the effect of exchange rate fluctuation on Nigerian import or export and capital goods.
- To determine if the continuous fluctuation of exchange rate of naira have an impact on the quality and quantity of output of manufacturing firms.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
INTRODUCTION
The monetary and traditional flow theory serves as the theoretical basis for this study. The monetary approach to exchange rate determination postulates that the relative supply of the demand for money between two countries is the basis for the determination of exchange rate. It views increase in the supply money as being able to generate inflation, hence, resulting in exchange rate depreciation. The model opines that a situation of falling prices with a given nominal money supply results in exchange rate depreciation while traditional flow model is essentially based on the principle of the interplay of demand and supply. The forces of the market (interaction between demand and supply) determine the rate of exchange. However, when there is speculation or expectation of a change in the rate of exchange, this could lead to the disequilibrium even without any change in the initial determined factors. Exchange rate can adversely affect the ability to import and therefore manufacturing output. Fluctuations in exchange rate will cause instability in purchasing power and hence, negatively impact on investment in import of manufacturing inputs. On the other hand, the effect on manufacturing output and overall income level will also affect investment in import of inputs and invariably the exchange rate. This is because among the determining factors of the rate of exchange are the demand for foreign exchange, the supply itself being influenced by an economy’s productivity level. Nigeria being an import dependent nation particularly for capital goods and considering the centrality of the rate of exchange of such country’s currency to her trading partner’s currency, a number of writers have expressed their interest and position on this important subject. More recently, Azu and Nasiri (2015) researched on Exchange rate Fluctuation and Sustainable Economic growth in Nigeria and the essence of their research is to ascertain the relationship between real exchange rate and economic development applying those variables that adjudged to make up equilibrium exchange rate thereby defining how interrelated are Real Exchange Rate (RER), Gross Domestic Product (GDP), Export (EXP), Import (IMP), Foreign Exchange Reserve (FER) and Foreign Direct Investment (FDI). The major aim was to define how exchange rate fluctuation stimulates economic development in Nigeria from 2004 to 2014. Analyzing the data using (vector auto regression analysis) VAR technique, based on the prevailing situation in Nigerian economy within the period of study, one can envisage that RER fluctuation was significantly controlled by positive relation to real import as well as its negative relation to real GDP and foreign direct investment. In as much as the naira is been devalued by the CBN or forces of demand and supply in the foreign exchange market, the research shows that the tendency of increasing FDI would definitely pressurize for the appreciation of the naira, likewise would GDP growth. Ayodele (2014), analyzed the impact of exchange rate on the economic performance of Nigeria using the Ordinary Least Squares (OLS) method.The study covered the period of 13 years from year 2000 to year 2012.From his findings, exchange rate of naira to dollar has negative correlation with the GDP. Though the Nigeria GDP keeps increasing every year, the negative impact had not allowed the GDP to grow maximally as expected. In fact, the naira exchange to $1.00 is N160.00 at the parallel market instead of the official rate of N158.00. This is as a result of the naira being cheaper has compared to dollar. The demand for dollar has remained so high, hence the increase in exchange rate and ultimately resulting to high cost of imported goods. According to King-George (2013), the effect of exchange rate fluctuations on the Nigeria manufacturing Sector was set to find out the effect of exchange rate on the Nigeria manufacturing Sector. Hypothesis was stated to guide the study. To evaluate this hypothesis, annual time series data on manufacturing gross domestic product a proxy for economic growth, exchange rate, private foreign investment and manufacturing employment rate were collected from the year, 1986 to 2010. A multiple linear regressions were adopted employing Ordinary Least Square (OLS) techniques. This analysis yielded some interesting results. From the results it was observed that exchange rate has no significant effect on economic growth of Nigeria. Also that dependent variable (Manufacturing Gross Domestic Product) can be controlled by, exchange rate, private foreign investment and manufacturing employment rate. Olufayo and Fagile (2014), their research examined the impact of exchange rate volatility on the performance of Nigeria export sectors, separating the sectors into oil and non-oil sector. They adopted the econometrics method of Seemingly Unrelated Regression (SUR) and in testing the volatility of the exchange rate; they adopted GARCH (generalized autoregressive conditional heteroskedasticity) and examine the effect of floating exchange rate policy on the volatility of the nominal exchange rate. Using the GARCH model, they discovered that there exists volatility in the exchange rate of the country. Their study established the negative relationship between the volatility of exchange rate and export performance of oil and non-oil sectors using time series data of 1980 to 2011, though it is statistically not significant and also they discovered the significant effect of the floating exchange rate regime in Nigeria ,thus, the introduction of floating exchange rate induces instability in the country exchange rate, this is in agreement with the submission of many scholars, who asserted that the shift from fixed exchange rate to floating exchange rate brought about uncertainty in the exchange rate. More so, the negative relationship between the exchange rate volatility and exports in Nigeria called for drive towards domestication of the country’s resources, through inward looking policy that would encourage the local utilization of the country abundant resources and also diversification of the country’s exports base. Opaluwa, Umeh and Abu (2010) examined the impact of exchange rate fluctuations on the Nigerian manufacturing sector during a twenty (20) year period (1986 – 2005). The econometric tool of regression was used for the analysis. Using data from 1986 to 2005, the estimated model used e-views software package. The finding of this study is that fluctuations in the rate of exchange are not favourable to economic activities in the manufacturing sector. It was discovered that the performance of the manufacturing sector was affected by factors such as high cost of foreign exchange for procuring raw materials and machineries required for production, availability of financial capital, technological underdevelopment, inadequate socio-economic infrastructure, shortage of technical manpower and foreign domination; following the implementation of exchange rate devaluation; the manufacturing sector has not performed any better because of the influence of the earlier mentioned factors which affect the manufacturing sector performance. There is an inverse relationship between exchange rate fluctuations and the manufacturing sector performance. As exchange rate reduced nominally, the exchange value of the naira appreciates and the manufacturing sector performs better.
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought the effect of exchange rate fluctuation on the Nigeria manufacturing sector
Sources of data collection
Data were collected from two main sources namely:
(i)Primary source and
(ii)Secondary source
Primary source:
These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.
Secondary source:
These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.
Population of the study
Population of a study is a group of persons or aggregate items, things the researcher is interested in getting information the effect of exchange rate fluctuation on the Nigeria manufacturing sector. 200 staff of Dangote group of company, Lagos state selected randomly by the researcher as the population of the study.
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain the effect of exchange rate fluctuation on the Nigeria manufacturing sector. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of exchange rate fluctuation on the Nigeria manufacturing sector
Summary
This study was on the effect of exchange rate fluctuation on the Nigeria manufacturing sector. Four objectives were raised which included: To ascertain the impact of exchange rate fluctuation on the Nigerian manufacturing sector, to ascertain the effect of exchange rate fluctuation on Nigerian import or export and capital goods, to determine if the continuous fluctuation of exchange rate of naira have an impact on the quality and quantity of output of manufacturing firms. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of Dangote group of company, Lagos state. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made production managers, engineers, administrative staff and junior staff were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies
Conclusion
The study empirically verified the effect of exchange rate fluctuations on the manufacturing sector. This is against the backdrop of the fact that exchange rate is a crucial variable and the manufacturing sector is expected to be the moving force in the drive towards industrialization. It is observed that the fact that Nigeria is highly dependent on the external sector for import of inputs has made the effect of exchange rate devaluation worse especially in manufacturing because capacity to import was constrained by the depreciating currency leading to a corresponding decline in output. It is pertinent to note that the devaluation of exchange rate in association with factors such as technology and human skills are necessary for a country to be established in the export market which are lacking in the case of Nigeria. The country should therefore, embark on improving basic amenities like electricity, transportation, water supply, telecommunication, human resource development, instead of implementing policies in an unhealthy economic and social structure
Recommendation
- The government should restrict the importation of similar products manufactured in Nigeria to increase the buying of Nigerian products.
- Government should stimulate export diversification in the area of agriculture; agro-investment, and agro-allied industries, oil allied industries such will improve Exchange rate fluctuations on manufacturing sector in Nigeria Economy.
- The government should therefore, embark on improving basic amenities like electricity, transportation, water supply, telecommunication, human resource development, instead of implementing policies in an unhealthy economic and social structure.
- The government should encourage the made in Nigeria products by removing the exportation duties in order to increase exportation of Nigeria products.
- The government should encourage foreign investors to invest in Nigeria to increase their gross domestic product in order to increase the standard of living of the citizen of the country.
REFERENCES
- Abdullahi, F.Z; Ladan, S and Bakari, H.R (2012) “Foreign private investment and Economic growth in Nigeria: A co integrated VAR and Granger causality analysis” CBN Journal: 15 – 28.
- Adeoye, B.W and Atanda, A.A (2012) “Exchange rate volatility in Nigeria: Consistency, Persistency and severity analyses” CBN Journal: 29 – 49.
- Akpan, E.O and Atan, J.A (2012) “Effects of exchange rate movement on Economic growth in Nigeria” CBN Journal for applied statistic: 1 – 14.
- Asher, O.J (2012) “The impact of exchange rate fluctuation on the Nigeria Economic growth (1980 – 2010)” Unpublished B.Sc project department of Economics, Caritas University Emene Enugu, Enugu State.
- Azeez, B.A; Kolopo, F.T and Ajayi, L.B (2012) “Effect of exchange rate volatility on macroeconomic performance in Nigeria” Interdisciplinary Journal of contemporary Research in Business 4(1): 149 – 155.
- Dada, E.A and Oyeranti, O.A (2012) “Exchange rate and macroeconomic aggregates in Nigeria” Journal of Economics and Sustainable development. 3(2): 93 – 101.
