Impact of Exchange Rate on Economic Growth in Nigeria (1986-2018)
CHAPTER ONE
Objectives of the Study
The general objective of this study was to determine the extent to which exchange rate led to economic growth in Nigeria. To achieve this general objective, the following specific objectives will be examined.
- To examine the impact of exchange rate on economic growth in Nigeria.
- To examine the impact of exchange rate on financial sector.
CHAPTER TWO
LITERATURE REVIEW
Conceptual Literature
Economic Growth
Economic growth involves improvements in a variety of indicators such as literacy rates, life expectancy, and poverty rates. In addition to increasing private incomes, economic growth also generates additional resources that can be used to improve social services such as healthcare, safe drinking water etc. (Jelilov, Gylych, Muhammad & Maimuna, 2015). Though it is often measured by rate of change of gross domestic product, it is generally understood in terms of increase in per capita income, and attainment of a standard of living equivalent to that of industrialized countries.
Economic growth connotes a sustained increase in a country’s national income (Jhingan, 1997). When the GNP rises eventually, it depicts a growth in the economy.
Exchange rate
Exchange rate is the ratio between a unit of one currency and the amount of another currency for which that unit can be exchanged at a particular time (Ngerebo-a and Ibe, 2013). In other words, exchange rate is the price of one currency vis-à-vis another and is the number of units of a currency required to buy another currency (Mordi, 2006). Economic history has shown that there are two common concepts of exchange rate namely nominal exchange rate and real exchange rate. The nominal exchange rate is the price of domestic currency in term of foreign currency. The real exchange rate is the relative price of foreign goods in term of domestic goods.
Exchange Rate Policy in Nigeria
Exchange rate policy in Nigeria has undergone a good number of changes. It has developed from a fixed parity in 1960. In 1974, in order to minimize the effect of devaluation of a single individual currency, Nigerian currency was tired to both the pound and dollar. Almost throughout the 1970s there was persistent appreciation of the nominal exchange rate of the naira occasioned by increases in the price of oil in the international market. In 1978, the naira was pegged to a basket of 12 currencies comprising Nigeria’s major trading partners. However, the 1978 policy was jettisoned in 1985 in favour of quoting the naira against the dollar. Before 1986, the prevailing exchange rate policies encouraged over-valuation of the naira. To solve the problems associated with the over-valuation the naira was deregulated in September 1986 under the Structural Adjustment Programme Package. To enhance the implementation of the Structural Adjustment Programme was the introduction of the Second-tier Foreign Exchange Market (SFEM). SFEM was expected to usher in a mechanism for exchange rates determination and allocation in order to ensure short term stability and long term Balance of Payments equilibrium.
CHAPTER THREE
RESEARCH METHODOLOGY
Types and Sources of Data
Data and the literature for this study were obtained from secondary sources, the CBN statistical bulletin were instrumental in the collection of statistical information used in carrying out this research.
Method of Estimation
The study adopts an econometric model in determining the effect of exchange rate on economic growth in Nigeria. The Generalised Least Square (multiple linear regression) model was used to evaluate the relationship between exchange rate and economic growth in Nigeria.
The multiple regression model is stated thus; Yi = B0 +B1X1i + B2X2i + u Where; Y is the dependent variable, X1 and X2 are the explanatory variables, u is the stochastic error term, and i is the ith observation since the data are time series (Porter and Gujarati, 2009).
CHAPTER FOUR
PRESENTATION AND ANALYSIS OF RESULTS
Presentation of Results
From the regression result, gross domestic product (GDP) was the dependent variable and proxy for economic growth while nominal exchange rate (NER) and fixed exchange rate (FER) were the independent variables. The regression results obtained are presented in the table below.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
Summary
This Research work was carried out to examine the relationship between exchange rate and economic growth in Nigeria. The study is in five chapters. In the first chapter, a general background of the study was undertaken. In view of the background, the problems of study were identified and stated, the research questions, the objective, scope and significant of the study were outlined and discussed.
Chapter two contains the review of various literatures on the concept of exchange rate and the Nigerian economy. Also in the second chapter is the empirical and theoretical reviews. In the third chapter of this work, the type and sources of data, the method of estimation, model specification and evaluation criteria were all discussed.
In the fourth chapter, data collected were presented and analysed using regression method (generalised least square) to answer the research questions. After the analysis, the findings are as follows:
- Nominal exchange rate was significant and had impact on economic growth in Nigeria.
- A good exchange rate system is needed to be maintained.
Conclusion
This study has underscored the impact of exchange rate on economic growth in Nigeria. Findings from this research uncovered that good exchange rate has contributed greatly to the economic growth of the country. This is done through its role in providing stable value of money, availability of market, and increase in standard of living. This study is in consistent with the findings of Huang and Malhorta (2004), findings suggest that the exchange-rate regime matters for developing economies: fixed and managed floating regimes outperform the others in terms of growth. However, for advanced economies, no significant regularity is discovered. This position was also reiterated in the findings of Fapetu, and Oloyede (2014) and corroborated that managing the economy’s foreign exchange rate does affect quite a number of economic variables, which in turn affects growth in the economy.
Thus, in the light of the foregoing, this study reliably concludes that exchange rate will influence the level of economic growth.
Recommendations
For economic growth to increase, good exchange rate system is important in Nigeria. On the strength of the observations and findings made in this study the following recommendations have been made.
- Government should adopt a nominal exchange rate policy.
- Government should ensure a good exchange rate system.
Limitations to the Study
The study faced some constraints. They include insufficient literature material, financial constraint, and time constraint. However, findings made is valuable for policy implementation.
Suggestions for Further Studies
This study has researched on impact of exchange rate on economic growth in Nigeria (1986-2018). Further research can be done on the following:
- Impact of exchange rate on industrialization.
- Impact of exchange rate on financial sector.
REFERENCES
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- Central Bank of Nigeria (CBN) (2000). Central Bank of Nigeria economic and financial review. Statistical Bulletin, 38(2), 17-33.
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- Central Bank of Nigeria (CBN) (2017). Annual Publication of the Central Bank of Nigeria. Annual Report and Statement of Account, 55(3), 16-18.
- Central Bank of Nigeria (CBN) (2017). Statistical Bulletin, Annual Publication of the Central Bank of Nigeria, 55(7), 20-23.
- Domar, E. (1946). Capital expansion, rate of growth, and employment. Econometrica, 14(2), 137-147.
- Fapetu, O & Oloyede, J. (2014). Foreign exchange management and the Nigerian economic growth (1960 – 2012). European journal of business and innovation research 2(2), 19-31.
- Ghosh, A.R., Ostry, J.D., Gulde, A.M. & Wolf, H.C. (1997). Does the nominal exchange rate regime matter? NBER Working Paper, 5874.
