Impact of Exchange Rate on Economic Growth in Nigeria (1996-2020)
CHAPTER ONE
RESEARCH QUESTION
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
- To determine the impact of exchange rate fluctuations on Nigeria’s growth
- To ascertain the effect of exchange rate on Nigerian
CHAPTER TWO
LITERATURE REVIEW
DETERMINANTS OF NIGERIA’S EXCHANGE RATE
In terms of finance, exchange rate (also known as a foreign exchange rate, forex rate, ER, Fx rate or Agio) between two currencies is that rate at which on currency will be exchanged for another. It is also regarded as the value of one country’s currency in relation to another. In a commonest definition, exchange rate ‘ER’ is the price of a nation’s currency in terms of another currency.
An exchange rate can be quoted in two ways, direct and indirect.
- Direct; the price of the foreign currency in terms of dollars.
- Indirect: the price of dollars in terms of foreign currency
SOME OF THE MAJOR TYPES OF EXCHANGE RATE ARE AS FOLLOWS:
- Fixed exchange rate system.
- Flexible exchange rate system.
- Floating exchange rate system.
Fixed exchange rate system: This refers to a system in which exchange rate for a currency is fixed by the government.
The basic purpose of adopting this system is; to ensure stability in foreign trade and capital movements.
To achieve stability, government undertakes to buy foreign currency when the exchange rate becomes weaker and sell foreign currency when the rate of exchange gets stronger.
Flexible exchange rate system: This refers to a system in which exchange rate is determined by forces of demand and supply of different currencies in the foreign exchange market.
In this exchange rate system, the value of currency is allowed to fluctuate freely according to changes in demand and supply of foreign. There is no official (government) intervention in the foreign exchange market. Flexible exchange rate is also known a ‘floating exchange rate.
Exchange rate movements is an important determinant of international transactions. Furthering, Ogunleye (2020) noted that the exchange rate in Nigeria has been principally influenced by external shocks resulting from the vagaries of world price of agricultural commodities and oil prices, both major sources of Nigeria export and foreign exchange earnings; contending that when the economy depended on agricultural exports, exchange rate volatility was less pronounced given the fact that these products were subjects to less volatility and that there were more trading partners involved in the calculation of the country’s exchange rate. This is minimally affected by the real exchange rate fluctuating by only 0.14% between 1970 and 1977. The increased dependence of the country on oil, resulted in several trade shocks from global oil price shock fluctuating the naira exchange rate by 10% between 1970 – 1985 (Ogunleye 2020). To Iyoha and Oriakhi (2002), movements in real exchange rate during this period were nominal shocks resulting from fiscal expenditure in ambitious development projects; and when the windfall ended, the government resorted to financing its expenditures through money creation. Thus expansionary monetary fiscal policy according to him, exerted upwards pressure on inflation, aggravating sharp movements in real exchange rate. From 1986, the adoption of the structural adjustment programme (SAP) became a contributory factor in shaping the dynamics of real exchange rate in Nigeria. One of the cardinal points of this policy was floating nominal exchange rate policy. As the naira was allowed to float the nominal exchange rate movement became more pronounced.
CHAPTER THREE
RESEARCH METHODOLOGY
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MODEL SPECIFICATION
We shall employ the single equation technique of econometric simulation for this study. The model specification involves the determinant of the dependent and independent variables were included in the model the priori expectation of the signs and sizes of the parameters of the functions, the functional form of the model, the mathematical form of the equation.
The model that will be adopted is the classical least regression model that will be used (OLS). The choice of this method is predicted on the basic features of OLS (BLUE).
CHAPTER FOUR
PRESENTATION AND ANALYSIS OF RESULTS
PRESENTATION OF RESULTS
Two models were estimated in this research work based on the topic the researcher is discussing. The models were estimated using the ordinary least square (OLD) method. The result of the models are presented below as thus;
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND POLICY RECOMMENDATION
SUMMARY OF FINDINGS
This research work is meant to emphasize on the issue of exchange rate and its impact on international trade, purchasing power of average Nigerian and output growth level of Nigeria. This study investigated empirically on two models. The first model investigated empirically, the impact of variables such as exchange rate (ER), real interest rate (INT) and degree of trade openness (DOP) on the GDP on the economy.
- Exchangerate has a positive impact on GDP both on short run and long run.
- Theinterest rate has a negative impact on GDP both on short run and long run.
- Degree of trade openness has a positive impact on GDP
- Exchange rate is positive relationship to output growth
CONCLUSION
Having conducted this research in the study of exchange rate stability on economic growth, thus there is needed to maintain a stable exchange rate. Using time, series data from 1996-2020, I estimated the effect of exchange rate on export performance in Nigeria, our result showed that export trade performance are influenced by exchange rate stability. The study showed that Nigeria exchange rate stability has a positive and significant effect on export and GDP, which is, if exports are sufficiently risk averse, and increase in exchange rate raises the marginal utility of export revenue and therefore induces them to increase exports. A stable exchange rate will curtail inflation, increase export, maintain a favourable balance of trade, and help to solve the problem of deficits and increase the external reserve of the economy.
POLICY RECOMMENDATIONS
Sequel to the findings of this study, I specifically made the following policy recommendations to the maintenance of stable exchange rate. To control exchange rate, these policies have to be adopted.
- 1. The government should create incentive such as loan subsidy etc, to small scale industries, thereby encouraging them to process on domestic goods into processed goods that will help boast our export.
- 2. The government should encourage the export promotion strategies in order to maintain a surplus balance of trad
- 3. An effective policy should be made based on the fiscal and monetary policies which should be aimed at achieving a realistic exchange rate for naira
- 4. An appropriate environment and infrastructural facilities should be provided so that foreign investors will be attracted to invest in Nigeria This will provide employment opportunities, increase the level of income and the standard of living of the people.
- 5. Strict foreign exchange control polices should be adopted in order to help in determination of appropriate exchange rate value This will go a long way to strengthen the naira.
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