ABSTRACT
This study examined the impact of exchange rate fluctuation on economic growth in Nigeria. The study was anchored on neoclassical growth theory. The study covered the period of eleven years starting from 2001 to 2011. Secondary data collected was analysed with the use of regression analysis and findings indicated that fluctuation in exchange rate in Nigeria have a significant negative impact on the economy of the nation. Based on these findings, the study therefore recommends that when embarking on exchange rate policy of a nation, the impact of the fluctuation rate should be considered first in order to avoid possible negative impact on the economic growth of the country.
CHAPTER ONE
INTRODUCTION
1.1 Background of the study
A volatile and constantly fluctuating economy leads to depreciating exchange rate which can adversely affect a number of key macroeconomic variables such as private investment, GDP growth and the demand for money (Valadkhani, 2010). Over the time, Nigeria has experienced high fall in value of its currency; Nigerian Naira against the dollar and other major currencies since its independence till date. According to the report and observation of Omaka(2015) in 1999, one dollar was exchanged for 65 naira and in 2015 a dollar was exchanged for 240 naira and letter, a dollar was exchanged for 170 naira. This shows that for over the years the currency has fallen by approximately 50% and as result leads to high cost of living and high rate of inflation. According to Madura (2000), exchange rate measures the value of one currency in units of another currency. As economic condition changes, exchange rates also substantially change. Determinants of exchange rates volatility are of interest because of the exchange rates potential linkages to other economic variables (Karl, 2004). Previous studies showed that volatile exchange rates depress or adversely affect international trade due to uncertainty and the associated risks of fall in the value of the currency (Sauer, 2001; Dell’ ariccia, 1999; Chowdhurry, 1993) quoted in Karl (2004). Investments and profitability of companies and other businesses are negatively affected by exchange rates volatility (Bleeney, 2001).
1.2 Statement of the Problem
The recent devaluation of Nigeria currency which has greatly affected the rate of exchange rate of Naria to dollar in nigeria currency bring much debate regarding the policies needed to sustain rapid economic growth and promote productivity in Nigeria. External competitiveness, exchange rate fluctuations seen in Nigeria currency and the appropriate exchange rate policy have featured prominent as one of the major factor that affect Nigeria economic growth. Taking into consideration the broader perspective of the impact of exchange rate fluctuations , it could be noted that this fluctuation rate is one of the major problem which affect the economic growth of Nigeria since the cost of living will tend to increase and the purchasing ability of naira will be less as compared to other currency. This greatly have significant effects on the economy for at least two reasons; first, even short-term real exchange rate volatility can impose large welfare costs (Bleeney, 2001). Especially in a context of underdeveloped financial markets, where firms and households face cash-flow constraints. Such volatility reduces the level of international trade, affects investment decision, and hinders growth possibilities. Second, such welfare costs are magnified in the case of prolonged and sustained exchange rate fluctuation, which can badly distort resource allocation. Exchange rate management in Nigeria has been quite challenging owing to the myriads of problems. This explain why Usman (1993:15) said that the areas of failure in exchange rate policy have been accentuated by two considerations; one “micro” and the other “macro” The micro consideration has to do with the structure and
institutional setting of the foreign exchange market itself. Inspite the reforms in the foreign exchange market, the regulators of the foreign exchange market have had to contend with some operators that were fast trying to outguess them and exploit the lope-holes in the markets arrangement to their personal advantage. How one recalls the alleged cases of multiple bids submitted by foreign exchange applicants and/or their banks, some shady deals under the autonomous markets
round tripping by operators accessing funds through official market and reselling them on the parallel market and other under the table sales, where bank officials collected perennial from buyers etc. All these added to the fact that the implication of some of the measures were not exhaustively considered, left the CBN in a situation where it was merely reacting to the situations apparently always a few step behind those that were busy trying to abuse and exploit the system to their advantage.
The second problem is that of government conduct of macro economic policy itself. There have been always inconsistency and lack of continuity of policy. Government intervention through the monetary and fiscal policies has influence the exchange rate a lot. Experience has shown that there was undue emphasis on achieving monetary restraint without a commensurate emphasis on fiscal restraints. For instance, in the first two years of SAP, 1986 and 1987, the government adopted a fairly enhanced and consistent approach to both monetary and fiscal policies. Usman (1993), says that from the beginning of 1988 government became obsessed with demonstrating short-term nature of SAP and began to remove the steps in fiscal restraint. This saw the federal governments’ budget deficit rise from N12 billion in 1988 to N15 billion in 1991. Essentially, what is required is a realistic approach that is mindful of the strength and structural weakness that are inherent in the economy but still anchored on a deregulated framework.
Due to these problem, this research will evaluate the impact of exchange rate fluctuations on economic growth in Nigeria.
1.3 Research Question
In other to gather relevant responses and to carryout this study, the following research questions were designed and posed as follows:-
- What are some of the impacts of exchange rate fluctuation on economic growth of Nigeria?
- To what extent has Nigeria Naria depreciated over other currency in past 11years(2001-2011)?
- Is there a bidirectional relationship between real exchange rate and economic growth?
- What are the determinants (determining factors) of real exchange rate in Nigeria?
1.4 Objective of the Study
The main purpose of the study is to investigate the impact of exchange rate fluctuations and economic growth on Nigeria. Other specific objective of the study are:
- To determine the impact of fluctuation in real exchange rate on economic growth in Nigeria.
- To ascertain The depreciation in the naira exchange rate over the period of 11 year(2001-2011).
- To determine the bidirectional relationship between real exchange rate and economic growth in Nigeria.
- To determine the determinants (determining factors) of real exchange rate in Nigeria.
1.5 Research Hypothesis
The following hypothesis are designed to test the research questions posed.
H1:There is significant impact of fluctuation in real exchange rate on economic growth in Nigeria.
H0: There is no significant impact of fluctuation in real exchange rate on economic growth in Nigeria.
H1: There is significant relationship between real exchange rate and economic growth in Nigeria.
H0: There is no significant relationship between real exchange rate and economic growth in Nigeria.
1.6 Significant of the Study
This study is significant since it highlights various factors which determines the rate of exchange rate in Nigeria and why the is constant fluctuation of naira over other currency. The study will also highlight the impact of depreciation of Naria on the productive sector and on trading subsector which are the major contributor to economic growth. It also determine the extent Nigeria Naria has depreciated over other currency in past 11years(2001-2011). On the other hand, the study will also serve as a source of reference for other researcher, add to the existing knowledge and give suggestions on what to be done by the in other to encourage Nigeria economic growth. The findings of the study is of help to Government as it give possible ways in which Nigerian government can contribute and build a stable economic growth in Nigeria.
1.7 Organization of the study
Each of the chapter in this study contains the following heading which were discussed .
Chapter one contains the introduction of to the study, chapter two contains a review of related literature, chapter three contains the method used for the study, chapter four contains the result while chapter five contains the discussion of the finding of the research, the study will also cover the recommendation and the conclusion of mad by the study.
