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Impact of exchange rate on economic growth in nigeria (1996-2020)

ABSTRACT

Exchange rate is the price of one currency in terms of another currency. Exchange rates 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 from 1996-2020 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.

CHAPTER ONE

 

 

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

A country foreign exchange policy is derived from the perceives overall economic objectives to achieve and the expected direction of growth (CBN, 2003). Consequently, non conflicting sectoral policies are conceived within the ambit of the overall policy framework such that each sectoral policy reinforces each other.

A simplest definition has it that exchange rate is the price of one currency in terms of another. Thus, it measures the worth of a domestic economy in terms of another economics (Obeski, 1998).

Exchange rates regularly quoted between all major currencies mostly that of the trading partners, but frequently one important currency (that is the dollar) is used as a standard in which to express and compare all rates.

It is one of the key tools in economic management and in the stabilization and adjusts policies in developing countries. Exchange rates policies play a vital role in determine the position of a country in terms of international competition.

In autonomous markets, the exchange rate was seen to be volatile, and depreciated at will. This exerted pressure on the official foreign exchange market, and made the monetary policy target of the period to continually unrealistic due to the inflationary financing of government deficit with the deregulation of the economy; a market-based framework for the determination of exchange rate was adopted. It was envisaged that the realization of macroeconomic stability would lead to the elimination of distortions in the external sector and this enhance growths, stimulate non oil exports, increase foreign exchange inflows, moderate demand pressure in the foreign exchange market and generally improve foreign exchange to eliminate the parallel market premium capital flight and also enhance the inflow of foreign investigation (CBN: 2003).

From the forgoing it becomes clear that the concept of exchange rate policies has the impact so as to show in the one of the macroeconomic variables, it contribute to economic growth of Nigeria. It is therefore necessary that a research work be carried out to this effect so as to provide suggestion that will served as a guide towards the actualization of macroeconomic objectives that will bring about the level of targeted economic growth in Nigeria.

 

1.2 STATEMENT OF THE PROBLEM

The exchange rate of the naira was relatively stable between 1973 and 1979 during the oil boom era (regulating require). This was also the situation prior to 1990 when agricultural products accounted for more than 70% of the nations gross domestic products (GDP) (Ewa, 2011). However, as a result of the development in the petroleum oil sector in 1970’s, the share of agriculture in total exports declined

significantly while that of oil increased. However, from 1981. the world oil market started to deteriorate and with its economic crises emerged in Nigeria because of the country’s dependence on oil sales for her export earnings. To underline the importance of oil export to Nigerian economy, the gross national product (GNP) fell from $76 billion in 1930 to $40 billion in 1996, a number of policy measures to revive and strengthen the economy. The real rate of economic growth became negative as a result of adoption of Structural Adjustment Program (SAP)

 

(Hinkle, 1999) stated that, while some economist disputes the ability to change in the real exchange rate to improve the trade balance of developing countries because of the elasticity of their low export, others believe that structural policies could however, change the long –term trends in the trade and prospects for exported growth. Instabilities of the foreign exchange rate is also a problem to the economy.

 

1.3 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

  1. To determine the impact of exchange rate fluctuations on Nigeria’s growth
  2. To ascertain the effect of exchange rate on Nigerian

 

 

1.4 RESEARCH QUESTIONS

  1. To what extent does exchange rate fluctuation impacts on the volume of Nigeria’s economic growth?
  2. What is the effect of exchange rate on Nigeria’s export?

 

1.5 RESEARCH HYPOTHESIS

Base on the objectives of the study, the following hypothesis were formulated.

  1. HO: exchange rate has no significant impact on Nigeria’s economic growth
  2. HO: exchange rate has no significant impact on export in Nigeria.

 

1.6 SCOPE OF THE STUDY

This research work is designed to cover the period 1996-2020, a period of thirty one years. The general overview of the profile of Nigerians exchange rate over the years shall be discussed.  The scope consist of the regulatory and deregulatory exchange rate period that is the fixed exchange rate and the floating exchange rate period. The study is based on core macro-economic performance of Nigeria between 1996-2020.

 

1.7 SIGNIFICANCE OF THE STUDY

The significance of this study lies on the recommendations made at the end of the following:

  1. Importer who make payment in foreign currencies.
  2. Policy makers of the central bank of Nigeria who issues the guideline government international trade practice.
  3. Bank-especially the commercial banks and merchant banks.
  4. The general public who has a right contribute and be informed of the activities our banking institutions.
  5. It is hoped that findings and recommendations of this study will adequately benefit the various interest groups named above.

 

1.8 LIMITATIONS OF THE STUDY

During the course of this research the researcher experience a number limitation constrains.

The researcher was faced with already known problem of gathering material from the Nigeria organization. Almost every information is classified and therefore most of the companies and banks approached were weary of releasing financial information related to the topic.

Gathering of information from public organization such as federal ministry of finance, federal of statistics and central bank of Nigeria was also difficult.

 

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