IMPACT OF EXCHANGE RATE FLUCTUATION ON ECONOMIC GROWTH IN NIGERIA (2000-2015).
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IMPACT OF EXCHANGE RATE FLUCTUATION ON ECONOMIC GROWTH IN NIGERIA (2000-2015).
Chapter one
INTRODUCTION
1.1 Background for the Study
The exchange rate is increasingly important in any economy because it has a direct impact on domestic pricing levels, the profitability of traded goods and services, resource allocation, and investment decisions.
The stability of the exchange rate is now a powerful foundation for all economic activities. Since the implementation of the Structural Adjustment Programme (SAP) in 1986, Nigeria has transitioned from fixed/pegged exchange rate regimes in the 1960s to various types of floating regimes in the mid-1980s. The floating currency rate has been found to be preferable to the fixed system due to its responsiveness to the foreign exchange market (Otuori, 2013).
The liberalisation of the exchange rate system in 1986 resulted in the adoption of several strategies with the goal of determining the best appropriate strategy for establishing an acceptable exchange rate for the naira.
The frequency with which these measures were implemented and imposed is informed by the monetary authorities’ aggressive efforts to counteract the Naira’s ongoing depreciation and instability.
According to Ngereboa and Ibe (2013), an exchange rate is the ratio of a unit of one currency to the amount of another currency that may be exchanged for that unit at any given time.
The currency exchange rate is the relationship between domestic and foreign prices for products and services. Also, the exchange rate can rise or fall. The exchange rate rises when fewer units of domestic currency are exchanged for a unit of foreign currency, and falls when more units of domestic currency are exchanged for a unit of foreign currency.
Since 1986, multiple market-determined rates have been implemented in an ongoing effort to fix the exchange rate and ensure a single exchange rate for the Naira.
The Second-tier Foreign Exchange Market (SFEM) was established in 1986, and the First and Second-tier markets were amalgamated to form the expanded Foreign Exchange Market (FEM) in 1987, which was later renamed the Inter-Bank Foreign Exchange Market (IFEM) in January 1989.
This new approach enabled bureaus de change to source their foreign exchange requirements from the IFEM. The Autonomous Foreign Exchange Market (AFEM) was later updated in 1995, allowing the Central Bank to purchase foreign exchange from oil corporations (Taiwo and Adesola, 2013).
Despite these regulations, the Naira’s currency rate has remained unstable since deregulation. The necessity to analyse the influence of shifting exchange rates on the financial performance of the banking industry is critical to the economy.
For a country that relies on imports, exchange rate stability is critical for credit distribution (Adebiyi 2006). It is also crucial to investigate how the level of volatility in the currency rate influences economic growth in Nigeria.
The influence of currency rate variations on economic growth in Nigeria remains a source of contention, as there is no agreement on whether the impact is negative or positive, as evidenced by past research.
As a result, this study will bridge the information gap by investigating the impact of exchange rate fluctuations on Nigerian economic growth from 2000 to 2015.
1.2 Statement of Problem
The unstable exchange rate of Nigeria’s indigenous currency (Naira), which is denominated in US dollars, has caused returns on investment to be negative in some situations, deterring investments in the country.
According to Osinubi and Amaghionyeodiwe (2009), the Naira/US Dollar exchange rate has been falling steadily throughout all segments of the foreign exchange market. In the official exchange market, it has gradually depreciated, creating a risky operating environment that can be linked to Nigeria’s inability to attract foreign investment to its full potential
as well as restricted domestic investment. Despite the country’s large investment opportunities, many potential investors are hesitant to participate due to uncertainty in the investment climate, which can be ascribed to Nigeria’s significant exchange rate volatility.
A historical assessment of foreign exchange movement in Nigeria reveals a high level of volatility, prompting an investigation into its impact on Nigerian economic growth. As a result, the purpose of this study is to look into the impact of exchange rate fluctuations on Nigerian economic growth from 2000 to 2015.
1.3 Objectives of the Study
The study will have the following objectives:
i. To investigate how exchange rate fluctuations affect Nigeria’s gross domestic product.
ii. Investigate the effect of exchange rate volatility on foreign direct investment in Nigeria.
iii. To determine the relationship between exchange rate variations and manufacturing sector production.
1.4 Research Questions.
This study will be led by the following research questions.
i. How do exchange rate fluctuations affect Nigeria’s gross domestic output?
ii. Does exchange rate volatility affect foreign direct investment in Nigeria?
iii. How do exchange rate variations affect manufacturing sector output?
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