IMPACT OF EXCHANGE RATE ON ECONOMIC GROWTH IN NIGERIA (1986-2018)
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IMPACT OF EXCHANGE RATE ON ECONOMIC GROWTH IN NIGERIA (1986-2018)
Chapter one
INTRODUCTION
1.1 Background for the Study
Over the last few decades, one of the goals of Nigerian policymakers has been to maintain economic stability, which supports the country’s economic progress. This was in response to inflationary pressures on the naira, which had a negative impact on Nigeria’s external balances.
To address these difficulties, successive Nigerian governments have implemented a variety of policy regimes, the majority of which include structural modifications to external equilibrium and exchange rates, since 1986.
For example, the Economic Stabilisation Act and the Structural Adjustment Programme (SAP) were implemented in 1982 and 1985, respectively, to create the groundwork for long-term, inflation-free growth. These policy moves aimed to achieve a competitive exchange rate.
The Central Bank of Nigeria (CBN) continues to play its customary role of achieving economic stability, a competitive exchange rate, low inflation, and long-term growth and development through exchange rate policy measures.
However, the CBN’s ability to attain her goals is heavily reliant on the effectiveness of the exchange rate in stimulating economic growth. The exchange rate can be defined as the price of one currency in terms of another.
Exchange rates have changed greatly over the world, particularly after the fall of the Bretton Woods fixed exchange rate system. Since then, there has been much disagreement concerning the effect of exchange rates on economic growth.
The exchange rate of an economy plays a key role because it directly affects all macroeconomic factors. Exchange rate decisions in emerging countries are frequently delicate and divisive.
The primary goals of Nigerian exchange rate policy are to protect the value of the native currency, maintain a favourable external reserve position, and assure external balance without jeopardising the requirement for internal balance or the overall goal of macroeconomic stability.
Thus, the purpose of this study is to assess the impact of exchange rates on economic growth in Nigeria. This is because a thorough understanding of these effects is useful in determining exchange rate policy targets and allowing the monetary authority to interpret macroeconomic and financial variable movements with more precision.
Statement of the Problem
Despite the numerous exchange rate policies implemented by the Central Bank of Nigeria throughout the years, macroeconomic difficulties such as inflation, currency rate volatility, and external balance imbalances remained to hinder Nigeria’s economic growth.
The failure of exchange rate policies to meet macroeconomic difficulties has been attributed to a policy gap. Nigeria has a system of numerous exchange rates, including the official CBN rate, an interbank rate, another utilised by international money transfer businesses, an Importers And Exporters [I&E] Window launched in April 2017, and a black market rate.
In addition to the foregoing, it is unclear whether measure of exchange rate policy is most successful in resolving macroeconomic fluctuations in Nigeria. Most previous studies appeared to be divided on this subject. As a result, this study aims to investigate the impact of exchange rates on economic development from 1986 to 2018.
This study will focus on the following research questions:
What impact does the exchange rate have on Nigeria’s economic growth?
What impact does the exchange rate have on Nigeria’s financial sector?
1.4. Objectives of the Study
The overall goal of this research was to evaluate how much the exchange rate influenced Nigerian economic growth. To attain this overarching goal, the following specific objectives will be examined.
The purpose of this study is to look at how exchange rates affect Nigeria’s economic growth.
To investigate the effects of exchange rates on the financial industry.
1.5 Research Hypotheses.
H0: The exchange rate has no major effect on economic growth.
H0: Exchange rates have no considerable impact on the banking industry.
1.6 Significance of the Study
This study will be extremely valuable to investors, the government, and scholars since it will provide policy suggestions to various Nigeria stakeholders for taking appropriate economic steps to promote rapid growth and industrialization.
It is envisaged that the examination of the foreign currency market will offer investors and the government with a comprehensive understanding of how the markets operate.
The changing nature of the financial sector, in particular, will require new evidence(s) in exchange rate studies. It will add to the existing research on the issue by experimentally analysing the effect of exchange rates in a country’s economic growth and development. This study will be beneficial to:
Members of the academic community will find the study useful because it will serve as a foundation for future research and a reference tool for academic work.
Government: This study will expose to the government what is happening in the foreign currency market. The development and implementation of policies based on these findings would ensure growth.
Investors: This study will also benefit investors, particularly those with a research interest, as it will drive their private investment selections.
1.7 Scope of Study
The purpose of this research is to look at how currency rates affect economic growth in Nigeria. The investigation ranged from 1986 to 2018. This is owing to the 1985/86 Structural Adjustment Period, during which the country saw significant structural changes and economic data could be recorded.
1.8 Organisation of the Study
The study is organised into five chapters. The first chapter is an introduction, which includes the study’s history, statement of problem, research questions, research hypotheses, study objectives, the study’s importance, scope and constraints, and lastly the study’s organisation.
The second chapter is a literature review that includes conceptual, theoretical, and empirical literature, as well as a theoretical framework and gaps in the literature. The third chapter discusses methodology, which includes data analysis techniques, data kinds and sources, estimating methods, and model formulation.
Chapter four is the presentation and analysis of outcomes, which includes the presentation of results, interpretation of results, and summary of key findings. Finally, Chapter 5 provides the summary, conclusion, and suggestions.
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