Project Materials

IMPACT OF EXCHANGE RATE VOLATILITY AND EXPORT IN NIGERIA (1986 -2016)

ABSTRACT

The study looked at the influence of currency rate volatility on Nigerian exports from 1985 to 2016. The study primarily looked at the impact of exchange rate volatility (proxy by official naira/dollar rate), real GDP, and interest rates (proxy by loan rate) on exports (proxy by net export) in Nigeria between 1985 and 2016. The study used the following econometric techniques: Augmented-Dickey Fuller unit root test, Johansen Cointegration test, Error Correction Mechanism, and Granger Causality test. The findings revealed that the exchange rate and loan rate were stationary at the level, net export was stationary at the first order difference, and real GDP was stationary at the second order difference. The Trace and Maximum Eigen statistic showed a single cointegrating equation between net export, exchange rate, real GDP, and loan rate; The ECM results revealed that the rate of adjustment from short-run equilibrium to long-run equilibrium is roughly 68% per year. From 1985 to 2016, the exchange rate and loan rate had a negative impact on Nigeria’s net exports. The Granger Causality test revealed unidirectional causality between net export, exchange rate, lending rate, and real GDP. The study concluded that exchange rate fluctuation has a detrimental impact on Nigeria’s export performance. The study recommended that the government implement selective credit control to direct funds to the productive sectors of the economy, which will increase production for local consumption and exportation; the country’s resources should be domesticated through an inward-looking policy that will encourage the local utilisation of the country’s enormous resources while also diversifying the country’s export base; Monetary authorities are encouraged to maintain currency rate stability in order to combat inflationary tendencies in Nigeria, which have a detrimental impact on exports; a welcoming business environment should be created. Policymakers should prioritise encouraging exports in a more business-friendly climate that includes adequate security and infrastructure.

Chapter one

INTRODUCTION

1.1. Background of the Study

It is critical to note that exchange rates, whether fixed or floating, influence macroeconomic performance such as import, export, national price level, agricultural output, interest rate, and so on, as well as economic units such as individuals’ purchasing power, firm performance, and so on, which may have an impact on economic growth in the long run (Chong and Tan, 2008).

Chong and Tan’s (2008) empirical investigation demonstrated that exchange rate volatility is responsible for changes in macroeconomic fundamentals in emerging countries.

The volatility and unpredictability of currency rates are attributable to the convergence of the forces that influence them (Hanias and Curtis, 2008).

As a result, the issue of exchange rate sensitivity and determinacy is contentious and has been the subject of much debate. A huge number of research and papers addressed the problem both conceptually and practically, yielding disparate results that have fanned the discussion.

The classic assumption is that exchange rate variations affect relative local pricing, prompting spending to move between domestic and foreign items (Khan et al, 2010; Betts and Kehoe, 2005). According to the new approach, exchange rate swings have little effect on relative prices in the near run.