Foreign Exchange Rate and Economic Growth Nexus: New Evidence from Nigeria (1981 to 2017)

Abstract

The paper estimates the impact of foreign exchange rate on economic growth of Nigeria. The study makes used of Autoregressive Distributed Lag model (ARDL) on time series Data, for the period 1981-2017. The data set on real effective exchange rate, inflation rate, money supply, lending interest rate, real GDP and foreign direct investment, oil revenue and trade openness (% of GDP) were tested for stationary using ADF and PP tests and established stationarity at I (1) for five variables and I (0) for two variables. The correlation test result shows that the highest correlation is between money supply and oil revenue while the lowest correlation is between inflation rate and foreign direct investment. The ARDL Co-integration test revealed the existence of long-run relationship among the variables. ARDL test results reveal that real effective exchange rate is negatively and significant in explaining economic growth in Nigeria in the long-run. In the short-run, the lag value of real effective exchange rate is insignificant in explaining the changes in the current rate of economic growth. in the same period, the lag value of money supply is negative and significant in explaining GDP. But in the long run it is positive and significant in explaining economic growth in Nigeria. The rate of inflation both in the short run and long run is negatively and significant in explaining GDP. The Error Correction Term value of 20.7% shows the speed of adjustment toward long-run equilibrium The findings of the study imply that interest rate in Nigeria is inflationary. Meaning that increase in the rate of interest rate will lead to an increase inflation rate. Therefore, the research study concludes that the impact of foreign exchange rate on the economic growth of Nigeria is negative and significant and that the monetary authorities should adopt flexible exchange rate in Nigeria.

Exchange Rate Fluctuations and Economic Performance of Manufacturing Sector: Evidence from Nigeria

“…However, Economic performance of the manufacturing sector responded negatively and significantly to Naira/Pound Sterling exchange rate fluctuations (meaning, changes in Naira value against Pound Sterling) for the considered sample period. These findings corroborate the work of previous researchers (Oseni, 2016;Alagidede& Ibrahim, 2017;Ufoeze, et al, 2018;Amoah &Ahiabor, 2019;Musa, et al, 2019;Ribeiro, et al, 2020;Alasha, 2020;Onwuka, et al, 2020;Iheanachor&Ozegbe, 2021;Elijah, et al, 2022;Ewubare&Ushie, 2022) who found that a fluctuation of the Naira to foreign currency has a negative impact on the performance of the Nigerian economy. Meanwhile, the third hypothesis found that Foreign exchange supply on the contrary led to a positive impact on the economic performance of the manufacturing sector but does not significantly have effect on the economic performance of manufacturing sector for the sample period being considered.…”

“…Ewubare and Ushie ( 2022) noted that exchange rate has direct impact on macroeconomic variables therefore plays a vital role of growth in nations building. However, reliance on importation for capital goods and finished goods, unexampled reduction in utilization rate in trade in addition to diverted attention from agricultural sector are responsible for low incomes and debased living standards of Nigerians (Musa, Muhammad, Mohammed &Adamu, 2019). The implications and consequences of fluctuation in exchange rate, on the macroeconomics of developing nations like Nigeria has been a great concern (Iheanachor&Ozegbe 2021).…”

Exchange rate fluctuations and economic growth nexus: An empirical evidence from Nigeria

“…Therefore, in theory, if the right regime is adopted, it could facilitate better business climate and potentially enhance economic growth in the long-run. Economic theory does not clearly articulate how exchange rate regimes can affect economic growth, and there are a limited number of studies which investigate this relationship (Musa et al, 2019) [15,16] . i).…”

“…In portfolio analysis, the current account balance becomes the reflection of the government budgetary imbalance when the private sector is satisfied with the holding of financial assets. The inability of government to sell bonds to foreigners without an excessive fall in their prices reflected in the overall balance of payment deficit Musa et al (2019) [15,16] . ii).…”

“…International competitiveness is measured in a common currency. The purchasing power parity this theory, countries with higher domestic inflation than their competitors would face their appreciating exchange rate Musa et al (2019) [15,16] . iii).…”