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Tagged as economic growth
Impact of exchange rate on economic growth in Nigeria (1986-2018)
ABSTRACT
The study explores the impact of exchange rate on economic growth in Nigeria. The objectives of this study were to examine the impact of exchange rate on economic growth in Nigeria, to examine the impact of exchange rate on financial sector. The data used were sourced from the CBN statistical bulletin for the period 1986 to 2018. Two research questions guided the study. The data collected were analyzed using multiple linear regression. The result revealed that nominal exchange rate was significant and had impact on economic growth in Nigeria, a good exchange rate system is needed to be maintained. Following the findings, it was recommended that government should adopt a nominal exchange rate policy, government should ensure a good exchange rate system.
Keywords: exchange rate, economy growth, Nigeria.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Over the past decades, one of the objectives of policy makers in Nigeria has been the maintenance of economic stability that supports the growth of her economy. This was in response to the challenges of inflation pressure on the naira which adversely affected the Nigerian external balances. Various policy regimes most of which have to do with structural adjustments on external equilibrium, exchange rate have been introduced by successive governments in Nigeria since 1986 to address these challenges. For example the Economic Stabilization Act and the Structural Adjustment Programme (SAP) were launched in 1982 and 1985 respectively to lay basis for sustainable and non-inflationary growth. These policy shifts were meant to achieve a competitive exchange rate.
The Central Bank of Nigeria (CBN) partly continued to play the traditional role of attaining economic stability, competitive exchange rate, low inflation and sustainable growth and development through exchange rate policy measures. However, the ability of the CBN to achieve her targeted objectives depends largely on the effectiveness of exchange rate on economic growth. Exchange rate may be described as the price of one currency in terms of another currency. Exchange rates across the world have fluctuated widely particularly after the collapse of the Bretton Woods system of fixed exchange rates. Since then, there has been extensive debate about the impact of exchange rate on economic growth.
The exchange rate of an economy has a crucial role to play as it directly affect all the macroeconomic variables Exchange rate policies in developing countries are often sensitive and controversial. The main objectives of exchange rate policy in Nigeria are to preserve the value of the domestic currency, maintain a favourable external reserves position and ensure external balance without compromising the need for internal balance and the overall goal of macroeconomic stability.
Thus, this study is conducted to evaluate the impact of exchange rate on economic growth in Nigeria. This is because a proper understanding of this impacts will be useful in the settings of exchange rate policy targets and helps the monetary authority to interpret with relative precision the movements in both macroeconomic and financial variables.
1.2. Statement of the problem
Despite the various exchange rate policy adopted by the Central Bank of Nigeria over the years, macroeconomic challenges such as inflation, exchange rate volatility and disequilibrium in external balances continued to threaten the Nigeria’s economic growth.
The failure of exchange rate policy measures to address macroeconomic challenges has been blamed on policy gap. Nigeria operates a system of multiple exchange rates, these include; the official exchange rate from CBN, an interbank rate; another used by international money transfer companies, an Importers And Exporters [I&E] Window established in April 2017 and a black market rate.
Added to the above is the problem knowing precisely, which measure of exchange rate policy is most effective in addressing macroeconomic fluctuation in Nigeria. Most previous studies seemed to be divided on this issue. Therefore, this study seeks to examine the impact of exchange rate on economic growth from 1986 to 2018.
1.3. Research Questions
This study will be based on the following Research Questions:
- What is the impact of exchange rate on economic growth in Nigeria?
- What is the impact of exchange rate on the financial sector of Nigeria?
1.4. Objectives of the Study
The general objective of this study was to determine the extent to which exchange rate led to economic growth in Nigeria. To achieve this general objective, the following specific objectives will be examined.
- To examine the impact of exchange rate on economic growth in Nigeria.
- To examine the impact of exchange rate on financial sector.
1.5 Research Hypotheses
- H0: Exchange rate has no significant impact on economic growth.
- H0: Exchange rate has no significant impact on financial sector.
1.6 Significance of the Study
This study will be of utmost importance to investors, government and the researchers because it will provide policy recommendations to the various Nigeria stakeholders taking adequate measures in the economy for rapid growth and industrialization. It is hoped that the exploration of the foreign exchange market will provide a broad view of the operations of the markets to investors and government. The changing character of the financial sector especially will push studies on exchange rate to new evidence(s). It will contribute to existing literature on the subject matter by investigating empirically the role, which exchange rate plays in economic growth and development of the country. This study will be of benefit to;
The Academia: members of the academia will find the study relevant as it will also form basis for further research and a reference tool for academic works.
Government: this study will reveal to the government happenings in the foreign exchange market. Formulation and implementation of policies based on this findings would ensure growth.
Investors: this study shall also be valuable to the investors especially those who may have research interest as it shall guide their private investment decisions.
1.7 Scope of the Study
This research work is to examine the impact of exchange rate on economic growth in Nigeria. The study covered the period of 1986-2018. This is due to the Structural Adjustment Period of 1985/86 where the country went through a major structural changes and economic data could be recorded from that period.
1.8 Organization of the Study
This study is divided into five chapters. Chapter one is introduction which consists of the background to the study, statement of problem, research questions, research hypotheses, objectives of the study, the significance of the study, the scope and limitations of the study and finally the organization of the study. Chapter two deals with the literature review which consists of the conceptual literature, theoretical literature, empirical literature, theoretical framework, gaps in literature. Chapter three gives the methodology including techniques of analysis of data, types and sources of data, method of estimation and model specification. Chapter four is presentation and analysis of results which contains the presentation of results, interpretation of results and summary of major findings. Finally, Chapter five gives the summary, conclusion and recommendations.
