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Product Category: Seminar

Product Code: 00007357

No of Pages: 32

No of Chapters: 5

File Format: Microsoft Word

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Expectation on the Relationship between Exchange Rate and Domestic Credit:

Sectoral Variations and Controlling for Interest Rate:

Expectation on Interest Rate as a Control Variable:


Descriptive statistics

Unit Root Test

The Impact/Regression Analysis

Discussion Of Major Findings




Policy Recommendations

REFERENCES:Top of FormTop of Form







The impact of exchange rates on investment decisions is a crucial aspect of economic analysis, particularly in the context of emerging markets such as Nigeria. The Nigerian economy, characterized by its reliance on oil exports and vulnerability to external shocks, has experienced fluctuations in its exchange rates over the years (Ogundipe et al, 2014). Understanding how these fluctuations influence investment decisions is essential for policymakers, investors, and economic analysts seeking to navigate the complexities of the Nigerian financial landscape. This study aims to delve into the intricate relationship between exchange rate movements and investment decisions, unraveling the implications for various sectors and stakeholders.

Nigeria, as one of the largest economies in Africa, has undergone significant economic transformations in recent years. The country's economic landscape is marked by diverse sectors, including oil and gas, agriculture, manufacturing, and services (Suberu et al, 2015; Chete et al, 2014).The exchange rate, being a key economic indicator, plays a pivotal role in shaping investment dynamics. Nigeria has faced challenges such as exchange rate volatility, inflationary pressures, and external economic uncertainties, all of which can impact the decision-making processes of investors (Abdullahi, 2018). Therefore, a comprehensive examination of the impact of exchange rates on investment decisions is crucial for gaining insights into the economic dynamics of the country.

Despite the importance of understanding the relationship between exchange rates and investment decisions, there exists a gap in the existing literature regarding the specific nuances of this relationship within the Nigerian context. The impact of exchange rate fluctuations on different sectors, the mechanisms through which it influences investment decisions, and the effectiveness of existing risk mitigation strategies are areas that warrant thorough investigation. Additionally, the evolving nature of the global economic landscape and the dynamic policy environment in Nigeria necessitate an up-to-date analysis to provide relevant insights for both academics and practitioners.


This study seeks to address the following research questions to fulfill its overarching objective:

  1. How do exchange rate fluctuations impact investment decisions in Nigeria?
  2. To what extent does exchange rate stability influence credit to private sector?

The objectives of the study are as follows:

  1. To examine how the exchange rate fluctuations impact investment decisions in Nigeria.
  2. To examine the influence of exchange rate stability on credit to private sector?

This study covers a period of 22 years, ranging from 2001 to 2022, to capture recent developments and trends in exchange rate movements and their impact on investment decisions. The study incorporates relevant variables which are the real exchange rate, interest rate and the domestic credit to private sector to proxy for investment decision.  The study uses domestic credit to private sector as a measure of investment decision due to the fact that the variable exhibits the actual behavior of investors of all kind in the domestic sectors of the Nigerian economy. Also, the dependent variable of the study is domestic credit to private sector, the independent variable is the exchange rate while interest rate is incorporated as control variable.

It is important to acknowledge certain limitations that may impact the scope and generalizability of the study. These limitations include potential data constraint as data were only available up to the year 2022 on relevant variables. Pertinent to note is the dynamic nature of the economic environment and the inherent challenges in accurately predicting exchange rate movements. Additionally, the study may not encompass all possible factors influencing investment decisions, and variations in individual investor behavior may introduce complexities that cannot be fully addressed within the scope of this research. Despite these limitations, the study aims to provide valuable insights into the intricate relationship between exchange rates and investment decisions in Nigeria.


In this section of the study, we reviewed relevant literature which are sacrosanct to give us an insight into the mystery behind the impact of exchange rate on investment decision in Nigeria. We briefly reviewed the literature to examine what other researchers have related to the scope of this study in terms of methodology, scope and findings.

Harchaoui et al. (2005) examined the effects of exchange rate on investment with evidence from 22 canadian manufacturing industries. Using industry level data spanning between 1981-1997 they studied the relationship between exchange rate and investment. They employed techniques such as GARCH, OLS, two stage least square to achieve the objective of their study. Their empirical results show that the overall effect of exchange rates on total investment is statistically insignificant. Further investigation reveals the non-uniform investment response to exchange rate movements in three channels. First, it is important to distinguish between environments that have low and high exchange rate volatilities. Through changes in output demands, depreciations would have a positive effect on total investment when the exchange rate volatility is low. Yet, this stimulative effect becomes considerably smaller as the volatility increases. Second, these results for total investment are mainly due to movements in other machinery and equipment, and not to investment in information technology and structures. Third, investment in industries with low markup ratios are more likely to be affected by exchange rate movements.

With the use of data on the variables obtained from the Central Bank of Nigeria (CBN) Statistical Bulletin and World Development Indicators, the study of Ewubare and Ushie (2022) examined the relationship between exchange rate and economic growth in Nigeria between 1981 and 2020.  The specific objectives were to determine the effects of exchange rate, inflation and interest rate on gross domestic product (GDP). Data was analyzed using descriptive statistics, unit root as well as bounds cointegration tests and ARDL model. The unit root test results showed that the variables were mixed integrated. While inflation was stationary at levels, the other variables in the model were stationary at first difference. The bounds cointegration test showed that long-run relationship existed between  GDP growth  and the  underlying explanatory  variables. Findings from the study showed that exchange rate and inflation negatively impacted on economic growth. The finding indicates that increase in exchange rate and price level was detrimental to the growth of the Nigerian economy. There was evidence of a significant positive effect of interest rate on GDP growth. The authors recommend the federal government through the CBN should ensure that exchange rate policy is consistent to provide opportunity for a realistic and stable exchange rate capable of driving economic growth in Nigeria. 

Alasha (2020) examined the relationship between exchange rate fluctuations and its impact on the Nigerian economic growth using exchange rate, interest rate, inflation rate and trade balance as variables. Data was sourced from Central Bank of Nigeria statistical bulletin & publications from the National Bureau of statistics. The analysis was done using the classical least regression model and ordinary least square method (OLS) and other techniques such as the Augmented Dickey Fuller test, Cointegration and Granger Causality test. Findings indicated that inflation rates and exchange rates negatively impacts GDP while interest rates had positive impact on GDP.

Adelowokan et al. (2015) evaluated the effect of exchange rate volatility on investment and growth in Nigeria using the vector error correction (VEC) method and found out that exchange rate volatility has a negative effect on investment and growth while exchange rate volatility has a positive relationship with inflation and interest rate in Nigeria. Rapetti et al. (2012) presented evidence that real exchange rate volatility impedes economic growth and reduces productivity and growth in a large sample of industrial and developing countries. Oseni (2016) also analyzed the effect of exchange rate volatility and private sector consumption in Sub-Sahara Africa. The study employed generalized method of moments (GGM) dynamic panel regression econometric tools, which showed a negative relationship between exchange rate volatility and manufacturing sector performance. Amoah (2019) examined the link between exchange rate volatility and long-run productivity growth. It revealed a non-linearity between real exchange rate volatility and output volatility among emerging market economies. Their finding suggests that real exchange rate volatility aids in absorbing shock and limiting  output  volatility,  but  too  much  volatility  in  the  exchange  rate  increases  output  volatility. 

Alagidede and Ibrahim (2017) assessed the causes and effects of exchange rate volatility on Ghana’s economic performance using the vector error correction model (VECM) to analyze the annual time-series data spanning 1980 to 2013. The study revealed that excessive volatility adversely affects Ghana’s economic growth. Bakare (2011) analyzes the consequences of the foreign exchange rate reforms on the performances of private domestic investment in Nigeria. The analysis started with the test of stationarity and co-integration of Nigeria’s time series data. The empirical study finds that the data were stationary and co integrated. The multiple regression results show a significant but negative relationship between floating foreign exchange rate and private domestic investment in Nigeria.

Iyke and Ho (2017) differentiates the short-run impacts from the short run impact of exchange rate uncertainty on domestic investment using annual data for the period 1980-2015 in Ghana. They find that exchange rate uncertainty has differential impacts on domestic investment in the short run. That is, while the current level of uncertainty enhances investment, previous levels of uncertainty dampen investment. In the long run, exchange rate uncertainty has a positive impact on domestic investment.

It is evident in the literature that various researchers have investigate the impact of exchange rate on various sectors of the Nigerian economy and other external economies of the world ranging from impact of exchange rate on growth and development to investment and to other relevant macroeconomic variables. Also, various researchers exploring this discourse has employed various econometric technique such as OLS, ARDL, VECM, etc. which also support the fact that there are extant work of researchers in the literature. This study is quite different from other study in terms of the variable used as proxy for investment decision. We used domestic credit to sector to measure investment decision which exhibits the clearer stand and behavior of investors.

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