EXCHANGE RATE AND ECONOMIC GROWTH IN NIGERIA (1980-2020)

The relationship between the exchange rate and economic growth in Nigeria between 1980 and 2020 was investigated in this study. It is important to understand the effects of exchange rate, inflation, and interest rate on gross domestic product (GDP). The Central Bank of NIGERIA provided the information on the variables as well as The National Bureau of Statistics, Nigeria (CBN) Statistical Bulletin, and World Development Indicators. The price of one currency in relation to another currency is known as the exchange rate. The country's rate of output growth is also estimated using this exchange rate. Nigeria has used a variety of exchange rate regimes over the years, and current study is focused on how exchange rates affect the country's economic growth, with a focus on the typical Nigerian's purchasing power and the volume of international trade. In order to achieve this, the conventional linear regression model is utilized, and the ordinary least squares econometric technique is also applied to assess the effect of exchange rate on economic growth. Given the results, this study suggests, among other things, that the federal government, through the CBN, should make sure that exchange rate policy is consistent to allow for a reasonable and stable exchange rate that can stimulate economic growth in Nigeria. 

Keywords: exchange rate, inflation rate, interest rate, economic growth.

 

Title page-- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -  - - - - - - - --  -- - - - -  -1 

Certification - - - - - - - - - - - - - - - - - - - - - - - - - --- - - - - - - - - - - - - - - - - - - - - 2 

Dedication -- - - - - -- - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - -  - - -   - - - - - - -3 

Acknowledgement - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -  - - - - - - --4 

Table of content - - - - - - - -- - - -  - - - - - - - - - - - - - - - - - - - - - - - - -  - - - - - - - -  5 

Abstract - - - - - - - - - - - - - - - - ---------- - - - -  -   - - -  - - - - - - - - - - - - - - - - - - - -9  

1.1 Background of the Study - -- - - - - - -  - - - - - - -  - - - - - - - - - - - - - -  - - - - 10 

1.2 Statement of the Problem - - - - - - - - - - - - - - - - - - - - - -  - - - - - - --  - - - - 12 

1.3 Research Questions - - - - - - - - - - - - - - - - - - - - - - --- - - - - - - - - - - - - - - - 13 

1.4 Objective of the study --- - - - - - - - - - - - - - - - - - - - -  - - - -  - - - - - - -- 13 

1.5 Statement of Hypothesis- - - - - - - -  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 13 

1.6 Significance of the Study - -- - - - - - - - - - - - - - - - - - - - - -  - - -  - - - - - - - - - 14 

1.7 Scope of the Study - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 15 

2.1 Introduction - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - 16 

2.2 Conceptual Framework-- - -- - - - - - - - - - - - - - - - - - -  -- - - -  - -- - - - - - - - - 16 

2.2.1 Currency Devaluation -- - - - - -- - - - - -- - - - - - - - - - - - -- - - - - - - - - - - - -  -  16 

2.2.2 Exchange Rate -- - - - - - - - - - - - - - - - - - - -- - - - - - - -- - - - --  - - - - - - 17 

2.2.3 Economic Growth-- - - - - - - -- - - - - - - - -- - - - - - - - - - -- - - - - - - - - - - - 17 

2.2.4 Export--- - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - -  -- - - - - -  - - - - - 18 

2.2.5 Import- -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -  - 19 

2.2.6 Inflation Rate- - - - - -- - -- - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - -  - - - - 19 

2.2.7 Interest Rate  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - 19 

2.2 Conceptual Review- - - - --  - - - - - - - - - - - - - - - - - - - - - - - -- - -  - - - - - - - - 20 

2.3  The Purchasing Power Parity Theory- - -- - - - - - - - - - - - - - - - - - -  -- - - - - - - 25 

2.3.1 The Elasticity Approach-- - - - - - - - - - - - - - - - - --- - - - - - - -  - - -- - - - - - -27 

2.3.2 The Monetary Approach - - --- - - - - - - - - - - - --- - - - - - - - - - - - - - - - - - - 28 

2.4 Empirical Review -- - - - - - - - - - - - - - - - - - --- - - - - - - - - - - - - - - - - - - - --  -32 

 

3.1 Introduction -- - - - - - - - - - - - - - - - - - --- - - - -  - - - - - - - - - - - - - - - - - - - - 38 

3.2 Theoretical Framework -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - -  -3 

3.3 Model Specification- -- - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - -- - -- - - - - 40 

3.4 Estimation Techniques -- - - - - - - - - - - - - - - - - -- - - - - - - - - -- - - - - - -  - - -- 42 

3.5 Nature and Source of Data- --  - - - - - - -- - - - - - - - - - - - - - - - - - -  - - - - - 42 

4.1 Introduction - - - -- - - - - - - - - - - - - - - - - -- - -- -- - - - - - - - - - - - - - - - - - -  -43 

4.2 Presentation of Results- - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 43 

4.2.1 OLS Regression Table For Model 1 - - - - - - - - - - - - - -- - - - - - -- - - - - - - -43 

4.2.2 OLS Regression Table For Model 2 - - - - - - - - - - - - -- - - - - - -- - - - - - - -43 

4.3 Result Interpretation- --- - - - - - - - - - - - - - - - - - - - -  - - - - - - -- - - - -  - - - - - 44 

4.3.1.Analysis of Result based on Economic Criteria- - - - -- - - - - -  - - - - - - - - - - 44 

4.3.2 Analysis based on statistical Criteria -  - - -- - - - - -- - - - - - - - - - - - - - - - - - - - 46 

4.3.2.1 The Coefficient of Determination - --- - - - - - - - - -- - - - -- - - - - - -  - - - -  46 

4.3.2.2 The t-test Statistics- - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 46 

4.3.2.2.1 T-stat table for model 1 -- - - - - - - -  - -- - - - - - - - - - - - - - - -  - - -- - - -- -47 

4.3.2.2.2 T-stat table for model 2 - - - - - - -  -- - - - - - - - - - - - - - - -  - - - - - - - - - - -47 

4.3.2.3 The f-statistics Test- - --- - - - - - - - - - - - - - - - - - - - - - - - -   - -- - - - -  - - - -48 

4.3.3.3.1 F-stat table for model 1 - - - - - - - - - - - -- - - - - - - - - - - - - - -  - - - - - - - -48 

4.3.3.3.2 F-stat table for model 2 - - - - - - - - - - - -- - - -- - -- - - - - - - - - - - - - - --- -49 

4.3.3 Analysis based on Econometric Criteria--- - - - - -  - - - - - - - - - - -- -  - -  - - - 49 

4.3.3.1 Test of Autocorrelation- - --- - - - - - - - - - - - -- - - - -- - - - - - - - - - - - - - - - 49 

4.3.3.2 Normality Test- - - - - - - - -- - - - - - --- - - - - - - - - -  - - - - - - -- - - - - - - 51 

4.3.3.3 Heteroscedasticity Test--- - - - - - - - - - - -  -- - - - - - - - -- - - - -- - - -  - - - - - 52 

4.3.3.4 Multicollinearity Test- - - - - - --- - - - - - - - - - - - - - - - - - - -- -- - - - - - -  53 

4.3.3.4.1 Multicollinearity Test Table - - - - - - - - -- - - - - - - - - -- - - - - - -  - - - - - 53 

4.4 Evaluation of Research Hypothesis- -  - - - - - - --- - - - - - - - -  - - - - - - - - - - - 54 

Summary of Findings, Conclusion and Policy Recommendation 

5.1 Summary of Findings- - --- - - - - - - - - - - - - - -  -- - - - - - - - - - - - - -  - - - - - 56 

5.2 Conclusion- - - - - -- - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - 57 

5.3 Policy Recommendation- - - -- - - - - - - - - - - - - - - - - - - - -- -- - - - - - --- - - - 57 

References - -- - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - -- - - -- -  - - - - - 59 

 

 

 

 

 

In economics, exchange rate is one of the most frequently debated issues in Nigeria today. Macroeconomic policy formulation is a process by which the agencies played a vital role for the conduct of economic policies try to influence a set of instrumental variables that help achieve specific objectives. Within Nigeria. These goals include achieving domestic price stability, a balanced budget, fair income distribution, economic expansion and development. Because the exchange rate of an economy directly affects all macroeconomic factors, such as domestic price indicators, the profitability of traded goods and services, resource allocation, and investment decisions, monetary authorities and the private sector work to maintain stability in these factors (Ajakaiye, 2001). 

To further understand the concept of exchange rate, we have to take a close look at naira fluctuation. Only a decision by the government or monetary authority of a nation can change the currency's official value under a fixed exchange rate regime. These actions are occasionally taken by governments, frequently in response to irregular market pressures. Most times the government uses Naira Devaluation as a means of correcting exchange rate imbalances.  Devaluation, which is the intentional reduction in the official exchange rate, lowers the value of the currency; in contrast, revaluation is an increase in the value of the currency. Countries that have a fixed exchange rate or semi-fixed exchange rate use this monetary policy tool. Some analysts have questioned the central bank's devaluation strategy, claiming that it might have serious consequences for Nigeria's importdependent economy. 

As a result, whenever the Naira depreciates, the cost of importing all of these inputs skyrockets, raising the cost of manufacturing, which the manufacturers reflect in higher pricing. Consider a situation where a government has set the value of 10 of its currency to equal one dollar. It might declare a devaluation by declaring that moving forward, 20 of its currency units will be equivalent to one dollar. Due to this, the devaluing nation's currency would be twice as expensive to Americans as the U.S. dollar. The rate of exchange might be changed from ten units to one dollar to five units to one dollar as part of a revaluation; this would make the currency twice as expensive to Americans and the value of the dollar in their own country. When a government devalues its money, it frequently does so because the fixed exchange rate of the currency has become unworkable due to the combination of market forces and policy actions. A nation must have enough foreign exchange reserves, frequently dollars, and be willing to use them in order to accept all offers of its currency at the predetermined exchange rate in order to maintain a fixed exchange rate. A nation must devalue its currency to a level that it can and will support with its foreign exchange reserves if it is unable or unwilling to do so. 

This might help to lower the current account deficit by lowering imports and raising exports for the nation. Other policy issues may force a country to change its fixed exchange rate. For example, rather than implementing unfavorable fiscal spending policies, a government may try to boost aggregate demand in the economy through devaluation in order to combat unemployment. Revaluation, which makes a currency more valuable, may be used to minimize a current account surplus, where exports surpasses imports, or to try to keep inflationary pressures at bay. 

Various international organizations, such as the International Monetary Fund (IMF), have been established since the 1930s to assist nations in coordinating their trade and foreign exchange policies, thereby avoiding successive rounds of devaluation and retaliation.Article IV of the IMF charter was revised in 1976 to encourage policymakers to avoid "manipulating exchange rates...to obtain an undue competitive advantage over other members." The IMF also established each member country's right to freely adopt an exchange rate regime with this modification. In order to gain foreign assistance to rectify its balance of payments problems, the government propositioned the IMF for a three-year program to effectively alter and restructure the Nigerian economy's consumption and productive patterns, as well as to eliminate price imbalances and heavy reliance on crude oil exports and imports of consumer and producer goods. 

 

Because of the implementation of the structural adjustment program, the real rate of economic growth turned negative (SAP). Foreign exchange rate instability is another issue for the economy. The depreciation of the naira has created so much imbalance in the country that the economy is now fragile, if not in chaos. The goal of this analysis is to uncover the key causes of the Naira's depreciation in order to propose solutions to help the Naira appreciate significantly. 

The fact that the Naira is depreciating further at a time when our economy is deregulated is a serious concern. Because of the depreciation of the Naira, every commodity in the country is now very expensive. Therefore, a reduction in the degree of over-valuation of the Naira was to be brought about in an effort to adopt a realistic exchange rate policy. That is the motivation propelling my interest in this study. 

 

As a result, the statement of problems is formulated by answering the following questions: 

 

The purpose of this study is to see how the devaluation of the Naira affects the Nigerian economy. 

i. Examine how the currency rate fluctuation affects Nigeria's economic Growth ii. To observe the impact of currency rate on Nigerian exports iii. To determine how Nigeria's inflation rate affects economic growth. 

 

 

Ho: There is no causality effect of the Nigerian exchange rate fluctuation on the Nigerian economic growth 

Hi: There is causality effect of the Nigerian exchange rate fluctuation on the Nigerian economic growth 

Ho: There is no significant relationship between currency rate and Nigerian export 

Hi: There is significant relationship between currency rate and the Nigerian export 

Ho: There is no significant relationship between inflation rate and economic growth in Nigeria. 

H1: There is significant relationship between inflation rate and economic growth in Nigeria. 

 

The significance of the study is to provide useful synthesis and analysis of how vital the devaluation of the naira is to further build the economy in terms of growth. The purpose of this project is to do research on how the depreciation of the naira has affected the Nigerian economy. It is frequently employed in developing nations to minimize significant external imbalances, encourage export development, adjust the value of the real exchange rate, and support local market activity. Importantly, this study would aid the government and the central bank of Nigeria (CBN) in determining the advantages and disadvantages of each foreign exchange system, allowing them to adopt the course of action that will best promote economic growth and development. The study will also act as a guide for future researchers in this area. 

The affected areas of the Nigerian economy due to the Naira's Exchange will be covered in this study, including the gross domestic product, gross national product, unemployment, inflation, import and export rate, and others. It will also cover the reform, the structural adjustment program, the analysis of the IMF's operations that had an impact on the Nigerian economy, and the impact of the naira's devaluation on poverty levels in Nigeria. The study covers the exchange rate of Naira from the period of 1980-2020