IMPACT OF EXCHANGE RATE VOLATILITY ON ECONOMIC GROWTH IN NIGERIA, 1987- 2014

IMPACT OF EXCHANGE RATE VOLATILITY ON ECONOMIC GROWTH IN NIGERIA, 1987- 2014

ABSTRACT

The degree of volatility of exchange rate movements has led policy makers and researchers to investigate the nature and extent of the impact of such movements on growth. This study examines the impact of exchange rate volatility on the economic growth in Nigeria. The thesis offers empirical evidence on the impact of exchange rate volatility on Nigeria’s economic growth. A review of literature shows that exchange rate volatility can have either positive or negative effects on economic growth depending on the parameter used. The study used annualized time series data for the period 1987-2014 to examine the impact of exchange rate volatility on economic growth in Nigeria using real gross domestic product growth rate as proxy for economic growth. The data sources were mainly from Central Bank Nigeria Statistical Bulletin (various years).The study builds on absolute percentage change measure for exchange rate volatility measurement. The unit root tests employed are based on the work of Dickey-Fuller. Application of Johansen multivariate procedure was to obtain the trace and maximum eigen value likelihood ratio test statistics. The impact of exchange rate volatility on exports and imports were also examined so as to determine the extent to which this volatility can influence these variables via growth. For a more robust model, inflation, a determinant of economic growth was also included to examine its effect. The empirical analyses began with the testing of the four formulated hypotheses for the thesis. From the findings, exchange rate volatility had a negative and significant impact on the economic growth in Nigeria within the period studied. The study also found a negative and significant casual relationship between inflation and economic growth. Exchange rate volatility exerted positive and significant impact on exports, and negative and significant impact on imports. This indicates that higher exchange rate risk encourages exports and discourages imports, and also discourages economic growth. Although economic theories suggest that export oriented economies tend to grow faster than import dependent ones, yet the Nigeria case was different during the period studied. Thus, the study recommends that Nigeria should increase her economy diversification by encouraging production and exportation of primary commodities and discouraging importation of goods that can be locally produced.