IMPACT OF EXCHANGE RATE VOLATILITY ON THE NIGERIAN ECONOMY, 1987-2015

IMPACT OF EXCHANGE RATE VOLATILITY ON THE NIGERIAN ECONOMY, 1987-2015

ABSTRACT

This study examined the impact of exchange rate volatility on the Nigerian economy using five (5) key macroeconomic indicators. To achieve these objectives, which are to; ascertain the impact of exchange rate volatility on economic growth, determine the impact of exchange rate volatility on foreign portfolio investment, establish the impact of exchange rate volatility on foreign direct investment, examine the impact of exchange rate volatility on international trade volume and evaluate the impact of exchange rate volatility on foreign reserve management. The study employed Bollerslev (1986) Generalized Autoregressive Heteroscedasticity which is a modification of Engel (1982) Autoregressive Heteroscedasticity Model. Exchange rate volatility entered the models as the independent variables, while the dependent variables were economic growth, foreign portfolio investment, foreign direct investment, trade flows and external foreign reserves. Variables such as degree of economic openness, inflation rate, interest rates, government revenue, market size, and monetary policy and interbank lending rates entered the models as controlled variables. The findings of the study revealed that exchange rate volatility is harmful to the Nigerian economy, with relatively high welfare cost. The implication is that exchange rate volatility increases the risk of factor of domestic firms trading internationally, which lead to increased prices to hedge against additional risk premium. Based on the findings, the study made recommendations that could stablise the foreign exchange rate and reduce welfare cost. Some of the recommendations are; the need to stabilise exchange rate policies, build countercyclical fiscal buffers during economic boom, diversifying the Nigeria economy to reduce vulnerability to external shocks, tax all foreign exchange transactions to reduce the volatility of foreign exchange, restructure the economy to eliminate all structural rigidities that hinders the ease of doing business, among others.