EXCHANGE RATE VOLATILITY AND THE NIGERIAN ECONOMY (1995-2022)
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EXCHANGE RATE VOLATILITY AND THE NIGERIAN ECONOMY (1995-2022)
ABSTRACT
This study investigates the impact of exchange rate volatility on the Nigerian economy over the period 1995 to 2022. The research explores how fluctuations in the exchange rate have influenced key macroeconomic indicators such as inflation, gross domestic product (GDP), interest rate, trade balance, and foreign direct investment (FDI). Employing both descriptive and econometric methods, particularly the GARCH model to measure volatility, and Ordinary Least Squares (OLS) regression to estimate relationships, the study reveals that persistent exchange rate volatility has had significant adverse effects on economic growth and macroeconomic stability in Nigeria. Findings indicate a strong correlation between exchange rate instability and inflationary trends, as well as reduced investor confidence and trade disruptions. The study recommends strengthening foreign exchange policy, enhancing monetary coordination, diversifying the economy, and building robust foreign reserve buffers to mitigate the effects of currency volatility. It concludes that a more stable exchange rate regime is crucial for achieving sustained economic growth and development in Nigeria.
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study
Exchange rate volatility has become a prominent issue in the discourse on macroeconomic management in Nigeria. Since the deregulation of the foreign exchange market in 1986, Nigeria has experienced frequent fluctuations in its exchange rate, shifting from a fixed regime to a flexible and market-driven system (CBN, 2021). These fluctuations are often linked to global economic dynamics, crude oil price shocks, political instability, and structural deficiencies in Nigeria’s economy (Oyejide, 2019).
The exchange rate plays a central role in determining a country’s external competitiveness, trade balance, and capital flows. For Nigeria, whose economy is heavily dependent on crude oil exports, changes in the exchange rate significantly affect import prices, inflation, and economic growth (Akinlo & Adejumo, 2019). A depreciating naira, for instance, can increase the cost of imported goods, fuel inflationary pressure, and disrupt production that relies on imported raw materials (Adedipe, 2020).
Between 1995 and 2022, the Nigerian foreign exchange market has experienced heightened instability characterized by persistent depreciation of the naira, increased speculative activities, and multiple exchange rate windows. This period also saw significant policy shifts, including the introduction of the Interbank Foreign Exchange Market (IFEM), the Dutch Auction System (DAS), and the more recent Investors and Exporters (I&E) window (CBN, 2022). These policy responses, while aimed at ensuring stability and transparency, have yielded mixed results in terms of economic outcomes (Nwafor, 2021).
1.2 Statement of the Problem
Despite various monetary and fiscal reforms targeted at exchange rate management, Nigeria continues to grapple with unstable exchange rate movements. Volatility in the foreign exchange market has led to unpredictability in planning and investment decisions, adversely affecting macroeconomic variables such as GDP growth, inflation rate, and the country’s balance of trade (Eze & Okpala, 2021).
The persistent depreciation of the naira, especially during global oil price collapses and political uncertainty, has heightened the exposure of the Nigerian economy to external shocks (Bamidele, 2020). Additionally, foreign investors often hesitate to commit capital due to fears of currency losses, thereby limiting foreign direct investment inflows (Adegbite & Nwankwo, 2018). There is also concern that currency fluctuations hinder Nigeria’s trade competitiveness and exacerbate inflationary trends (Olisadebe, 2021).
Therefore, it is imperative to examine the extent to which exchange rate volatility has affected economic growth and macroeconomic stability in Nigeria over the past two decades.
1.3 Objectives of the Study
The broad objective of this study is to evaluate the impact of exchange rate volatility on the Nigerian economy between 1995 and 2022.
The specific objectives are to:
Examine the trend and patterns of exchange rate movements in Nigeria from 1995 to 2022.
Investigate the impact of exchange rate volatility on Nigeria’s Gross Domestic Product (GDP).
Assess the effect of exchange rate fluctuations on inflation and interest rates.
Determine the relationship between exchange rate volatility and foreign direct investment.
Explore the effect of exchange rate instability on Nigeria’s trade balance.
1.4 Research Questions
This study seeks to answer the following questions:
What are the trends and patterns of exchange rate volatility in Nigeria from 1995 to 2022?
How has exchange rate volatility affected Nigeria’s GDP?
What is the impact of exchange rate fluctuations on inflation and interest rates?
How does exchange rate instability influence foreign direct investment?
What is the relationship between exchange rate volatility and trade balance in Nigeria?
1.5 Research Hypotheses
The study will test the following hypotheses:
H₀₁: Exchange rate volatility has no significant impact on Nigeria’s GDP.
H₀₂: Exchange rate volatility does not significantly affect inflation and interest rates.
H₀₃: Exchange rate volatility has no significant effect on foreign direct investment.
H₀₄: Exchange rate volatility does not significantly influence Nigeria’s trade balance.
1.6 Significance of the Study
This study is significant for policymakers, investors, researchers, and economic planners. By understanding the nature and impact of exchange rate volatility, government agencies can design more effective monetary policies to stabilize the naira and promote macroeconomic stability (Obadan, 2018). Investors can also use the findings to hedge against exchange rate risk in their investment decisions. Additionally, the study contributes to the growing body of literature on exchange rate economics in developing economies.
1.7 Scope of the Study
The scope of this study covers the period from 1995 to 2022. It focuses on analyzing the impact of exchange rate volatility on key macroeconomic indicators such as GDP, inflation, interest rates, foreign direct investment, and trade balance in Nigeria. The study employs secondary data from the Central Bank of Nigeria (CBN), World Bank, and National Bureau of Statistics (NBS).
1.8 Operational Definition of Terms
Exchange Rate Volatility: The degree of variation in the exchange rate of the naira relative to other currencies over time.
Gross Domestic Product (GDP): The total market value of all final goods and services produced in Nigeria during a specific period.
Foreign Direct Investment (FDI): Investment by foreign entities in Nigerian assets or businesses.
Inflation: The rate at which the general level of prices for goods and services rises.
Trade Balance: The difference between the value of a country’s exports and imports.
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