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Impact of Exchange rate fluctuation on the Nigerian Economic Growth and Development

 Format: MS WORD   Chapters: 1-5

 Pages: 68   Attributes: COMPREHENSIVE RESEARCH

 Amount: 3,000

 Feb 19, 2020 |  10:50 pm |  1171

CHAPTER ONE

INTRODUCTION

 

1.1    Introduction

The exchange rate is perhaps one of the most widely discussed topics in Nigeria today. As macroeconomic policy formulation is a process by which the agencies responsible for the conducts of economic policies manipulates a set of instrumental variables in order to achieve some desired objectives. In Nigeria, these objectives include achievements of domestic price stability, balance of payment equilibrium, efficiency, equitable distribution of income and economic growth and development. Economic growth refers to the continuous increase in a country’s national income or the total volume of goods and services, a good indicator of economic growth to increase in the Gross National Products (GNP) over a long period of time. Developing countries are faced with many kinds of structural transformations, because of this exchange rate policies as it’s seems to be sensitive and controversial to their economies, nations therefore put extra efforts in the management of their exchange rate policies.

In Nigeria, the exchange rate policy has undergone substantial transformation from the immediate post-independence period when the country maintained a fixed parity with the British pound, through the oil boom of the 1970s, to the floating of the currency in since 1986 following the near collapse of the economy between 1982 & 1985 period (Akpan & Atan 2012). During the 1970s through the mid-1980s, the Naira was pegged to other currencies mainly the Dollar, the exchange rate policy tended to encourage over valuation of the Naira as it swung between 0.71 & 0.89 to a dollar in 1970 through 1985 which encourage import of all kinds while discouraging non-oil exports. Nigerian exchange has been more volatile in the post structural adjustment program (SAP) period due to its excessive exposure to external shocks. The effects of the recent global economic meltdown on Nigerian exchange were phenomenon as the Naira exchange rate to the dollar rose astronomically from & 2009. This is attributed to the sharp drop in foreign earnings of Nigeria as results of the persistent fall of crude oil price. Which plunged from a high oil price of US dollar 147 per barrel in July 2007 to a low US dollar 45 per barrel in December 2008? (CBN 2008). hinking in terms of supply and demand is a necessary first step toward understanding exchange rate; we need Tto know the perception and action of international financial investors especially when dealing with floating exchange rate.

Hence it is believed that the billions of naira of foreign exchange trading that occurs each day is related to both international trade in goods and services and  positioning & repositioning of the currency composition of the portfolio of international financial investors. With this exchange rate policy adopted by a country becomes very sensitive to macroeconomic shock. Countries before tends to adopt exchange rate policy that absolve both internal and international shock, this is because the performance of the country’s economy is better if shocks are less disruptive as the economy is more stable with such policy.

Nigeria has adopted several exchange regimes. During the time of the fixed exchange rate, the movement of exchange rate seemed to be stable but the economy were getting worse every day, the alarming deterioration of the economy called for a change, hence the switch over flexible exchange rate, the management of the floating exchange rate has not proved better as the naira deteriorates every day and many macroeconomic variables are not stable by the country. It is therefore important to investigate the effects of exchange rate fluctuation on the Nigeria economic growth and also the factors that influences exchange rate in Nigeria. Consequently, changes in the demand and supply of foreign exchange can outer exchange rates but not the countries international reserves. In this arrangement, the exchange rates serves as a “buffer” for external shocks thus allowing the monetary authorities full discretion.in conducts of monetary policy, the disadvantages of the freely floating regimes have been documented. It is therefore important to know that economic objectives are usually the main consideration in determining the exchange control for instance from 1982-1983, the Nigeria currency was pegged to the British pound sterling on a 1.1 ratio. Before then the Nigerian naira has been devaluated by 10%.

 

1.2    Statement of the Problem

The exchange rate of the naira was relatively stable between 1973 & 1979 during the oil boom era (regulating required). This was also the situation prior to 1990when agricultural products accounted for more than 70% of the nation’s Gross Domestic Products (GDP) (Ewa, 2011). However, as a result of the development in the petroleum oil sector in the 1970s the shares of agriculture in total exports declined while that of the oil increased. However, from 1981, the world oil market started to deteriorate and with its economic crisis emerged in Nigeria because of the country’s dependence on oil sales for her export earnings. To underline the importance of oil export to Nigerian economy, the gross national products (GNP) fell from 76 billion dollars in 1930 to 40 billion dollars in 1996, a number of policy measures to revive and strengthen the economy. The real rate of economic growth became negative as a result of the adoption of Structural Adjustment Program (SAP). (Hinkle 1999) stated that while some economist dispute the ability to change in the real exchange rate to improve the trade balance of developing countries because of elasticity of their low export, others believe that structural policies could however change the long term trend in the trade and prospects for exchange.

1.3    Objectives of the Study

The objective of the study is to show the impacts of exchange rate on gross domestic products and hence how this affects the growth of the country at large.

          The specific objectives of the study are to;

     i.        determine the impacts of exchange rate fluctuation on Nigerian’s growth

   ii.        ascertain the effects of exchange rate on Nigerian export

  iii.        proffer solution on maintaining favorable external reserve position in Nigeria

 

1.4                 Research Questions

i.        To what extent does an exchange rate fluctuation impact on the volume of Nigeria’s economic growth?

ii.      What are the effects of exchange rate on Nigeria’s export?

iii.    How can Nigeria maintain favorable external reserve?

 

1.5    Research Hypothesis

Base on the objectives of the study, the following hypothesis were formulated

H1= Exchange rate fluctuation has no significant impact on the volume of Nigeria’s                         economic growth?

H2= Exchange rate has no significant impacts on Nigeria’s     economic growth?

1.6    Limitations of the Study

The study structured to evaluate the Nigeria exchange rate as the pilot of economy growth and development. The study is therefore limited to the core economic growth in Nigeria and not the socio-political factor of the foreign exchange rate.

1.7     Scope of the Study

This research work designed to cover the period 1980-2016 a period of thirty-six years. The scope consists of the regulatory and deregulatory exchange rate period i.e. the fixed exchange rate and floating exchange rate period. The study is based on cored macro-economic performance of Nigeria between 1980- 2016 more so, it rests can core economic growth and development in Nigeria for the period of thirty –one years.

1.8    Significance of the Study

The significance of the research work lies in the fact that if the causes of the unstable exchange rate of the naira is identified and corrected, the economy will rapidly grow and develop into an advanced one. This is because if unstable exchange rate of the naira is proved to be affection badly the macro-economic major variables, including real exchange rate, interest rate, inflation rate, gross domestic products and trade openness of the country attempts should be made to stabilize the exchange rate. This is because these variables are gauge for the importantly measurement of growth and development of any economy. Importantly, this study would help the government and central bank of Nigeria (CBN) to identify the strength and weakness of each foreign exchange system and hence adopts the policy that the economy best this will definitely enhance growth and development of the economy the study will also serve as a guide to future researchers on this subject.

REFERENCES

Adebiyi, M.A &Dauda, R.O.S (2009). Trade Liberalization policy and Industrialization Growth performance in Nigeria: An Error Correction Mechanism Technique, being a paper presented at the 45th annual conference of the Nigerian economic Society, 24th to 26th August, Central Bank of Nigeria new building auditorium, Abuja.

Aghion, P., P. Bacchetta, R. Ranciere, and K. Rogoff. 2009. “Exchange Rate Volatility and Productivity Growth: The Role of Financial Development.” Journal of Monetary Economics 56 (4): 494-5 13.

Ahmed, H.I and Zarma, A. (1997), “The Impact of Parallel Market on the Stability of Exchange Rate: Evidence from Nigeria”, NDIC Quarterly Publication, Vol 7, No. 2 pp 42-61.

Akpan I.P (2008) ‘Foreign Exchange Market and Economic Growth in an Emerging Market:Evidence from Nigeria’. Economic Business Review volume 2 fall.

Aliyu, S.R.U. (2011). Impact of Oil Price Shock and Exchange Rate Volatility on Economic Growth in Nigeria: An Empirical Investigation, Research Journal of International Studies.

Aliyu, S.R.U. (2011). Impact of Oil Price Shock and Exchange Rate Volatility on Economic Growth in Nigeria: An Empirical Investigation, Research Journal of International Studies.

Amache, R.C and Cerbich, H.H (1986). Principle of Macro Economics. Chinati: South Western Publishing Company.

Anuanwaokoro, M. (1999). Theory and Policy of Money and Banking. Hosanna Publication.

Anyanwu, A. (1995). Fundamentals of Economics. Jonance: Educational Publisher Ltd. Onitsha.

Arize, A. C., T. Osang, and D. J. Slottje. 2000. “Exchange-Rate Volatility and Foreign Trade:Evidence from Thirteen LDCs.” Journal of Business and Economic Statistics 18 (1): 10-17.

Asher, O. J (2012). The Impact of Exchange rate Fluctuation on the Nigeria Economic Growth (1980 — 2010). Unpublished B.sc Thesis of Caritas University Emene, Enugu State, Nigeria.

Azeez, B.A., Kolapo, F.T and Ajayi, L.B (2012). Effect of Exchange rate Volatility on Macroeconomic Performance in Nigeria. Interdisciplinary Journal of Contemporary Research in Business. 4(1), 149-155.

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