THE IMPACT OF EXCHANGE RATE MANAGEMENT ON THE GROWTH OF NIGERIA ECONOMY

Abstract

This study was on the impact of exchange rate management on the growth on Nigeria economy. Three objectives were raised which included:  To examine the impact of exchange rate on Gross Domestic Product (GDP) in Nigeria, to evaluate the effect of exchange rate on Gross National Product (GNP) in Nigeria and to determine the impact of exchange rate on unemployment in Nigeria. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from CBN, Abuja. Hypothesis was tested using Chi-Square statistical tool (SPSS).

Chapter one

Introduction

1.1Background of the study

Exchange rate strategically lies at the centre of global financial system and sets the terms on which countries trade each other’s goods and services. Exchange rate is one of the most important key microeconomic variables in the context of general economic policy making and reform programmes. It is an essential element in the determination of the pace at which a country’s economic activities will grow. Thus, discussion on methods of management of exchange rate has been a recurring topic in international monetary economics. According to Chou (2000), the debate on exchange rate management transcended the collapse of the gold standard in the 1930s to the emergence of Bretton Wood System of adjustable peg from the 1940s through other various exchange rates. The debate moves along the two notable poles of fixation and flexibility. With the move from fixed to flexible exchange in Europe in 1973, there was increasing concern about effects of exchange rate variability on trade. Flexible exchange rate which followed the collapse of the Breton Wood System is of concern to economists and policy makers (Williamson, 2001).

The Nigerian economy has been visibly distressed in the different phases of exchange rate management (ERM); each coming with its own, possible problem. According to Idika (1998), frequent changes in foreign exchange policies caused by unstable political environment have prevented these policies from coming full circle. Exchange rate stability, which is essential for growth is influenced greatly by the appropriate policy mix by government in their quest to attain macroeconomic targets

Fluctuations in exchange rate have powerful effects on imports and exports of the countries in question through relative prices of goods. Mordi (2006) posited that the Nigerian economy is highly dependent on imports for both consumption and production. According to World Bank (2003), many oil producing nations are exposed to variations in exchange rate due their large oil wealth. This variation which acts as tax on investment in trade goods production has adverse impact on growth especially on agricultural and manufacturing sectors. Ewa (2011) agreed that the exchange rate of the naira was relatively stable between 1970 and 1979 during the oil boom era and when agricultural produce accounted for more than 70% of the nation’s Gross Domestic Products (GDP). In 1986 when Federal government adopted Structural Adjustment Programme (SAP), the country moved from a pegged to a flexible regime where exchange rate was left completely to be determined by market forces but with monetary authorities intervening periodically in the foreign exchange market in order to attain some strategic objectives (Mordi, 2006). This inconsistency and lack of continuity in exchange rate policies aggravated the unstable nature of the naira rate (Gbosi, 2005). Benson and Victor (2012) and Aliyu (2011) noted that despite various efforts by the government to maintain a stable exchange rate, the naira has depreciated throughout the 80’s to date.

Gross National Product (GNP) was similarly affected. The combined effects of exchange rate variability on GDP and GNP, among others, resulted in the abysmal low level of per capita income of Nigerians. The economic implication of this may not be clear to the ordinary citizens. What they invariably understand is that the Naira has lost reasonable proportion of its purchasing power. This is often reflected in the quantity of goods and services purchased by Naira. Another area where deplorable state of the GDP and GNP in Nigeria usually become evident is in unemployment rate. Consequent upon the intrinsic relationship between these variables, unemployment rate in the country has continued to rise unabated with decline in the GDP and GNP. There is no gainsaying that the economic, psychological and physical consequences of unemployment in a country like Nigeria where provision of social welfare for the unemployed is seen as hallucination, can better be imagined than described

Statement of the problem

Since the generalized fixed exchange rate regime and adoption of floating system by the industrialized countries in 1973, most countries including Nigeria, have experimented with various types of exchange rate arrangement ranging from the peg system to weighted currency basket, managed floating and more recently. to the monetary zone arrangement (Mordi, 2006). Inconsistent management of the various exchange rate regimes adopted so far by the country to help check volatility appears to have jeopardized the overall macroeconomic policy objectives. According to Mordi (2006), once an exchange rate is not fixed it will be subject to variation, thereby making floating exchange rates more volatile. The degree of volatility and the extent of stability maintained are affected by economic fundamentals. Thus, strong economic fundamentals are meant to produce favourable economic environment. The naira exchange rate has been fluctuating since the introduction of the Structural Adjustment Programme (SAP) in 1986. The Nigerian situation since SAP has mostly been characterized by increasing demand which outstripped supply, contributing generally to the continuous depreciation of the naira. The SAP was designed to deal with the underlying imbalances in the Nigerian economy following the collapse of international oil market. This phenomenon of excess demand for foreign exchange in relation to supply has contributed to the dwindling fortunes of the naira in all the foreign exchange markets. Also, weak production base and undiversified nature of the economy are among the factors that led to the depreciation of Naira. The country’s over dependency on oil as the main source of revenue resulted in negligence of non-oil exports for foreign exchange earnings in the early 1970s. The enormous foreign exchange earnings from crude oil exports encouraged the massive importation of finished goods and services. The implication of over dependency on export of oil is that the economy is highly prone to external shocks to the extent that any crash in the oil price will lead to decline in foreign exchange earnings, and destabilizing effects on macroeconomic variables such as exchange rate, gross domestic product, interest rate, and inflation rate. According to Obadan (1998), adverse foreign exchange rate regimes adopted so far have affected the Nigerian economy over the years. The combined effect of dwindling price of oil and the volatility in exchange rate due to inconsistency in rate regimes has led to constant depreciation of naira. It is against this background that this study is structured

Objective of the study

The objectives of the study are;

1.  To examine the impact of exchange rate on Gross Domestic Product (GDP) in Nigeria.
2.  To evaluate the effect of exchange rate on Gross National Product (GNP) in Nigeria.
3. To determine the impact of exchange rate on unemployment in Nigeria

Research Hypotheses

The following research hypotheses are formulated to guide the study;

H1: there is no impact of exchange rate on Gross Domestic Product (GDP) in Nigeria.

H2: there is no effect of exchange rate on Gross National Product (GNP) in Nigeria

Significance of the study

The study will give a clear insight on the impact of exchange rate management on the growth of Nigeria economy. The study will be beneficial to students, lecturers and policy makers. The study will suggest solution to fluctuation of our exchange rate. The study will also serve as a reference to other researcher that will embark on the related topic

Scope of the study The scope of the study covers the impact of exchange rate management on the growth of Nigeria economy. The study will be limited to central bank of Nigeria

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