THE IMPACT OF EXCHANGE RATE FLUCTUATION ON THE NIGERIA ECONOMIC GROWTH

CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

the exchange rate is perhaps one of the most widely discussed topic in Nigeria today. This is not surprising given it’s macro-economic importance especially in a highly import dependent economy as Nigeria (Olisadebe, 1995:20). Macroeconomic policy formulation is a process by which the agencies responsible for the conduct of economic policies manipulate a set of instrumental variables in order to achieve some desire 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 2

indicator of economic growth is the increase in Gross National Product (GNP) over a long period of time. Economic development on the overhead implies both structural and functional transformation of all the economic indexes from a low to a high state (Siyan, 2000:150) one of the macro –economic variables of importance is the exchange rate policy country.

Exchange rate policy involves choosing where foreign transaction will take place (Obadan, 1996). Exchange rate policy is therefore a component of macroeconomic management policies the monetary authorities in any given economy uses to achieve internal balance in medium run. Specifically internal balance mean the level of economic activity that is consistent with the satisfactory control of inflation. On the contrary, external or sustainable current account deficit financed on lasting basis expected capital inflow.

It is important to know that economic objectives are usually the main consideration in determining the exchange control. For instance from 1982 – 1983, the Nigerian currency was pegged to the British pound sterling on a 1.1 ration. Before then, the Nigerian naira has been devalued by 10%. Apart from this policy measures discussed above, the Central Bank of Nigeria (CBN) applied the basket of currencies approach from 1979 as the guide in determining the exchange rate was determined by the relative strength of the currencies of the country’s trading partner and the volume of trade with such countries. Specifically weights were attached to these countries with the American dollars and British pound sterling on the exchange rate mechanism (CBN, 1994). One of the objectives of the various macro – economic policies adopted under the structural adjustment programme (SPA) in July, 1986 was to establish a realistic and sustainable exchange rate for the naira, this policy was 4

recommended in 1986 by the International Monetary Fund (IMF). On exchange mechanism and was adopted in 1986.

The key element of structural adjustment programme (SAP) was the free market determination of the naira exchange rate through an auction system.

This was the beginning of the unstable exchange rate; the government had to establish the foreign exchange market (FEM) to stabilize the exchange rate depending on the state of balance of payments, the rate of inflation, Domestic liquidity and employment. Between 1986 and 2003, the federal Government experimented with different exchange rate policies without allowing any of them to make a remarkable impact in the economy before it was changed. This inconsistency in policies and lack of continuity in exchange rate policies aggregated unstable nature of the naira rate. (Gbosi, 1994:70).

1.2 STATEMENT OF THE PROBLEM

The exchange rate of the naira was relatively stable between 1973 and 1979 during the oil boom er (regulatory require). This was also the situation prior to 1990 when agricultural products accounted for more than 70% of the nation’s gross domestic products (GDP) (Ewa, 2011:78).

However, as a result of the development in the petroleum oil sector, in 1970’s the share of agriculture in total exports declined significantly while that of oil increased. However, from 1981 the world oil market started to deteriorate and with it’s economic crises 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 product (GNP) fell from $76 billion in 1980 to $40 billion in 1996, a number of economic growth 6

became negative as result of the adoption of structural adjustment programme (SAP).

This major problem which this study is designed to solve is whether the exchange rate has any bearing on Nigerians economic growth an d development. While some Economist dispute the ability of change in the real exchange rate to improve the trade balance of developing countries (Hinkle, 1999:21) because of elasticity of their low export, others believe that structural policies could however change the long-term trends in the terms of trade and the prospects for export led growth. Instabilities of the foreign exchange rate is also a problem to the economy.

1.3 OBJECTIVE OF THE STUDY

the objective of the study is to show the impact of exchange rate on gross domestic product and hence how this effect the growth and 7

development of the Nigerian economy identifying the impacts of the unstable exchange rate of the naira on these major macro-economic variables would however, depend on the conditions prevailing in the economy at a given time.

The main objectives of exchange rate policy in Nigeria are:

(1) To present the value of the domestic currency.

(2) To maintain favourable external reserve position.

(3) To ensure price stability and price stability and price levels which are consistent with those of our trading partners.

(4) To have a realistic exchange rate which will remove the existing distortions and distortions and disequilibrium in the external sector of the economy.

(5) To have a stable and realistic exchange rate that is in consonance with other macro-economic fundamentals.

1.4 FORMULATION OF THE RESEARCH HYPOTHESIS

Based on the objectives of the study, the following hypothesis were formulated.

Ho: Exchange rate fluctuation has no significant impact on Nigeria economic growth and development.

Hi: Exchange rate fluctuation has a significant impact on Nigerians economic growth and development.

1.5 SIGNIFICANCE OF THE STUDY.

The significance of this research work lies in the fact that if the cause of the unstable exchange rate of the naira is identified and corrected, the economy will rapidly grow and develop into an advance one. This is so because if the unstable exchange rate of naira is proved to be affecting the macro- economy major variables badly, including Real exchange rate, Real interest rate, inflation rate, gross domestic product and trade openess of the country, attempts should be made to stabilize the exchange rate. This is because these variables are gauge for the measurement of growth and development of any economy. Importantly, this study would help the government and the central bank of Nigeria (CBN) to identify the strength and weakness of each foreign exchange system and hence adopt the policy that suits 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.

1.6 LIMITATIONS OF THE STUDY

The study is structured to evaluate the Nigeria exchange rate as the pilot of economy growth and development. The study is therefore 10

limited to the core economic growth in Nigeria and not the socio- political factors of the foreign exchange rate.

1.7 THE SCOPE OF THE STUDY

This research work is designed to cover the period 1980-2009 a period of thirty years. The scope consist of the regulatory and deregulatory exchange rate period i.e. the fixed exchange rate and the floating exchange rate period. The study is based on core macro- economic performance of Nigeria between 1980-2010 more so, it rests can core economic growth and development in Nigeria for the period of thirty-one years.

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