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IMPACT OF
EXCHANGE RATE FLUCTUATION ON ECONOMIC GROWTH IN NIGERIA (2000-2015)
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Exchange
rate plays an increasingly significant role in any economy as it directly
affects domestic price level, profitability of traded goods and services,
allocation of resources and investment decision. The stability of the exchange
rate is today a formidable bedrock of all economic activities. Since the
adoption of the Structural Adjustment Programme (SAP) in 1986, Nigeria has
moved to various types of floating regimes of exchange rate from the
fixed/pegged regimes between 1960s and the mid-1980s. Floating exchange rate
has been shown to be preferable to the fixed arrangement because of the
responsiveness of the rates to the foreign exchange market (Otuori, 2013).
The
liberalisation of the exchange rate regime in 1986 has led to introduction of
various techniques with the view of finding the most appropriate method for
achieving acceptable exchange rate for the Naira. The frequency with which
these measures were introduced and charged is informed by the determined
efforts of the monetary authorities to unrelentlessly combat the unabating
depreciation and instability of the Naira exchange rate.
According to
Ngereboa and Ibe (2013) exchange rate is the ratio between a unit of one
currency and the amount of another currency for which that unit can be
exchanged at a particular time. Exchange rate of currency is the link between
domestic and foreign prices of goods and services. Also, exchange rate can
either appreciate or depreciate. Appreciation in the exchange rate occurs if
less unit of domestic currency exchanges for a unit of foreign currency while
depreciation in exchange rate occurs if more unit of domestic currency
exchanges for a unit of foreign currency.
In a
continued effort to stabilised the exchange rate, as well as ensure a single
exchange rate for the Naira, numerous variants of market determined rates have
been adopted since 1986. The Second-tier Foreign Exchange Market (SFEM) was
introduced in 1986, while the First and Second tier markets were merged into
enlarged Foreign Exchange Market (FEM) in 1987, this was later changed to the
Inter-Bank Foreign Exchange Market (IFEM) in January 1989. This new system
allowed for bureau de change to source for their foreign exchange requirement
from the IFEM. This was later modified the Autonomous Foreign Exchange Market
(AFEM) in 1995 which allow the Central Bank to purchase foreign exchange from
oil companies (Taiwo and Adesola, 2013).
Despite
these policies, the exchange rate of the Naira has remained unstable since the
deregulation period. The need to investigate the impact of this fluctuating
exchange rate on the financial performance of the banking industry is important
for the economy. For a country that is import dependent, the stability of its
exchange rate is important for credit allocation (Adebiyi, 2006). It is
therefore important to examine how the level of volatility of exchange rate
affects economic growth in Nigeria.
The impact
of exchange rate fluctuations on economic growth in Nigeria still presents
controversies because there is no consensus on whether the impact is negative
or positive as shown in the results of previous studies. Hence, this study will
close the gap in knowledge by exploring the impact of exchange rate fluctuation
on economic growth in Nigeria focusing on 2000-2015.
1.2 Statement of the Problem
Unstable
exchange rate of Nigeria’s domestic currency (Naira) which is domiciled in US
dollars has in some cases made returns on investment to be negative, thereby
discouraging investments in thecountry. Osinubi and Amaghionyeodiwe (2009)
opined that the Naira/US Dollar exchange rate has witnessed a continuous slide
in all the segments of the foreign exchange market (that is official bureau de
change and parallel markets). In the official exchange market, it has
depreciated progressively leading to a precarious operating environment which
can be attributed to the reason why Nigeria has not only been unable to attract
foreign investment to its fullest potentials but also has had a limited
domestic investment. Despite the vast investment opportunities in the country,
many would be investors shy away as a result of uncertainties in the investment
climate which can be attributed to high exchange rate volatility in Nigeria.
A historic
examination of foreign exchange movement in Nigeria shows a considerable level
of volatility, thus necessitating the need to determine its effect on economic
growth in Nigeria. therefore, this study seeks to examine the impact of
exchange rate fluctuation on economic growth in Nigeria focusing on 2000-2015.
1.3 Objectives of the Study
The study
will be conducted with the following objectives:
i.
To examine the impact of exchange rate fluctuation on gross domestic
output in Nigeria.
ii.
To investigate the impact of exchange rate volatility on foreign direct
investment in Nigeria.
iii.
To find out the link between exchange rate fluctuations and
manufacturing sector output.
1.4 Research Questions
This study
will be guided be the following research questions:
i.
What is the impact of exchange rate fluctuation on gross domestic output
in Nigeria?
ii.
Does exchange rate volatility have any impact on foreign direct
investment in Nigeria?
iii.
What is the relationship between exchange rate fluctuations and
manufacturing sector output?
1.5 Research Hypotheses
The
researcher intends to test the following hypotheses:
Hypothesis
1:
Ho: There is no significant relationship between
exchange rate fluctuation and gross domestic output in Nigeria.
HI:There is
a significant relationship between exchange rate fluctuation and gross domestic output in Nigeria.
Hypothesis
2:
Ho: Exchange rate volatility has no impact on
foreign direct investment in
Nigeria.
HI: Exchange rate volatility has an impact on
foreign direct investment in
Nigeria.
Hypothesis
3:
Ho: There is no significant relationship
between exchange rate fluctuations and
manufacturing sector output.
HI: There is a significant relationship between
exchange rate fluctuations and
manufacturing sector output.
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