Impact Of Exchange Rate On The Economic Growth
(A Case Study Of Anambra Motor Manufacturing Company Enugu)
The impact of exchange rates on economic growth is a complex and interconnected phenomenon that involves various factors influencing a nation’s financial landscape. Exchange rates play a crucial role in shaping a country’s economic trajectory by affecting its trade balance, investment levels, and overall competitiveness in the global market. A fluctuating exchange rate can influence exports and imports, directly impacting the balance of trade. A depreciating currency may boost export competitiveness, potentially fostering economic growth by expanding market share abroad. Conversely, a strengthening currency might lead to increased imports, impacting domestic industries. Furthermore, exchange rate movements influence foreign direct investment (FDI) and capital flows, influencing the availability of funds for investment and infrastructure development. The intricate relationship between exchange rates and economic growth underscores the significance of policymakers’ efforts to maintain stability and competitiveness in the international economic landscape.
This research work is centred on the impact of exchange rate fluctuation on the Nigeria’s economic growth with special emphasis on purchasing power of the average Nigeria and the level of international trade transaction. Without exchange rate the exchange of goods and services among trading partners will be faced with a lot of problems, which may virtually narrow it down to trade by barter. This exchange also is used to determine the level of output growth of the country. Hence, the rate at which exchange fluctuates calls for a lot of attention. However, with already existing exchange rate policies, a constant exchange rate has not been attained. The rate by which exchange rate fluctuates brings about uncertainty in the trade transaction, and also the rate of naira has been unleashed and continues to depreciate. This has resulted to declines in standard of living of the population increase in costs of production (this is because most of the raw materials needed by industries are usually imported), which resulted in cost-push inflation. We made use of many tests, like the t-statistics table, f-statistic table and the chi-square etc. When we found out real exchange rate has a positive effect on the GDP.
Title page
Approval page
Dedication
Acknowledgement
Abstract
Table of content
CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Objective of the study
1.4 Research Questions
1.5 Research Hypothesis
1.6 Scope of the Study
1.7 Significance of the Study
1.8 Limitation of the Study
CHAPTER TWO
2.0 LITERATURE REVIEW
2.1 Determinants of the Nigerians Exchange Rate Volatility
2.1.1 Foreign Exchange Rate Volatility, Export Performance and Economic Growth
2.1.2 The purchasing Power Parity Theory
2.1.3 Theoretical Issues
2.1.4 The Traditional Flow Model
2.1.5 The Elasticity Approach
2.1.6 The Monetary Approach
2.1.7 The Portfolio Balance Model
2.2 Empirical Literature
2.3 Limitations of Previous Studies
CHAPTER THREE
3.0 RESEARCH METHODOLOGY
3.1 Model Specification
3.2 Method of Data Analysis
3.3.1 Economic Criteria
3.3.2 Statistical test (first order)
3.3.3 Econometric (second order test)
3.4 Nature and Source of Data
CHAPTER FOUR
4.0 PRESENTATION AND ANALYSIS OF RESULT
4.1 Presentation of Results
4.2 Result Interpretation
4.2.1.Analysis of Result based on Economic Criteria
4.2.1.2 Analysis based on the A priori Criteria
4.2.2 Analysis based on statistical Criteria
4.2.2.1 The Coefficient of multiple Determination
4.2.2.2 The t-test Statistics
4.2.2.3 The f-statistics Test
4.2.3 Analysis based on Econometric Criteria
4.2.3.1 Test of Auto correlation
4.2.3.2 Normality Test
4.2.3.3 Heteros cedasticity Test
4.2.3.4 Multi collinearity Test
4.3 Evaluation of Research Hypothesis
CHAPTER FIVE
5.0 SUMMARY OF FINDINGS, CONCLUSION AND POLICY RECOMMENDATION
5.1 Summary of Findings
5.2 Conclusion
5.3 Policy Recommendation
Bibliography
Journals
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The exchange rate is perhaps one of the most widely discussed topics in Nigeria today. 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 desired objectives. In Nigeria, these objectives include achievements of domestic price stabilit6y, 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 is the increase in Gross National Product (GNP) over a long period of time. Economic development on the other hand implies both structural and functional transformation of all the economic indexes from a low to a high state.
After several years of exchange rate floating among countries exchange rate arrangement in Nigeria have undergone significant changes over the past four decades. It shifted from a fixed regime in the 1960’s to a pegged arrangement
between the 1970’s and the med 1980’s and finally to the various types of the floating regime since 1936, following the adoption of the structural adjustment programme (SAP). A regime of managed float, without any strong commitment to defending any particular patty has been the predominant characteristics of the floating regime in Nigeria since 1986. The fixed exchange rate regime induced an overvaluation of the naira and was supported by exchange control regulations that engendered significant distortions in the economy. This gave rise to massive importation of finished good with the adverse consequences for domestic production, balance of payments position and the nation’s external reserves level. Moreover, the period was bedeviled by sharp practices perpetrated by dealers and end users of foreign exchange.
The floating exchange rate regime implies that the forces of demand and supply will determine the exchange rate. This regime assumes the absence of any visible hand in the foreign exchange market and that the exchange rate adjusts automatically to clear any deflect or supply of market. 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 rate serves as a “buffer” for external shocks thus, allowing the monetary authorit9ies full discretion
in the conduct of monetary policy. The disadvantages of the freely floating regime have been documented.
It is 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 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 determination of the exchange rate which was determined by the relative strength of the currencies approach from 1979 as the guide in determination of the exchange rate which 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 with such countries with the American dollars and British pound sterling on the exchange rate mechanism (CBN, 1994). One of the objective of the various macro-economic policies adopted under the structural adjustment programme (SAP) in July, 1986, was to establish a realistic and sustainable exchange rate for the naira, this policy was recommended in 1986 by the international monetary fund (IMF). One exchange rate mechanism was adopted in 1986. the key element of structural
adjustment programme (SAP) was the freely 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 make remarkable impact in the economy before it was changed. This consistency in policies and lack of continuity in ex-change rate policies aggravated the instability nature of the naira exchange rate (Gbosi, 1994).
1.2 STATEMENT OF THE PROBLEM
The exchange rate of the naira was relatively stable between 1973 and 1979 during the oil boom era (regulating require). This was also the situation prior to 1990 when agricultural products accounted for more than 70% of the nations gross domestic products (GDP) (Ewa, 2011). 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 its 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 1930 to $40 billion 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 programme (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 trends in the trade and prospects for exported growth. Instabilities of the foreign exchange rate is also a problem to the economy.
1.3 OBJECTIVES OF THE STUDY
The objectives of the study is to show the impact of exchange rate on gross domestic product and hence how this affect the growth of the country.
The sub-objectives are
1. To determine the impact of exchange rate fluctuations on Nigeria’s growth
2. To ascertain the effect of exchange rate on Nigerian export.
1.4 RESEARCH QUESTIONS
1. To what extent does exchange rate fluctuation impacts on the volume of Nigeria’s economic growth?
2. What is the effect of exchange rate on Nigeria’s export?
1.5 RESEARCH HYPOTHESIS
Base on the objectives of the study, the following hypothesis were formulated.
1. HO: exchange rate has no significant impact on Nigeria’s economic growth
2. HO: exchange rate has no significant impact on export in Nigeria.
1.6 SCOPE OF THE STUDY
This research work is designed to cover the period 1980-2010, a period of thirty one years. The general overview of the profile of Nigerians exchange rate over the years shall be discussed. The scope consist of the regulatory and
deregulatory exchange rate period that is the fixed exchange rate and the floating exchange rate period. The study is based on core macro-economic performance of Nigeria between 1980-2010.
1.7 SIGNIFICANCE OF THE STUDY
The significance of this 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 so because if the unstable exchange rate of the naira is proved to be affecting badly the macro-economic major variables, including real exchange rate, real interest rate, inflation rate, gross domestic product 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 the central bank of Nigeria (CBN) to identify the strength and weakness of each foreign exchange system and hence adopts 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.
1.8 LIMITATIONS OF THE STUDY
The study is structured to evaluate the Nigeria exchange rate as the pilot of economic growth and development. The study is therefore limited to the core economic growth in Nigeria and not the socio- political factors of the foreign exchange rate.
Impact Of Exchange Rate On The Economic Growth:
Exchange rates play a significant role in a country’s economic growth. The impact of exchange rates on economic growth is complex and multifaceted, and it can vary depending on several factors, including the exchange rate regime, the country’s level of development, and the overall economic conditions. Here are some ways in which exchange rates can influence economic growth:
- Export Competitiveness: A weaker domestic currency (depreciation) can make a country’s exports cheaper for foreign buyers. This can boost the demand for a country’s goods and services in international markets, leading to increased exports. Higher export revenues can stimulate economic growth by increasing production and job opportunities in export-oriented industries.
- Import Costs: Conversely, a weaker domestic currency can make imports more expensive. While this can hurt consumers by raising prices, it can also stimulate domestic production as consumers and businesses opt for locally-produced goods and services. This can potentially lead to the growth of domestic industries.
- Inflation: Exchange rate fluctuations can impact inflation rates. A rapid depreciation of the domestic currency can lead to higher inflation as the cost of imported goods and raw materials increases. High inflation can erode purchasing power and negatively affect economic growth.
- Foreign Investment: Exchange rates can influence foreign direct investment (FDI). A stable or strong currency can attract foreign investors looking for a stable investment environment, while a volatile or depreciating currency may deter such investments. FDI can bring in capital, technology, and expertise, which can contribute to economic growth.
- Capital Flows: Exchange rate movements can also affect capital flows in and out of a country. A strong currency might attract foreign capital seeking higher returns, while a weakening currency may lead to capital flight. The direction of capital flows can impact domestic investment and, consequently, economic growth.
- Fiscal and Monetary Policy: Exchange rates can affect a country’s monetary and fiscal policy choices. For example, a country may raise interest rates to defend its currency, which can have implications for borrowing costs and investment. These policy decisions can influence overall economic growth.
- Balance of Payments: A country’s balance of payments, which includes the trade balance (exports minus imports), can be affected by exchange rates. Persistent trade deficits can have long-term implications for a country’s economic growth, as they may lead to a buildup of foreign debt.
- Speculation and Market Sentiment: Exchange rates are influenced by market sentiment and speculative activities. Large swings in exchange rates driven by speculative behavior can lead to uncertainty and instability, which can be detrimental to economic growth.
It’s important to note that the impact of exchange rates on economic growth is not uniform across all countries and situations. Exchange rate movements are influenced by a complex interplay of domestic and international factors, and their effects on economic growth can vary depending on the broader economic context. Moreover, exchange rate policies and interventions by governments and central banks can further complicate the relationship between exchange rates and economic growth.