ABSTRACT
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 chisquare etc. When we found out real exchange rate has a positive
effect on the GDP.
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TABLE OF CONTENTS
Title Page — – – – – – – – – -i
Approval page – – – – – – – – – -ii
Dedication – – – — – – – – – -iii
Acknowledgement – – – – – – – – -iv
Abstract – – – – – – – – – – -vi
Table of content – – – – – – – – -vii
1.0 Chapter one: Introduction
1.1 Background of the study – – – – – – -1
1.2 Statement of the problem – – – – – – -5
1.3 Objective of the study – – – – – – -6
1.4 Formulation of the research hypothesis – – – – -8
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1.5 Significance of the study – – – – – – -8
1.6 Limitations of the study – – – – – -9
1.7 Scope of the study – – – — – – – -10
CHAPTER TWO: LITERATURE REVIEW
2.1 The Purchasing Power Parity theory – – – – -11
2.2 Theoretical issues – – – – – – – -14
2.3 The traditional flow model – – – – – – -17
2.4 The elasticity approach – – – – – – -18
2.5 The monetary approach – – – – – – -21
2.6 The portfolio balance model – – – – – -24
2.7 Empirical literature – – – – – – – -30
2.8 Limitations of the previous studies – – – – – -43
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2.9 Definition of the terms – – – – – – -46
CHAPTER THREE: Research Methodology
3.1 Theoretical framework — – – – – – – -50
3.2 Model specification – – – – – – – -51
3.3 Method of evaluation – – – – – – -54
3.4 Estimation procedure – – – – – – – -56
3.4.1 Economic A Priori test- – – – – – – -57
3.4.2 Statistical test (first-order) – – – – – -58
3.4.3 Econometric (second order) test – – – – -60
3.5 Nature and sources of data – – – – – – -62
CHAPTER FOUR: Presentation And Analysis Of Result
4.1 Presentation and interpretation of result – – – -63
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4.2 Economic a priori criteria – – – – – – – -64
4.3 Statistical criteria (first-order test) — – – – -66
4.3.1 Coefficient of multiple determination (R2
) – – – -66
4.3.2 The student’s T-test — – – – – – -67
4.3.3 F-statistics – – – – – – – – – -69
4.4 Econometrics criteria – – – – – – – -71
4.4.1 Test for Auto-correlation – – – – – – -71
4.4.2 Normality test for Residual – – – – – -73
4.4.3 Test for heteroscedasticity – – – – – -74
4.4.4 Test for multicollinearity – – – – – – -77
5.0 CHAPTER FIVE: SUMMARY OF FINDINGS,
CONCLUSIONS AND POLICY RECOMMENDATIONS
5.1 Summary of Findings — – – – – – 79
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5.2 Conclusions – – – – – – – – -80
5.3 Policy Recommendation – – – – – – -81
5.4 Bibliography – – – – – – – – -84
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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
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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.
3
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
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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).
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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
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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 longterm 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
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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.
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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
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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
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limited to the core economic growth in Nigeria and not the sociopolitical 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 macroeconomic 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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