The Consequences of Exchange Rate Fluctuations on Nigeria’s Economic Performance: An Autoregressive Distributed Lag (ARDL) Approach

Abstract

This study examined the effects of persistent exchange rate fluctuations on Nigeria's economic performance. It was motivated by the quest to ascertain why concerted efforts of the monetary authorities in Nigeria to pursue internal and external balances yielded little or no positive results in recent periods. The study employed the autoregressive distribution lag (ARDL) technique to test the short-run and long-run effects of exchange rate fluctuations on economic growth using annual time series data from 1986 to 2019. The empirical result revealed that the exchange rate, net direct foreign direct investments, and inflation rate had a significant adverse impact on Nigeria's economic growth in the long run. By implication, the net effect of this study established that excessive exchange rate fluctuations are detrimental to Nigeria's economic growth. On the premise of the empirical findings, this study recommends export diversification in agriculture and agro-investment in Nigeria. The state should influence the foreign exchange system through credible reforms that would reduce the adverse effects of an unstable foreign exchange system on the Nigerian economy.

The Dynamics of Exchange Rate Movements and Economic Growth in Nigeria: Does the Mundell–Fleming Model Stand?

“…This current study revealed that exchange rate depreciation, inflation, and monetary policy rates have negative impacts on real GDP in both short and long-run. This revelation is consistent with extant empirical findings (Adewuyi & Akpokodje, 2013;Alagidede & Ibrahim, 2017;Iheanachor & Ozegbe, 2021). Exchange rate has been volatile because of continued dependence on oil for revenue and foreign exchange earnings (Ndu-Okereke & Nwachukwu, 2017).…”

“…Flexible exchange rate regime is a critical reflection of the free market economic structure (Iheanachor & Ozegbe, 2021). In such a structure, the exchange rate oscillates frequently and such oscillations have a direct or indirect impact on the economy which can be observed through the macroeconomic performances.…”

“…Part of the objective of the policy was the jettisoning of the fixed exchange rates in favour of the free-floating regime in the late 1980s. This reform was implemented based on the expectation that a floating or flexible exchange rate regime would curtail the boom-and-bust syndrome and place the economy on the path of rapid growth and sustainable development (Alagidede& Ibrahim, 2017;Iheanachor & Ozegbe 2021). However, since the policymakers embraced the flexible exchange rate system in 1986, the domestic currency Naira (N) has been depreciated and considerably weakened against other major foreign currencies especially the US Dollar (US$), European (Euro €), and the British Pound Sterling (£).…”

“…What are the effects of exchange rate fluctuation on Nigeria's economic performance? Answering these questions will provide essential insights to the various economic agents such as policymakers, public and private investors, and the nexus between exchange rate and economic performance in Nigeria.The adverse and positive effects of exchange rate volatility have been examined in the developed and developing economies like Nigeria owing to its impact on employment generation(Bakhshi and Ebrahimi, 2016;Fang, 2020;Usman and Elsalih, 2018), inflation(Alagidede & Ibrahim, 2017;Bagheri & Gheisarinejad, 2016), trade(Asteriou et al, 2016;Jadoon and Guang, 2019;Rashid and Waqar, 2017;Senadza & Diaba, 2017), exports(Abdoh et al, 2016;Caselli et al, 2017;Fauceglia, 2020;Vieira & MacDonald, 2016;Vo & Zhang, 2019), investment(Avdjiev et al, 2019;Mostafapour et al, 2020;Zakari, 2017), and economic growth and development(Adewuyi & Akpokodje, 2013;Akinlo & Onatunji, 2020;Iheanachor & Ozegbe, 2021). While the exchange rate volatility has been connected to macroeconomic instability, few attempts have been made to unravel the channels through which exchange rate volatility creates such macroeconomic distortions.…”