Impact of Exchange Rate Volatility on Economic Growth in Nigeria

Abstract

The worsening state of the Nigerian currency occasioned by an unstable exchange rate has become a source of worry to policy makers, stakeholders, scholars and the organized private sector. This study therefore examines the impact of exchange rate volatility on economic growth in Nigeria using a time series secondary data which was analyzed using an econometric regression technique of the ordinary least square to ascertain the extent to which real exchange rate, nominal exchange rate, purchasing power parity, inflation rate and trade openness have explained variation in economic growth in Nigeria. From the result of the OLS, it is observed that real exchange rate, nominal exchange rate and purchasing power parity have a positive impact on GDP growth rate in Nigeria. On the other hand, inflation rate and trade openness have negative impact on GDP growth in Nigeria thus, increase in inflation rate and trade openness will bring about a decline in GDP growth in Nigeria. The study therefore concludes that real exchange rate, nominal exchange rate, purchasing power parity, inflation rate and trade openness are statistically significant in explaining economic growth in Nigeria. Sequel to the findings of this study, the study recommends that: To enhance economic growth, the government should deliberately fix the exchange rate. This is because a fall in the value of the exchange rate can cause a boost to economic growth. The government should improve the overall wealth of the country by implementing policies that encourage job creation, increase productivity, reduce inflation, attract foreign investment, and promote trade. Governments through fiscal policy can assist in fighting inflation. Governments can reduce spending by cutting cost of governance and increase taxes as a way to help reduce inflation. The government should imbibe trade openness policies that will bring about higher economic growth rates. This is because trade openness promotes the efficient allocation of resources, factor accumulation, technology diffusion, and knowledge spillovers.