Determinants of Exchange Rate Volatility and Its Implication on the Nigerian Economy (1995-2020)

Abstract

The study investigates the determinants of exchange rate volatility and its implication on the growth of the Nigerian economy; for the period (1995-2020). Secondary data were collected from the Central Bank of Nigeria Statistical Bulletin, 2020. The study employs Gross Domestic Product as proxy for the Nigerian economy and used as the dependent variable; whereas, exchange rate, import trade and export trade were used as explanatory variables to measure exchange rate fluctuation. Time series econometric techniques are used to test the hypotheses. Exchange rate has an insignificant impact on Gross Domestic Product in Nigeria. Import trade has a significant impact on Gross Domestic Product in Nigeria. Export trade has a significant impact on Gross Domestic Product in Nigeria. The error-correction result confirms that about 71% short-run adjustment speed from long-run disequilibrium. The coefficient of determination indicates that about 68% of the variations in the growth of the Nigerian economy can be explain by changes in exchange rate volatility variables. The study concludes that exchange rate fluctuation is positive; but, had a significant impact on the performance of the Nigerian economy. The study recommends that Government should encourage the export promotion strategies in order to maintain a surplus balance of trade and also conducive environment, adequate security, effective fiscal. The policy towards interest rate should be made such that savings would be stimulated thereby placing more funds in the hands of banks to intermediate to investors seeking funds. Government and policy makers should provide infrastructural facilities so that foreign investors will be attracted to invest in Nigeria. Government and policy makers should increase their surveillance on the commercial banks; in order to address the issue of arbitrarily increase of the exchange rate.