EFFECTS OF EXCHANGE AND INTEREST RATES ON MANUFACTURING SECTOR PERFORMANCE IN NIGERIA: ARCH AND GARCH APPROACH

Abstract

This study evaluates the effects of exchange, and interest rates on manufacturing sector performance in Nigeria. The data were sourced from the World Bank's World Development Indicators (WDI) and the Statistical Bulletin of the Central Bank of Nigeria (CBN) for the analysis. The unit root test was performed on the formulated model using the Augmented Dickey Fuller (ADF) method. The log of manufacturing sector contribution to GDP (MUFQ), exchange rate (LEXR), inflation rate (LIFR), and bank size (LBKS) were integrated at order zero I(0) while and the log of interest rate spread (LIRS). was stationary at order one I(1), as shown by the Augmented Dickey Fuller unit root test. In order to determine whether there is a long-run relationship between interest rate, exchange rate, and inflation, a bound test was conducted using the Auto-regressive Distributive Lag (ARDL) model. High volatility in exchange and interest rates have a positive effect on manufacturing sector performance, as shown by the results of the Auto-regressive Distributive Lag (ARDL) bound test, and the results from Arch and Garch corroborate these findings. Auto-regressive Distributive Lag (ARDL) results indicated a positive and statistically significant relationship between the exchange rate and the performance of the manufacturing sector over time at 0.05 level. However, bank size revealed a positive but insignificant relationship with manufacturing sector performance in the short-run, while the coefficient of interest rate spread and inflation rate were both negative and significantly influenced manufacturing sector performance in the current year period. The paper concludes that Nigeria's manufacturing sector is strongly correlated with the country's exchange and interest rates. The study recommended amongst others that as a result of too much dependence on oil, the federal government should peg the local currency rate and mandate the deposit money banks through the Central bank of Nigeria (CBN) to maintain a single digit interest rate. This would boost investors’ confidence on the Nigerian economy as well as the financial system while efforts should be taken to diversify the economy to ease the pressure from the local currency.