Exchange Rate Management and the Manufacturing Sector Performance in the Nigerian Economy

Abstract

Since Nigeria is heavily factor-input import dependent, the inability to locally source the required inputs in the manufacturing sector in the country is a chronic problem. Consequently, the exchange rate plays an important role in the ability of the economy to attain a realistic growth in the manufacturing sector. This study examined the impact of exchange rate management on the growth of the manufacturing sector in Nigeria. Ordinary Least Square (OLS) multiple regression analysis, using E-view was employed. The study covered the periods of 1986-2010 with the use of time-series data. The empirical result of this study shows that depreciation which forms part of the structural adjustment policy (SAP) 1986, and which dominated the period under review has no significant relationship with the manufacturing's sector productivity. It was found that in Nigeria, exchange rate appreciation has a significant relationship with domestic output. And that exchange rate appreciation will promote growth in the manufacturing sector. It was also ascertained from the estimated regression line that there is a positive relationship between the manufacturing gross domestic product and inflation. It is recommended that government should direct its exchange rate management policy towards exchange rate appreciation in order to reduce the cost of production in the manufacturing sector that depends heavily on foreign inputs while there should be total ban of importation on consumer and intermediate goods that can be produced locally. Since manufacturing sector depends much on foreign inputs, and for the importation of these foreign inputs not be continuous, efforts should be geared towards improving the level of technology, increasing agricultural production, and developing local raw materials in the country. In addition, the government should ensure stable electricity, good roads, water, telecommunication etc. And more importantly as regards this study, the exchange rate appreciation is what the Government should intensify efforts to achieve in Nigeria.