Exchange Rate Regimes and Real Sector Performance in Nigeria

Abstract

Exchange rates and the choice of the exchange rate regime have critical influence on the real sector performance and the behaviour of several other macroeconomic variables, especially in a high import dependent economy like Nigeria. Exchange rate reforms put in place by the Nigerian monetary authorities have not put the economy on the path of macroeconomic stability, recovery and sustainable development. Arising from this problem, this study investigates the relationship between exchange rate and the performance of Nigeria’s real sector with emphasis on the agricultural, industrial, building and construction, wholesale and retail trade and service sectors over the period of 1961-2017. The study adopts the modified Mundell-Fleming IS-LM framework. Autoregressive Distributed Lag and pairwise Granger Causality techniques were used to examine the relationship between exchange rate regime and real sector output performance. The results of the study reveals a long-term inverse and significant relationship between exchange rate and aggregate real output in regulated exchange rate regime but a long-term direct and significant relationship in the guided deregulated regime. The study therefore recommends that the monetary authorities should re-assess and adequately monitor the existing exchange rate policies in Nigeria with a view to stimulating increased performance of the real sector of the economy. The exchange rate system adopted should be aligned with the overall macroeconomic policy structure and also takes into consideration the integrity of the institutional arrangements on which the country’s development and stability prospects depend. The government should also develop a broad programme of development of domestic industries in both rural and urban areas to enhance domestic production, exports, create employment and reduce poverty. There is also the need to implement coordinated macroeconomic policies that would attract foreign private investment, impact inflation positively and stimulate exchange rate stability.