INTRODUCTION
Exchange rate policy has been
identified as one of the exogenous factors that can affect the
economic performance of a nation. Exchange rate plays a key role in
international economic transactions because no nation can remain in isolation
due to varying factor endowment. Movements in the exchange rate have ripple
effects on other economic growth (Onuorah and Osuji, 2014).
In Nigeria, exchange rates
and its constant changes is of great importance to the general public because
one way or the other its fluctuation has an effect on the macroeconomic performance of the Nigerian
economy.
Exchange rate is among the most important prices in an open economy. It
influences the flow of goods, services, and capital in a country, and exerts
strong pressure on the balance of payments, inflation and other macroeconomic
variables. Rodrick (2007) argues that poorly managed exchange rates can be
disastrous for economic growth. The exchange rate thus, serves as an
international price for determining the competitiveness of a country.
Similarly, Takaendesa (2006) explains that exchange rate plays a crucial role
in guiding the broad allocation of production and spending in the domestic
economy between foreign and domestic goods.
In any country, foreign exchange
policy is an important policy instrument. In the recent time,
Nigerian economy is experiencing unstable volatility in exchange rates. The
current high variability of exchange rate fluctuations in Nigeria may generate
adverse effects in the form of higher price, inflation and larger output
contraction (Ojo and Alege, 2014).
Incessant
fall in the value of Naira to US dollar which is followed by high and
persistent rise in general prices of commodities made Nigeria economy to slide
into recession in 2016. Oil production also nosedived to a historical low
record in May 2016 to worsen the situation. Consumer prices increased to 15.6
percent in May 2016. It was the highest increase more than six years. As the
inflation rate skyrocketed, cost of food, housing, utilities and transport
surged. The foregoing is linked to the GDP decrease to 0.36 percent in the
first three months of 2016 (Buzz Nigeria, 2016). The weak naira left Nigeria
struggling to manage increase in import cost which thrived after global oil
prices decline and in turn trigged a decline in foreign reserve.
Since Nigeria’s independence in
October 1960, her monetary authorities has pursued vigorously the objectives of
internal and external balance in a desperate bid to raise the standard of
living, alleviate poverty and acquire economic and political power, and
stability. They did this by administratively adjusting the foreign exchange
rate of the domestic currency Vis-a Vis the peculiar and prevailing
economic situations (Osuka and Osuji, 2008).After all of government’s effort
put in place to stabilize the exchange rate, why is there still a fluctuation
in the rate and does it affect economic growth?
Benson
and Victor, (2012) and Aliyu, (2011) noted that despite various efforts by the
government to maintain a stable exchange rate, the naira has depreciated
throughout the 80’s to date. Against this background, this study intends to
investigate the effect of exogenous variables on economic growth in Nigeria
over a period of 31 years (1986 – 2016).
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