Impact of Foreign Exchange Rate on Gross Domestic Product in Nigeria

Abstract

Foreign exchange markets exist because nations want to maintain their sovereign right and identities as nations, by administering and controlling their own currencies. In Nigeria, the foreign exchange market has developed over the years to represent a big network of exchange transactions involving large volumes of foreign exchange trading. The foreign exchange market, therefore, provides a mechanism for the determination of an appropriate exchange rate for a country's currency against the currency of another country. The mono-cultural nature of the Nigerian economy which is predominantly oil dependent has created uncertainties in the foreign exchange rate management in Nigeria. This could be attributed to oil being a major earner of foreign exchange as such volatility in oil prices in the world market impact directly on the economy negatively. Oil dependency has made the Nigerian economy subject to the vicissitude and vagaries of the international oil market such that the international oil price shocks were immediately felt in the domestic economy. Exchange rate fluctuations could again lead to income transfer from importing countries to exporting countries through a shift in terms of trade, and this negatively affects economic growth of the importing nation. Fluctuations in nominal and real exchange rate could thus affect economic performance of nations. It was against this background, therefore, that this study sought to examine the impact 'of (i) nominal foreign exchange rate on Oil gross domestic product (CD?) , (ii) real exchange rates on Oil CD?, (iii) nominal exchange rates on non-Oil CD? and (iv) real exchange rates on non-Oil CD? in Nigeria. The study adopted the ex-post facto research design. Time series data for 17years, 1995-2011 were collated from Central Bank of Nigeria published annual reports and statistical bulletin. Four hypotheses were formulated and the least square (LS) regression was used to estimate the impact of foreign exchange rate on economic growth. The growth rates of oil and non-oil gross domestic product were adopted as the dependent variables, while annual index of nominal and real exchange rate as independent variables. Results show that (i) Nominal exchange rate has positive and non-significant (coefficient of NER = 0.11, p> 0.05) impact on Nigeria's Oil CD?, (ii) Real exchange rate has positive and non-significant (coefficient of RER = 0.09, P > 0.05) impact on Nigeria 's Oil CD?, (iii) Nominal foreign exchange has positive and significant (coefficient of NER = 0.15, P < 0.05) impact on Nigeria's Non-oil CD? and (iv) Real exchange rate has positive and significant (coefficient of RER = 0.12, P < 0.05) impact on Nigeria 's Non-oil CD? The study therefore recommends among others that government monetary policies should be geared towards a reduction of exchange rate in Nigeria. This will increase the cost import thereby assisting in domestic inventiveness which in the long run grows the Nigerian economy.