Influence of Exchange Rate Movements on Economic Growth in Nigeria

Abstract

Nigeria’s dwindling external reserves and exchange rate fluctuations have been major sources of concern to major stakeholders in recent times. Adopting a longitudinal research design, this study examines the influence of exchange rate movements on economic growth in Nigeria, using annual time series data from 1981 – 2014 obtained from the Central Bank of Nigeria Statistical Bulletins. Economic growth is the dependent variable proxied by Real Gross Domestic Product (RGDP) while the explanatory variables are nominal exchange rate, inflation rate as well as growth in money supply. The unit root test indicates that all variables are I(1) while Johansen cointegration test reveals a long run relationship between economic growth and the explanatory variables. The Error Correction Model indicates a negative short run causality running from nominal exchange rate to RGDP, and from growth in money supply to RGDP in Nigeria. The error correction term indicates that departure from long run equilibrium gets corrected at the rate 93.55 percent. The paper also reveals that long run Granger causality runs from growth in money supply to RGDP, and from growth in money supply to inflation rate. Also, long run Granger causality runs from exchange rate to inflation. All results are tested at 5% level of significance.  The paper, therefore, recommends that Government should design export-oriented policies that would accelerate accretion to foreign reserves in order to reverse or, at least, minimize exchange rate depreciation. Finally, the Central Bank of Nigeria should ensure sound exchange rate, and inflation rate management with a view to promoting economic growth in Nigeria.

Keywords: Exchange Rate, Economic Growth, Cointegration, Granger Causality, Error Correction Model.