Impact of Real Exchange Rate Misalignment on Economic Growth in Nigeria

Abstract

This study analysed the impact of real exchange rate misalignment on economic growth in Nigeria between 1980 to 2021, using the Autoregressive Distributed Lag (ARDL) model. Quarterly data over the period of study were collected from sources such as the World Bank, International Monetary Fund and the Central Bank of Nigeria. The results show that nominal exchange rate, real interest rate differential, foreign direct investment, trade openness, external debt, terms of trade and productivity were the key fundamental variables explaining movements in real exchange rate in Nigeria and in determining its equilibrium path.  The real exchange rate misalignment was computed, and the result further showed that the exchange rate was misaligned, while the Naira Real Exchange Rate was on the average overvalued by 0.67% over the period covered by the study. Furthermore, it was discovered that Exchange rate misalignment had negative impact on Economic Growth in Nigeria. Flowing from the empirical findings, the study recommends that policy makers should focus on measures that will ensure that the Naira Exchange Rate remains within its equilibrium path to ensure that the country achieves its objectives of external balance and economic growth.  Such measures include the continued implementation of a market-based exchange rate system. In addition, measures to increase productivity, operating an open economy to promote exports and maintaining a positive real interest rate in the domestic economy to attract foreign capital inflows will impact positively on the Naira real exchange rate.

Keywords: Economic Growth, Real Exchange Rate Misalignment; Foreign Direct Investment; equilibrium exchange rate.

JEL Classification: F31, F3, O4 and F3.

DOI: 10.7176/JESD/15-3-03

Publication date:March 31^st 2024