IMPACT OF FOREIGN EXCHANGE RATE FLUCTUATIONS ON MAJOR MACROECONOMIC VARIABLES IN NIGERIA (1987-2011)

ABSTRACT
 
Foreign exchange volatility affects the performance of macroeconomic indicators positively and negatively. Most import-dependent economies like Nigeria face the problem of foreign exchange rate volatility. Nigeria’s over dependence in the oil and gas sector of the economy has affected the major macro economic variables, and adverse foreign exchange rate regimes have affected the Nigerian economy over the years. Nigeria’s major foreign earning is from oil; hence, volatility of crude oil prices in the world market has made the economy highly susceptible to the ever changing exchange rates. Nigeria’s failure to diversify its economy which would have helped cushion the effect of the constant changes in oil prices has made the country susceptible to fluctuations in exchange rate. This has had a heavy toll on our foreign reserves and invariably on our balance of trade and balance of payment.  A proper foreign exchange rate management in many ways strives to balance the level of imports with that of exports of goods that the country has comparative advantage. Such balance is necessary for an economy to develop to levels beyond subsistence. However, lack of government support for the real sector of the Nigerian economy as a result of its focus on foreign exchange earned from oil has also contributed immensely to the abysmal performance of the all other sectors especially the manufacturing sector. Manufacturers, who account for substantial contributions to Nigeria’s gross domestic product before now have been unable to produce, hence fewer jobs, are created.  The Nigerian economy is in dire need of effective foreign exchange rate management that will aid its diversification, break the dominance of the oil sector, and give more opportunities to other sectors of the economy such as the manufacturing, agriculture, solid mineral mining etc and ultimately improve its balance of payment. It is against this background that this study sought to examine the impact exchange rate fluctuations on economic growth, balance of payment position, consumer price stability, and foreign private investment in Nigeria. The study adopted the ex-post facto research design. Annual time series data for 25-years were collated from Central Bank of Nigeria – Statistical bulletin, for the period, 1987-2011. Four major hypotheses were formulated and tested using the 2Stage Least Square (2SLS) estimation. Gross domestic product (GDP), balance of payment (BOP) consumer price index (CPI) and foreign private investment (FPI) were used as the independent variables while exchange rate (EXR) was the dependent variable for the four hypotheses respectively. Export rate (EXPR) and Import rate (IMPR) were introduced as control variables. The results reveal that exchange rate fluctuations had a positive and non-significant impact on Nigeria’s gross domestic product growth rate (coefficient of EXR = 0.033, t-value = 1.327); Exchange rate fluctuations had positive and non-significant impact on Nigeria’s balance of payment (coefficient of EXR = 0.005, t-value = 1.449); Exchange rate fluctuations had negative and significant impact on Nigeria’s consumer price index (coefficient of EXR = -0.411, t-value = -3.554); and Exchange rate fluctuations had positive and significant impact on Nigeria’s foreign private investment (coefficient of EXR = 0.007, t-value = 5.906). This study contributes to literature by modifying Serven and Soilmano (1992) model, by including in-flow channel of foreign exchange (export rate) and outflow of foreign exchange (import rate) into the model. Thus, the study therefore, recommends amongst others, that an aggressive expansion of the Nigerian economy especially investment in the real sectors of the Nigerian economy will obviously lead to less dependence on oil revenue which is determined by fluctuations in exchange rate prices.