PROJECT TOPIC : THE IMPACT OF EXCHANGE RATE, POLICY AND MANAGEMENT ON ECONOMIC GROWTH OF NIGERIA (1970 - 2013) PROJECT PROPOSAL BACKGROUND TO THE STUDY Exchange rate is an important economy metric as it reflects underlying strength and competitiveness with world economies (Asinya and Takon, 2014; Akonji, 2013). Whether fixed or floating, exchange rate affects macroeconomic variables such as import, export, output, interest rate, inflation rate etc. Chong and Tan (2008) empirical analysis revealed that the exchange rate is responsible for changes in macroeconomic fundamentals for the developing economies. Mehdi et al (2014) state that the effect of exchange rate fluctuations on economic growth varies in different countries asserting that one of the factors determining the way exchange rate fluctuations affect economic growth is the development level of each countrys financial markets revealing that new theories emphasize the high correlation between economic growth and innovation. Exchange rate fluctuations influence domestic prices through their effects on aggregate supply and demand. In general, when a currency depreciates it will result in higher import prices if the country is an international price taker, while lower import prices result from appreciation. The potentially higher cost of imported inputs associated with an exchange rate depreciation increases marginal costs and leads to higher prices of domestically produced goods (Kandil, 2004). Also, import-competing firms might increase prices in response to foreign competitor price increases to improve profit margins. However, the extent of such price adjustment depends on a variety of factors such as market structure, the relative number of domestic and foreign firms in the market, the nature of government exchange rate policy and product substitutability (Fouquin et al, 2001). In the bid to achieve macroeconomic stability, Nigeria’s monetary authorities have adopted various exchange rate arrangements over the years. It shifted from a fixed regime in the 1960s to a pegged arrangement between the 1970s and the mid-1980s, and finally, to the various types of the floating regime since 1986 (Eze and Okpala, 2014; Dada and Oyeranti, 2012), following the adoption of the Structural Adjustment Programme (SAP). The fixed exchange rate regime induced an overvaluation of the naira and was supported by exchange control regulations that engendered significant distortions in the economy. That gave vent to massive importation of finished goods with the adverse consequences for domestic production, balance of payments position and the nation’s external reserves level (Akonji, 2013). Moreover, the period was bedevilled by sharp practices perpetrated by dealers and end-users of foreign exchange (Adelowokan (2012). These and many other problems informed the adoption of a more flexible exchange rate regime in the context of the SAP, adopted in 1986. A regime of managed float has been the predominant characteristic of the floating regime in Nigeria since 1986. Although the Naira exchange rate has witnessed some period of relative stability since the implementation of the Structural Adjustment Programme (SAP) in 1986, its continued depreciation, however, mars the economic performance of the country. The challenge of the combined effect of hikes in oil prices and exchange rate instabilities on macroeconomic economic stability and economic growth for oil producing nations like Nigeria is really enormous. Usman (2009) states that huge inflow of oil revenues in Nigeria are more often associated with expansion in the level of Government spending while periods of dwindling oil revenues are usually accompanied by budget deficits. There is no gain saying that Nigeria relies so much on revenue from oil exports, but, it equally massively imports refined petroleum and other related products. STATEMENT OF THE PROBLEM In any country of the world, foreign exchange policy is an important policy instrument. Up to the time of SAP, it appeared that Nigerian’s exchange rate policy tended to encourage over-valuation of the Naira. This, in turn, encouraged imports, and discourages non-oil export and over dependence on imported inputs. The overriding exchange rate management was made concerned apparently with medium and long-term balance of payment objectives. In other words exchange rate policy was not geared towards the attainment of long-run equilibrium rate that would equilibrate the balance of payment in the medium and long-term and facilitate the achievements of certain structural adjustment objectives e.g. export diversification. Nigeria’s exchange rate has been more volatile in the post-SAP period due to its excessive exposure to external shocks. The effect of the recent global economic meltdown on Nigerian exchange rate was phenomenon as the Naira exchange rate vis-à-vis the Dollar rose astronomically from about N120/$ to more than N180/$ (about 50% increase) between 2008 and 2009. This is attributable to the sharp drop in foreign earnings of Nigeria as a result of the persistent fall of crude oil price, which plunged from an all time high of US$147 per barrel in July 2007 to a low of US$45 per barrel in December 2008 (CBN, 2008). Although various factors have been adduced to the poor economic performance of Nigeria, it is necessary to examine the growth process of Nigeria under the various exchange regimes that had been adopted in the country, and that is the main thrust of this study. OBJECTIVES OF THE STUDY The broad objective of this study is to examine the effects of major exchange rate policies on the economic performance of Nigeria. The specific objectives of the study are as follows: 1. to examine exchange rate volatility in Nigeria 2. to investigate the effects of foreign exchange rate and policies on the economic growth of Nigeria; RESEARCH QUESTIONS According to the objectives stated above, the research questions that would be examined in the course of the study are as follows: 1. How volatile the exchange rate of Nigeria has been over the years? 2. How has the foreign exchange rate and policies affected the economic growth of Nigeria? RESEARCH HYPOTHESES Based on the research questions stated above, the hypotheses to be tested in the course of this research are stated below: HYPOTHESIS (1) H0 - That fixed exchange rate regime did not contribute to the economic growth of Nigeria. H1 - That fixed exchange rate regime contributed to the economic growth of Nigeria. HYPOTHESIS (2) H0 - That floating exchange rate regime does not contribute to the economic growth of Nigeria. H1 - That fixed exchange rate regime contributes to the economic growth of Nigeria. Where H0 – Null Hypothesis and H1 – Alternative Hypothesis RESEARCH METHODOLOGY Secondary data are the basis of data to be used in this study. They were sourced mainly from the publications of the Central Bank of Nigeria (CBN) namely; CBN Statistical Bulletin, CBN Annual Reports, CBN Economic and Financial Review Bullion, and Bureau of Statistics publications etc. The analysis in the study shall be based on time series data for the Nigerian exchange rates, and Gross Domestic Product (GDP) and Ordinary Least Square (OLS) estimation method shall be employed in obtaining the numerical estimates of the coefficients in the model using SPSS statistical software. One multiple regression models shall be used in the estimation. The model seeks to investigate the effect of exchange rates on Gross Domestic Product (GDP) under the fixed exchange rate regime and the floating exchange rate regime. The estimation period is restricted to the period between 1970 and 2013 due to non-availability of needed data. The models to be adopted in the estimation are stated below with the dependent variable as Gross Domestic Product (GDP) while the explanatory variables are Average Official Exchange Rate of Naira vis-à-vis US Dollar, Nominal Effective Exchange Rate Indices, and the lagged Gross Domestic Product (GDP). MODEL I: FIXED EXCHANGE RATE REGIME Yt = c + c1fixexrt + c2neert + c3Yt-1 + Ei Where Yt - Real Gross Domestic Product for current year fixexrt - Fixed Average Official Exchange Rate of Naira vis-à-vis US Dollar neert - Nominal Effective Exchange Rate Indices for Nigeria Yt-1 - Real Gross Domestic Product for previous year c, c1, c2, c3 - Constants Ei - Error term MODEL II: FLOATING EXCHANGE RATE REGIME Yt = d + d1floexrt + d2neert + d3Yt-1 + Ei Where Yt - Real Gross Domestic Product for current year floexrt - Floating Average Official Exchange Rate of Naira vis-à-vis US Dollar neert - Nominal Effective Exchange Rate Indices for Nigeria Yt-1 - Real Gross Domestic Product for previous year d, d1, d2, d3 - Constants Ei - Error term SIGNIFICANCE OF THE STUDY The effects of the recent global economic crisis on Nigeria’s exchange rate have reaffirmed the urgent need for protection of the economy from exchange rate risk. Although, no country is immune to such global crisis, the over-reliance on oil export revenue by Nigeria exposes her exchange rate and economy excessively to external shocks. Therefore, there is the need to conduct a research of this nature to examine the effect of exchange rate variability under different exchange rate regimes on Nigeria’s economic growth. SCOPE OF THE STUDY This project focuses on the effect of exchange rate regimes on the economic growth of Nigeria as necessitated by the inflationary pressure generated by recent global economic crisis through the exchange rate sensitivity. Despite the liberalization of the exchange rate in Nigeria since the introduction Structural Adjustment Programme (SAP) in 1986, no meaningful progress has been made to improve economic performance of the country. Therefore, this study would examine the economic performance of Nigeria under various exchange rate regimes with the view of identifying the real cause of growth instability in the country. The impact of foreign exchange rate and policies on the economic growth of Nigeria is being investigated empirically with the data spanning from 1970 to 2013. PLAN OF STUDY This project shall be divided into five chapters. The first chapter shall provide the background of the subject matter justifying the need for the study. Chapter two shall present related literature concerning foreign exchange rate policy and management. The research methodology shall be stated in chapter three while data presentation and analysis would be made in chapter four. Concluding comments in chapter five shall reflect on the summary, conclusion and recommendations based on the findings of the study. REFERENCES Adelowokan, O. A. (2012) “Exchange Rate Pass-Through in Nigeria: A Dynamic Evidence”. European Journal of Humanities and Social Sciences. Vol. 16, no. 1, pp. 785 – 801. Akonji, D. R. (2013) “The Impact of Exchange Rate Volatility on the Macro Economic Variables in Nigeria”. European Scientific Journal. Vol. 9, no. 7, pp. 152-165. Asinya, F. A. and Takon, N. (2014) “Exchange rate depreciation and government policy is Nigeria: An Empirical Evidence”. The Business and Management Review. Vol. 4, no. 3, pp. 161-170. Central Bank of Nigeria (2008) Annual Report and Statement of Accounts. Abuja: Central Bank of Nigeria. Chong, L. L. and Tan, H. B. (2008) “Exchange Rate Risk and Macroeconomic Fundamentals: Evidence from Four Neighbouring Southeast Asian Economies”. International Research Journal of Finance and Economics. Issue 16, pp. 88-95. Dada, E. A. and Oyeranti, O. A. (2012) “Exchange Rate and Macroeconomic Aggregates in Nigeria”. Journal of Economics and Sustainable Development. Vol. 3, no. 2, pp. 93 – 101. Eze, T. C. and Okpala, C. S. (2014) “Quantitative Analysis of the Impact of Exchange Rate Policies on Nigeria’s Economic Growth: a Test of Stability of Parameter Estimates”. International Journal of Humanities and Social Science. Vol. 4, no. 7, pp. 265-272. Fouquin, M., Sekkat, K., Mansour, J. M., Mulder, N. and Nayman, L. (2001) “Sector Sensitivity to Exchange Rate Fluctuations”. CEPII Working Paper. No. 11, pp. 1-115. Kandil, M. (2004) “Exchange rate fluctuations and economic activity in Developing countries: theory and evidence”. Journal of Economic Development. Vol. 29, no. 1, pp. 85-108. Mehdi, B.; Arezoo, N. and Alireza, J. (2014) “The Effect of Exchange Rate Fluctuations on Economic Growth considering the level of development of Financial Markets in selected Developing Countries”. Asian Economic and Financial Review. Vol. 4, no. 4, pp. 517-528. Usman, R. A. (2009) “Impact of Oil Price Shock and Exchange Rate Volatility on Economic Growth in Nigeria: An Empirical Investigation”. Research Journal of International Studies. Issue 11, pp. 4-15
Posted on: Thu, 04 Dec 2014 08:44:54 +0000
Trending Topics
Recently Viewed Topics
© 2015