EXCHANGE RATE AND THE NIGERIAN ECONOMY: ASSESSING THE IMPACT
ABSTRACT
    The study empirically investigates the effect of exchange rate on the Nigerian economy. In Nigeria, the role of exchange rate in the economy is very well documented. Using annual time series data covering a period of twenty six years (1986 to 2011), the Ordinary Least Squared (OLS) econometric technique was employed on five variables such as real gross domestic product (RGDP, proxied for economic growth), exchange rate, interest rate, inflation rate and money supply.
    The results from the empirical analysis indicate that exchange rate and money supply have a very significant positive impact on economic growth in Nigeria. Inflation rate and interest rate do not have any impact on the growth of the Nigerian economy.
    The study however recommends among others that In order to ensure macroeconomic stability, exchange rate should be properly managed so as to serve as an inducement for greater performance for stable economic growth which is capable of giving stability in prices for manufactured goods.

TABLE OF CONTENT
CHAPTER ONE: INTRODUCTION
1.1    Background of the Study                       
1. 2    Statement of the Research Problem               
1.3    Objective of the Study                       
1.4    Hypothesis of the Study                       
1.5    Relevance oft Study                       
1.6    Scope of the Study                           
1.7    Limitation of the Study                       
CHAPTER TWO: LITERATURE REVIEW
2.1    Introduction                               
2.2    Exchange Rate Regimes                       
2.3    Fixed Exchange Rate Regime                      
2.4    Floating Exchange Rate Regime                
2.5        Managed Floating Regime                      
2.6    Evolution of Foreign Exchange Markets In Nigeria       
2.7    Exchange Rates and Economic Growth           
2.8    The Empirical Literature                       
CHAPTER THREE: METHODOLOGY OF THE STUDY
3.1    Introduction                               
3.2    Theoretical framework                       
3.3     Model Specification                       
3.4    Estimation Technique                       
3.5     Source of Data                            
CHAPTER FOUR: EMPIRICALANALYSIS
4.1     Introduction                               
4.2    Regression Analysis                       
CHAPTER FIVE: SUMMARY, RECOMMENDATIONS AND CONCLUSION
5.1     Summary of Findings                       
5.2     Recommendations                           
5.3     Conclusion                               
    Bibliography                                Appendix                                
 CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND OF THE STUDY
The role of exchange rate and its effects on macroeconomic performance has continued to generate interest among economists. Many economists argue that exchange rate stability facilitates production activities and economic growth. They are also of the view that misalignment in real exchange rate could distort growth and generate macroeconomic instability (Manta Chowdhurg, 1999). Exchange rate policy guides investors on the best way they can strike a balance between their trading partners and investing at homes or abroad (Balogun, 2007).
Mordi (2006) argued that the exchange rate movements have effects on inflation, prices incentives, fiscal viability, competiveness of exports, efficiency in resources allocation, international confidence and balances of payments equilibrium. Exchange for another (Jhingan, 2003).
Exchange rate is said to depreciate if the among of domestic currency require the buy a foreign currency increase, while the exchange rate require to buy a foreign currency reduces. An appreciates in the real exchange rate may create current account problems because it leads to over valuation. Over-valuation in turn makes artificially cheaper while exports relatively expensive, thus reducing the international competiveness of a country (Takaendesa, 2006). Exchange rate volatility refers to the suling or fluctuation in the exchange rates over a period of time or the deviations from a benchmark or equilibrium exchange rate (Mordi, 2006). The existence of many parallel markets side by side the officially recognized foreign exchange market gives rise to exchange rate misalignment (Mordi, 2006). Instability and/or fluctuation in exchange rate hurt producers and investors alike because it affects theirs projected (Planned) revenue and costs, including profit margin. For instances, businesses (base on the exchange rate) set out the amount of money to be committed into acquiring raw materials and equilibrium/machines from abroad.
In the same manner, they estimate their future stream of incomes. Instability in the exchange rate may distort the realization of such estimates. For example, exchange rate depreciates results in high cost of importing raw materials and capital goods. This in turn firms importing these items. In order to cushion the effects of high cost of production, they (firms) would pass it on to the consumers in form of higher prices. Besides, production will decline and unemployment will rise. Couple with these, are the reduction in exports, accumulation of trade deficits and deterioration of balance of payments, as well as decline in the welfare of the people.
Prior to the year 1986, Nigeria practiced a fixed exchange rate, when the naira was pegged against the British pound and later on the American dollar.
However, with the collapse of the Bretton Wood Institution, a flexible exchange rate policy was adopted and the Nigerian exchange rate was allowed to float and its value relative to the American dollar determined by market forces of demand and supply.
Some of the policies employed to ensure exchange rate stability included among others: Second-Tier Foreign Exchange Market (SFEM), Autonomous Foreign Exchange Market (AFEM), Inter-Bank Foreign Exchange Market (IFEM), the enlarged Foreign Exchange Market (FEM) and the Dutch Auction System (DAS). It is pertinent to mention here that the inability and failure of individual policy to achieve stability in the exchange rate  led to the adoption of another. Despite various efforts by government to maintain exchange rate stability as well as avoiding its fluctuation and misalignment) in the last two decades,  the naira continued to depreciate against the American dollar. For example, the naira appreciates against the American dollar from N0.7143 in 1970 to N0.6159 in 1975 and further to N0.5464 in 1980 (see appendix 1).
However, the exchange rate balance relatively stable in the mid-1990s, it depreciates further in N102.1052, N120.9704 and N133.5004 in 2000, 2002, 2004 respectively. Therefore, the exchange rate appreciated to N132.147, N128.6516 and N117.968 in 2005, 2006 and 2007; respectively (see appendix 1).
In early 2009, the naira depreciated to N170 against the American dollar. Some have attributed the recent depreciation to the decline in the nations foreign exchange reserves. Other argued that the activities of some market operators (speculators) and banks are responsible for the recent decline in the value of the naira. It has also been argued that the guest  for higher profits in the face of global economic meltdown  is forcing some banks to engage in “round-tripping”, a situation in which banks buy foreign exchange from the Central Bank of Nigeria (CBN) and sell to parallel market operators at prices other than official prices. These practices lead to exchange rate fluctuations and misalignment. The exchange rate is approximately N159 against the American dollar.
The Naira was scheduled for redenomination in August 2008, although this was cancelled by the President, Umaru Musa Yar’Adua, with 100 old naira to become 1 new Naira. The Nigerian Central Bank stated that it will make the naira fully convertible against foreign currencies by 2009. Currently, the amount of foreign currency as regulated through weekly auctions while the Central Banks sets the exchange rate. The Naira appreciated against the American dollar through 2007 due to the high oil revenues.             
Also the then-Central Bank of Nigeria governor Professor
Chukwuma Soludo noted the weekly Central Banks Auctions of foreign currency will gradually be phased out, and the bank would “only intervene in the market as may be required to achieve defined policy objectives” see Appendix 2 for the denominations in which the coins and banknotes were to be issued.
In his own view, Abadan, (2006) argued that some of the factors that led to  the depreciation of the Nigerian exchange rate include weak production base, import dependent production structure, fragile export base and weak non-oil export earnings, expansionary monetary and fiscal, inadequate foreign capital inflow, excess demand for foreign exchange relative to supply, fluctuations include oil earnings, unguided trade liberation policy, speculative activities and sharp practices imperfect foreign exchange market, heavy debt burden, weak balance of payments position and capital flight.  
1.2    STATEMENT OF THE RESEACH PROBLEM
    Following the fluctuation of the Naira in 1986, a policy induced by the Structural Adjustment Programmed (SAP), the subject of exchange rate fluctuations has become a topical issue in Nigeria. This is because it is the goal of every economy to have a stable rate of exchange with its trading partners. In Nigeria, this goal was not realized inspite of the fact that the country embarked on devaluation to promote export and stabilize the rate of exchange (Opaluwa, Umeh and Abu, 2010). The failure to realize this goal subjected the Nigerian manufacturing sector to the challenge of a constantly fluctuating exchange rate. This was not only necessitated by the devaluation of the naira but the weak and narrow productive base of the sector and the rising import bills also strengthened it. In order to stem this development and ensure a stable exchange rate, the monetary authority put in place a number of exchange rate policies. However, very little achievement was made in stabilizing the rate of exchange. As a consequence, the problem of exchange rate fluctuations persisted throughout the study period.
    Accordingly, in macroeconomic management, exchange rate policy as an important tool derives from the fact that changes in the rate of exchange have significant implications for a country’s balance of payments position and even its income distribution and growth. It is not surprising since its behavour is said to determine the behavour of several other macroeconomic variables (Oyejide, 1985). It is even more so for Nigeria which had embarked on a course of rapid economic growth with attendant high import dependency. Exchange rate plays catalytic role in a modern economy and has many dynamic benefits that are crucial for economic transformation. However, the Nigerian economy is under-industrialized and its capacity utilization is also low, spite of the fact that manufacturing is the fastest growing sector since 1973/74 which is also a function of the exchange rate policy (Obadan, 1994). The sector has become increasingly dependent on the external sector for import of non-labour input (Okigbo, 1993). Inability to import therefore can impact negatively on manufacturing production and thus inhibits the rapid economic growth and development of Nigeria at large.
    In view of the foregoing therefore, the study seeks to empirically examine the impact of exchange rate policy on the growth of the Nigerian economy overtime and to see if there is any exchange rate led-growth. More specifically, the study seeks to provide answers to the following research questions:
(i)    What is the relationship between exchange rate and the growth of the Nigerian economy?
(ii)    Is there any relationship between interest rate and the growth of the Nigerian economy?
(iii)    What is the relationship between inflation rate and the growth of the Nigerian economy?
(iv)    What is the relationship between money supply and the growth of the Nigerian economy?
1.3    OBJECTIVE OF THE STUDY
    The main objective of the study is to determine the relationship between exchange rate and the Nigerian economy. However, other sub-objectives are to:
(i)    Determine the relationship between interest rate and the growth of the Nigerian economy
(ii)    Examine the relationship between inflation rate and the growth of the Nigerian economy
(iii)    Examine the relationship between money supply and the growth of the Nigerian economy
1.4    HYPOTHESES OF THE STUDY
    The following hypotheses will be tested during the course of the study:
(i)    There is no positive relationship between exchange rate and the growth of the Nigerian economy.
(ii)    There is no positive relationship between interest rate and the growth of the Nigerian economy.
(iii)    There is no positive relationship between inflation rate and the growth of the Nigerian economy.
(iv)    There is no positive relationship between money supply and the growth of the Nigerian economy.
1.5    RELEVANCE OF THE STUDY
    The study is significant in the following respect:
Firstly, the results from the study will provide relevant data to the government and policy makers with respect to the effective and efficient management of the monetary policy issues (including exchange rates) affecting the overall economic growth and development of the Nigerian economy.
    Secondly, investors, potential investors, lenders and borrowers and all stakeholders in the Nigerian stock market are all interested in the monetary policy (exchange rates)-stock prices direction in the country and hence, enable them to make some inform decisions with respect to investment and financing decisions.
     Furthermore, the study will also be relevant to researchers, academia, students of finance and allied disciplines, as it will provide them relevant data to carry out further studies in this area or similar areas if they so wish.
1.6    SCOPE OF THE STUDY
    The study is a Nigerian specific study and a time series data. It covers a period of twenty eight years (1985 to 2012), and relevant data shall be sourced from the Nigerian stock exchange publications and the central bank of Nigeria statistical bulletin (2013).
1.7    LIMITATION OF THE STUDY
    The two limitations envisage in this study has to do with the accuracy of the data used as well as the sources of data. However, effort will be made to minimize errors and thus assure the reliability of results obtained.