THE IMPACT OF EXCHANGE RATE VOLATILITY ON ECONOMIC GROWTH IN NIGERIA

Abstract:

This study investigates the impact of exchange rate volatility on economic growth in Nigeria using an Error Correction Model (ECM) over the period from 1990 to 2022. Key macroeconomic variables including lagged Real Gross Domestic Product (RGDP), Balance of Payment (BOP), Interest Rate (INTR), Exchange Rate (LNEXCR), Trade Openness (LNTRPN), and Net Export (NET) are examined to understand their relationships with economic growth. The findings reveal several important insights. Firstly, while lagged RGDP shows a minor positive association with current economic growth, it is statistically insignificant, suggesting limited short-term predictive power. Secondly, both BOP and INTR exhibit statistically insignificant associations with RGDP, contrary to expectations. However, LNEXCR and LNTRPN demonstrate significant negative impacts on RGDP, indicating that increased exchange rate volatility and trade openness are associated with notable decreases in economic growth. These findings have significant policy implications for Nigeria. Policymakers are urged to prioritize measures aimed at enhancing exchange rate stability, diversifying trade partnerships, investing in critical infrastructure, reassessing monetary policy frameworks, and strengthening institutional frameworks to foster economic stability and sustainable growth. This study highlights the intricate relationship between exchange rate volatility and economic growth in Nigeria, emphasizing the importance of informed policymaking to navigate the challenges posed by external economic factors effectively. Further research is warranted to deepen our understanding of these relationships and inform policy decisions aimed at promoting long-term economic prosperity.