THE IMPACT OF FOREIGN EXCHANGE RATE FLUCTUATIONS ON NIGERIA’S ECONOMIC GROWTH FROM 1981 TO 2013
CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND OF THE STUDY
The recent devaluation of the Nigerian currency (the naira) by the apex bank against the background of falling crude oil prices at the international market has generated renewed interest of economists and public affairs analysts in discussing the impact of fluctuating and depreciating naira exchange rate on the Nigeria economy.
     According to Iyoha (2004), exchange rate refers to the rate at which one currency exchange for another. It is the link between the various nation's currencies. Exchange rate policy encompasses the design and development of various strategies to achieve a stable and realistic exchange rate for the country's domestic currency consistent with overall macro-economic policy objectives. Mordi (2006).
Successive government though unsuccessful have formulated several exchange rate policies aimed at stabilizing the naira. Exchange rate fluctuation is a sign of distortions in the economy of any country which could ultimately result in deep economic crisis. A stable exchange rate gives government and citizens the opportunity to plan ahead without being afraid of varying cost in the nearest future. Getting the exclusive right or maintaining relative stability is critical for both internal and external balances and hence growth in the economy. (Mordi 2006).
In Nigeria, the transitory nature of exchange rate policy in exchanges from fixed exchange rate regime in 1960's to the pegged regime between 1970's and the mid 1980's. The pegged regime was later abandoned for a floating regime in 1986 following the adoption of the structural adjustment program (SAP) and the concomitant deregulation which drew the nation into the vortex of exchange rate fluctuation still bedeviling the economy today (Mordi, 2006).
In reaction to the failure of flexible exchange rate mechanism, government reintroduced on July22, 2002 the Dutch Auction System (DAS) with the aim of realigning the naira exchange rate, improving market transparency, conserve foreign exchange reserve and check capital flight from the country (CBN, 2006/07). Also Sanni in 2006 opined that the reintroduction of the Dutch Auction System (DAS) was used purposely to narrow the gap of official exchange rate and conserve foreign exchange reserve. Although, those system has been fairly unsuccessful in strengthening the naira but over dependence on oil, excessive importation and external shocks have made the long run stability elusive.
1.2    STATEMENT OF RESEARCH PROBLEM
         The failure of successive governments in Nigeria since the inception of exchange rate deregulation to formulate appropriate exchange rate policy caused fluctuations and depreciation in the foreign exclusive value of naira which is still plaguing the nation today.
        The volatility and frequent depreciation of the naira have implications for the economy and continues to be a cause for grave concern. Decline in standard of loving, real value of output and asset, increased rate of inflation and uncertainty for macro-economic planning and growth are some of the challenges that faced and still facing manager of the economy due to incessant fluctuations of exchange rate. (Obadan, 2006).
       The deregulation of the exchange rate led to over depreciation of naira which has led to the impoverishment of the citizenry, dearth a near mortal blow to the manufacturing sector which is heavily dependent on imported inputs and aggravated the external debt crisis. (Iyoha, 2004). In an import dependent economy such as Nigeria, the pass through from exchange rate changes to inflation is transmitted through the economy faster than through the changes in the interest rate .(Akanji,2006).
In summary, the undesirability of exchange rate fluctuations is not in doubt in view of the grave implications for micro and macro-economic planning and projections, cost of production and inflation, foreign investment flows, balance of payment and standard of living.
         In view of the above problem, the following research questions are asked:
•    To what extent does exchange rate fluctuation impacts on the economic growth?
•     What is the nature of the relationship between exchange rate instability and economic growth in Nigeria?
•    What is the relationship between foreign direct investment (FDI) and economic growth in Nigeria?
•    What is the effect of inflation on economic growth in Nigeria?
•     How has interest rate affected the Nigerian economic growth?
1.3     OBJECTIVES OF THE STUDY
         Broadly, this study will empirically determine the extent to which of exchange rate fluctuations effects or impact on the economic growth of Nigeria.
The specific objectives are:
1.    To determine the nature of the relationship between exchange rate instability and economic performance of Nigeria.
2.     To identify the impact of foreign direct investment (FDI) on the economic growth of Nigeria.
3.     To determine impact of inflation on the economic growth of Nigeria.
4.     To ascertain the relationship between interest rate and economic growth in Nigeria.
1.4    RESEARCH HYPOTHESIS
Based on the objectives of the study, the following hypothesis are formulated:
Hypotheses 1
H0: Naira exchange rate fluctuations does not have significant impact on economic growth.
Hypotheses 2
H0: Foreign direct investment (FDI) does not have any significant impact on economic growth.
Hypotheses 3
H0: Inflation does not have any significant impact on economic growth.
Hypotheses 4
H0: Interest rate does not significantly affect economic growth.
1.5 SIGNIFICANT OF THE STUDY
       The importance of having knowledge about exchange rate, exchange rate volatility and how it affects the economy cannot be over emphasized. This work will examine the extent at which exchange rate fluctuations affect the Nigerian economy and also enlighten the citizens about the adverse effect of changes of the exchange rate, assist government and policy makers in making effective policies that will help in achieving a realistic exchange rate and also serve as a guide to students and researchers in future researches. When the cause and impact of exchange rate is determined and corrected, it will definitely enhance growth and development in the country.
       Also, previous studies like the study conducted by Joyce in 2012 and Adeniran et al in 2014 failed to measure exchange rate volatility using standardized econometric method but this study will measure of exchange rate volatility with an econometric methodology which is GARCH modeling technique, which was not used by some of the previous studies.
1.6    SCOPE OF THE STUDY
         This research work will concentrate on the geographical domain of Nigeria. It is design cover the period of thirty two years (1982-2013).
1.7     RESEARCH METHODOLOGY
      This research work will make use of secondary data which will be sourced from the Central Bank of Nigeria (CBN) statistical bulletin, National Bureau of statistics (NBS), Statistical reports and other economic journals and publications.
          Since this work will be looking at the impact of exchange rate fluctuations or volatility on economic growth proxy with GDP and also the impact of inflation and foreign direct investment (FDI) on GDP, a multiple regression analysis will be used to examine the relationships between the variables. The ordinary least square techniques will be used because it possesses the property of the best linear unbiased estimator and also because the equation (model) will be specified in a linear form.
       The generalised auto regressive conditional heteroskedastic model (Garch model) will be used to measure exchange rate volatility. The model is considered suitable to measure volatility because it will provide a rich class of possible parameterizations of heteroskedasticity.
           The Unit root test (Augmented Dickey Fuller) will be conducted on the series in order to detect the presence of Unit root which could lead to spurious regression results.
1.8    LIMITATION OF THE STUDY
This research work is limited by inadequate fund which hinders the intended robustness of the research. Also, due to time frame for this research work and academic workload, certain ground could not be covered.
    There is also set back in the sourcing of data to be used in the work. Gathering data from different institutions, from the internet, libraries posed a major challenge to this work.
    Nevertheless, despite these limitations, the research work still retains sufficient robustness and usefulness in assessing the impact of exchange rate fluctuations on the econ growth of Nigeria.
1.9    STRUCTURE OF THE STUDY
This study is divided into five chapters. Chapter one which is the present chapter, gives a general overview of the study. Chapter two reviews papers related to this topic. It includes conceptual clarification, theoretical issues, and empirical issues. Chapter three focuses on the theoretical framework and model specification. Chapter four involves the presentation of data analysis and discussion of results in chapter three. While chapter five the last chapter is where the summary of findings from the results, recommendation and conclusion shall be done.
REFERENCES
Akanji, O.O. (2006). The achievement of convergence in foreign exchange market. Central Bank of Nigeria Bullion, 30(3), 10-15.
C.B.N (2006-07). The foreign exchange and its management in Nigeria. CBN     Briefs, Research and Statistics Department, (7), 51-62.
Eme, O.A. and Johnson, A.A. (2010). The Effect of Exchange Rate Movement on Economic Growth in Nigeria. CBN Journal of Applied Statistics,                      (2), Article 2.
Iyoha, M.A. (2004). Macro-Economic theory and policy. Benin City: Mindex
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Mordi, C.N. (2006). Challenges of exchange rate volatility in economic management in Nigeria. Central Bank of Nigeria Bullion, 30(3), 17-25.
Nnweke, T. (2014).  The Impact of Exchange rate volatility on balance of payment in Nigeria, University of Benin, Benin City, No. (93)
Obadan, M.I. (2006). Overview of exchange rate management in Nigeria. Central Bank of Nigeria Bullion, 30(3), 1-9.
Sanni, H.T. (2006). Challenges of sustainability of current exchange rate in Nigeria. Central Bank of Nigeria Bullion, 30(3), 26-37.