The Impact of Foreign Exchange Rate Volatility on Economic Growth of Nigeria

Abstract

The study examined the impact of foreign exchange volatility on economic growth using trade balance and foreign direct investment. Data for this series were assessed from Central Bank of Nigeria Statistics Bulletin covering from 1990-2023. Autoregressive Distributed Lag Model and estimation technique was employed using STATA. The result showed that there is a positive relationship between exchange rate and GDP growth rate. However, Exchange rate volatility, FDI as a percentage of GDP and foreign reserve exhibits a negative but insignificant relationship with the growth rate of GDP. I percent increase in Exchange rate volatility, FDI as a percentage of GDP and foreign reserve leads to 19%, 426% and 469% fall in the growth rate of GDP. The R-squared value of 0.680206 indicates that approximately 68% of the variation in the dependent variable, growth rate (GDP), is explained by the variation of the independent variables included in the model. Specifically, Foreign exchange volatility (EVAT) was found to have insignificant impact on economic growth in Nigeria both in the long run and the short run while inflation was found to have significant impact on economic growth both in the long-run and in the short run. In affirmative, the result suggests that FDI, OPN, RES and FTB were all found to have significant impact on economic growth in the short run. The study suggests that it is imperative for policymakers in Nigeria to prioritize measures aimed at addressing the foreign exchange volatility, ensuring the stability of inflation and ensuring the existence of balanced trade if not a surplus balance.

Keywords: Impact, Foreign Exchange rate, Volatility, Economic Growth, and Nigeria