Exchange Rate And Economic Growth In Nigeria

Abstract

This study investigates the effect of exchange rate on the growth of the Nigerian economy, using a multivariate framework that controls for inflation and manufacturing value added. Exchange rate instability remains a major macroeconomic concern in Nigeria due to the country’s heavy dependence on oil exports, high import reliance, and exposure to external shocks. Using annual time-series data from 2000 to 2024, the study applies a vector autoregression (VAR) model, supported by Granger causality and variance decomposition techniques, to examine how fluctuations in the exchange rate influence economic growth while accounting for additional macroeconomic conditions. The results show that exchange rate volatility significantly affects GDP in both the short run and long term. Specifically, depreciation exerts a contractionary effect initially but contributes positively to growth over time through competitiveness channels. The control variables, inflation and manufacturing value added, exhibit weak short-run effects, although manufacturing displays internal persistence consistent with structural rigidities in the Nigerian economy. Granger causality tests reveal a bidirectional causal relationship between GDP and the exchange rate, emphasizing the strong feedback between economic performance and currency stability. Variance decomposition results further show that exchange rate shocks become increasingly influential in explaining long-run fluctuations in GDP. The study concludes that effective exchange rate management, macroeconomic coordination, and structural reforms are essential for promoting stable and sustainable economic growth in Nigeria. It recommends policies aimed at improving exchange rate stability, diversifying the economy, strengthening the productive base, and reducing exposure to external shocks.