Naira Exchange Rate Variation and Nigeria Economic Growth: A Time Series Study

Abstract

This study examined the effect of exchange rate variation on Nigeria economy. The objective was to investigate how Naira exchange rate variations against key currencies affect the country’s real gross domestic product. Time series data was sourced from Central Bank of Nigeria statistical bulletin. Real gross domestic products were modeled as the function of United State commodity currency, British commodity currency, Japanese yen currency, Chinese yen currency and French franc currency. The ordinary least square method was used as data analysis techniques. The study used cointegration, unit root, and granger causality test and error correction estimate to study the dynamic effects of commodity currencies on financial market. The study found that naira exchange rate variation with the currencies can explain 65 percent variation on Nigerian real gross domestic products while the remaining 35 percent estimation can be traced to external variables not included in the model. The estimated f-test proved that the model is fit while the estimated DW statistics found the presence of positive serial autocorrelation among the variables. The estimated beta coefficient of the variables revealed that commodity currency of US; Japanese yen and Chinese yen have positive and significant effect on Nigeria real gross domestic products while British pound and French Franc have negative effect on Nigeria real gross domestic products.  From the co-integration test, we found at least two co-integrating equation from the trace test and maximum eigenvalue.  The granger causality test found unidirectional causality from real gross domestic products to Chinese yen and from French Franc to real gross domestic products. The study found that in the long run, Japanese and Chinese yen and French Franc have negative long run effect on Nigeria real gross domestic products; while United States dollar and British Pound Sterling have positive long run effect on Nigeria gross domestic products. The study recommended amongst others that Monetary and macroeconomic policies should be properly articulated with an impregnable feedback loop, implemented to the letter, and a quarterly examination of the impact on the Naira should be regularly engaged, evaluated, interpreted and ensure that the results and possible remedial action(s) get to the appropriate authority timeously so as to ensure well informed decision(s).