Exchange Rate Policy and Nigeria's Economic Growth: A Granger Causality Impact Assessment

Abstract

The exchange rate policy seems to be the life-wire of the Nigeria economy following the introduction of structural adjustment programme in 1986 which the mark the starting point of the depreciation of the local currency against the US dollar. With this in our minds, this study ascertains the impact of real exchange rate on gross domestic product and manufacturing capacity utilization of Nigeria from 1986 to 2015. The time series data we collected from the Central Bank of Nigeria statistical bulletin of 2015 passed the stationarity test and subjected to sensitivity analysis visa viz: Ramsey Reset specification, serial correlation, heteroskedasticity and multi-collinearity test. The ordinary least square estimation technique was applied in estimating the models developed. A long run relationship between exchange rate policy and economic growth was reveal by Johansen co-integration analysis. Focusing on impact assessment, the pairwise granger causality reveals that real exchange rate has significant impact on real gross domestic product and there is a positive but insignificant relationship between real exchange rate and real gross domestic product. Regardless of the positive and insignificant relationship between real exchange rate and manufacturing capacity utilization, real exchange rate significantly impacts manufacturing capacity utilization within the period studied. The Central Bank of Nigeria should put in place a strict foreign exchange policy control to ensure that the value of Naira against other currency is properly determined. Unethical practices by banks leading depreciation of the Naira should be investigated and erring operators sanctioned accordingly. Incentives, e.g. tax holiday and subsidies should be given to local manufacturers to improve output. An industrial blueprint should be put in place to allow a connection between agriculture and manufacturing to increase foreign exchange from exports.