The Effects of Real Exchange Rate on Nigeria’s Non-Oil Sectoral Output.
Abstract
This study investigated the effect of exchange rate on Nigeria’s non-oil sector outputs, with emphasis on the agricultural, manufactural and service sectors over a period of 1970-2012 through the co integration and the ECM approach.
The co integration test showed that there was a long run relationship between the variables.
Evidence suggested that exchange rate by has a negative non-significant effect on the agricultural and manufacturing sectors and a non- significant positive effect on the service sector.
The study found other factors such as inflation and ratio of private sector credit to GDP affecting non-oil sector outputs;
this implies that the state of the non-oil output growth in Nigeria could be explained by other macroeconomic factors and probably due to instability experienced during the period under review.
It can be concluded that exchange rate fluctuations is not an important variable affecting non-oil sectoral output of the country.
Other factors affecting non-oil sector output like inflations and commercial bank credit should be looked into and addressed to revamp the non-oil sectors in Nigeria.
Introduction
Background of Study
Studying the relationship between output growth and exchange rates is especially important for many developing economies where output productivity continues to drive trade flow.
As opined by Hernan (1998), exchange rate behavior, whether determined by exogenous or endogenous shocks or by policy, has been a common, yet controversial, policy issue in most of the developing countries.
He further stressed that economic authorities in developing countries have repeatedly resorted to nominal devaluations as a means to correct external imbalances and/or misalignments of real exchange rates,
to increase competitiveness, to increase revenues, to be a key element of adjustment programs, and/or to respond to pressures from interest groups.
The decision to devalue has been taken many times even if the devaluation might cause inflationary spirals, domestic market distortions, disruptive effects on growth, and undesirable redistributive effects.
The objective of exchange rate policy was derived from the overall objective of macroeconomic management to achieve internal and external balance in the medium term.
Internal balance means the level of economic activity consistent with the satisfactory control of inflation (Williamson, 1982),
while external balance means balance of payments equilibrium or sustainable current account deficit financed on a lasting basis by expected capital inflow (Komolafe, 1996).
Although many factors may have combined to explain adverse macroeconomic conditions, the exchange rate policy of a country has been frequently identified as a major contributor (World Bank, 1984).
As a result, inconsistencies or fluctuations of the real exchange rate may have resultant effects on any country’s economic growth.
The relationship between a country’s exchange rate and economic growth is a crucial issue from both the descriptive and policy prescription perspectives.
As Edwards (1994) puts it “it is not an overstatement to say that real exchange rate behaviour now occupies a central role in policy evaluation and design”.
References
Agbola F.W (2004) Does Devaluation improves Trade Balance of Ghana? Paper to be presented at the international conference on Ghana’s Economy at the half century, M- Plaza Hotel, Accra, Ghana, July 18-20.
Agénor, Pierre-Richard. (1991), “Output, Devaluation and the Real Exchange Rate in Developing Countries.”Weltwintschaftliches Archiv 127, No. 1, pp. 18–41.
Ajayi S.I (1975)Economic Analysis of Import Demand Functions for Nigerian Journal of Economic and social studies,17:169-182
Akbostanci, E (2002). “Dynamic of the Trade Balance; The Turkish J-Curve”, ERC working Papers, 02/05.
Alexander, S.S (1952). “Effects of Devaluation on a trade balance”, International Monetary Fund Staff Papers, 2, 263-78.
Alexander, S.S (1952). The Effects of Devaluation on Trade Balance New York: Sache city Publishes.