Foreign Exchange Rate Reforms and Economic Growth in Nigeria: Further Reassessment

Abstract

This study examines the impact of foreign exchange rate reforms on economic growth in Nigeria. In this process, gross domestic product was used as a proxy for economic growth. The real effective exchange rate, net trade in goods and services, general government final consumption expenditure, and domestic credit to the private sector were used as independent variables. All the variables achieved stationarity at unequal forms, and therefore confirm that the persistence shock is not an infinite memory. The Bounds test of cointegration was used due to the mixed stationarity of the variables. The result of the Bounds cointegration test showed that there is no cointegration, which led to the autoregressive distributed lag (ARDL) short-run model that measures the short-run impact of foreign exchange rate reform on economic growth in Nigeria. The model was then estimated as short run model without cointegration. The estimated coefficient of the model showed that log of GDP is significantly and positively influenced by its own value with one lag. Also, the current value of the log of domestic credit to private sector positively influences GDP (LGDP), but this effect is not significant. The real exchange rate has a negative and significant impact on gross domestic product with a lag in the short run. On the contrary, its current value has a positive and non-significant relationship with gross domestic product. The value of the coefficient of determination, which is 99.8% shows that the model is a good fit. For Nigeria, the need for maintaining external competitiveness and promoting growth remains a delicate task for policy-makers, as it involves managing an exchange rate regime accompanied by other consistent macroeconomic policies. Based on these results, it is recommended that appropriate monetary and fiscal measures be implemented to ensure that the real exchange rate has more impact on economic growth should be put in place.