The Impact of Exchange Rate Fluctuation on Macroeconomic Performance in Nigeria

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THE IMPACT OF EXCHANGE RATE FLUCTUATION ON MACROECONOMIC PERFORMANCE IN NIGERIA

CHAPTER ONE

INTRODUCTION
1.1 BACKGROUND OF THE STUDY
This study is designed to examine the causes of exchange rate fluctuations and their impact on the Nigerian economy since there is scarcely any country that lives in absolute autarky in this globalised world. The economies of all the countries of the world are linked directly or indirectly through asset or/and goods markets. This linkage is made possible through trade and facilitated by foreign exchange. The price of foreign currencies in terms of a local currency (i.e. foreign exchange) is therefore important to the understanding of the growth trajectory of all countries of the world.

According to Esther Adegbite (2007) Exchange rate is said to be the “relative price of two “national monies” or, the relative price of two national outputs” or the relative price of tradeables to non tradeables” that results in simultaneous equilibrium in the internal and external sectors of an economy. Moreover, some notable influences on the exchange rate of any country include variables like demand and supply of foreign exchange, monetary and fiscal policies, level of foreign reserves among others. These variables, if not properly managed often lead to different economic problems ranging from economic depression, rampaging inflation, high levels of unemployment, currency depreciation and balance of payment deficits. Hence, governments are constantly faced with the pressure of dealing with these variables. One of the various means this is achieved is through the use of government policies, specifically exchange rate policy which is the most common policy for achieving the equilibrium balance of payment. A great level of attention is given to balance of payments, because Nigeria, like many other low income open economies of the world, needs to pay more attention to her economic growth and development. Every developing nation will do anything to create employment opportunities for its growing population and improve the general standard of living. However, the foreign exchange rate of Nigeria has deteriorated due to continuous dwindling of the price of crude/petroleum. In the light of this, Nigeria, a country endowed with abundant natural resources strives to harness all her resources for her economic development, since the world is a global market for goods, services and investments, coupled with the fact that resource endowment in different parts of the world remains unequal. This has increased the need for countries which require goods and services for developmental purposes, settle bills by paying for their purchases and balance for their sales to buy other currencies and sell their own currencies too. To effect such transactions, an internationally acceptable mode of payment is required and this brought about the idea of foreign exchange. For instance the Nigerian economy has been entirely dependent on a single commodity i.e. petroleum, which has subjected the economy to instability due to the policies in the international petroleum market. Consequently, this has been posing serious social economic challenges on the developmental aspiration of the national economy, due to unfavorable balance of payments necessitated by huge expenditures on imported goods and services which could have been produced in the home country. Undoubtedly, a country benefits more where its exchange rate is neither over nor undervalued. Hence, the need for proper foreign exchange management arises. This can be attained through the proper manipulation of the foresaid crucial variables, so as to ensure that the country’s exchange rate contributes to the attainment of external payment’s viability and general economic prosperity. The consequences of substantial misalignments of exchange rates often lead to output contraction and extensive economic hardship. Moreover, there is reasonably strong evidence that the alignment of...
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