Foreign exchange volatility affects the performance of macroeconomic indicators positively and negatively. Most import-dependent economies like Nigeria face the problem of foreign exchange rate volatility. Nigeria’s over dependence in the oil and gas sector of the economy has affected the major macro economic variables, and adverse foreign exchange rate regimes have affected the Nigerian economy over the years. Nigeria’s major foreign earning is from oil; hence, volatility of crude oil prices in the world market has made the economy highly susceptible to the ever changing exchange rates. Nigeria’s failure to diversify its economy which would have helped cushion the effect of the constant changes in oil prices has made the country susceptible to fluctuations in exchange rate. This has had a heavy toll on our foreign reserves and invariably on our balance of trade and balance of payment. A proper foreign exchange rate management in many ways strives to balance the level of imports with that of exports of goods that the country has comparative advantage. Such balance is necessary for an economy to develop to levels beyond subsistence. However, lack of government support for the real sector of the Nigerian economy as a result of its focus on foreign exchange earned from oil has also contributed immensely to the abysmal performance of the all other sectors especially the manufacturing sector. Manufacturers, who account for substantial contributions to Nigeria’s gross domestic product before now have been unable to produce, hence fewer jobs, are created. The Nigerian economy is in dire need of effective foreign exchange rate management that will aid its diversification, break the dominance of the oil sector, and give more opportunities to other sectors of the economy such as the manufacturing, agriculture, solid mineral mining etc and ultimately improve its balance of payment. It is against this background that this study sought to examine the impact exchange rate fluctuations on economic growth, balance of payment position, consumer price stability, and foreign private investment in Nigeria. The study adopted the ex- post facto research design. Annual time series data for 25-years were collated from Central Bank of Nigeria – Statistical bulletin, for the period, 1987-2011. Four major hypotheses were formulated and tested using the 2Stage Least Square (2SLS) estimation. Gross domestic product (GDP), balance of payment (BOP) consumer price index (CPI) and foreign private investment (FPI) were used as the independent variables while exchange rate (EXR) was the dependent variable for the four hypotheses respectively. Export rate (EXPR) and Import rate (IMPR) were introduced as control variables. The results reveal that exchange rate fluctuations had a positive and non-significant impact on Nigeria’s gross domestic product growth rate (coefficient of EXR = 0.033, t-value = 1.327); Exchange rate fluctuations had positive and non-significant impact on Nigeria’s balance of payment (coefficient of EXR = 0.005, t-value = 1.449); Exchange rate fluctuations had negative and significant impact on Nigeria’s consumer price index (coefficient of EXR = -0.411, t-value = - 3.554); and Exchange rate fluctuations had positive and significant impact on Nigeria’s foreign private investment (coefficient of EXR = 0.007, t-value = 5.906). This study contributes to literature by modifying Serven and Soilmano (1992) model, by including in-flow channel of foreign exchange (export rate) and outflow of foreign exchange (import rate) into the model. Thus, the study therefore, recommends amongst others, that an aggressive expansion of the Nigerian economy especially investment in the real sectors of the Nigerian economy will obviously lead to less dependence on oil revenue which is determined by fluctuations in exchange rate prices.

There is scarcely any country that lives in absolute isolation in this globalised world. The economies of all the countries of the world are linked directly or indirectly through asset or/and goods markets, made possible through trade and foreign exchange. The price of foreign currencies in terms of a local currency is therefore important to understanding of the growth pattern of economies of the world.

The history of exchange rate systems in Nigeria is traceable to the early 1960s. According to Bakare (2011:3), …before the establishment of the Central Bank of Nigeria in 1958 and the enactment of the Exchange Control Act of 1962, foreign exchange was earned by the private sector and held in balances abroad by commercial banks that acted as agents for local exporters… The oil boom experienced in the 1970s made it necessary to manage foreign exchange rate in order to avoid shortage. However, shortages in the late 1970s and the early 1980s compelled the government to introduce some ad hoc measures to control excessive demand for foreign exchange. However, it was not until 1982 that a comprehensive exchange controls were applied. Then a fixed exchange rate system was in practice. The increasing demand for foreign exchange and the inability of the exchange control system to evolve an appropriate mechanism for foreign exchange allocation in consonance with the goal of internal balance made it to be discarded in September 26, 1986 while a new mechanism was evolved under the Structural Adjustment Programmes (SAP). The main objectives of exchange rate policy under the Structural Adjustment Programmes were to preserve the value of the domestic currency, maintain a favourable external balance and the overall goal of macroeconomic stability and to determine a realistic exchange rate for the Naira.

In macroeconomic management, exchange rate policy is an important tool. This is derived from the fact that changes in the rate of exchange have significant implications for a country’s balance of payments position and even its income distribution and growth. It aids international exchange of goods and services as well as achieving and maintaining international competitiveness and hence ensures viable balance of payment serves as an anchor for domestic prices and contributes to internal balance in price stability (CBN, 2011). It is not surprising therefore, that monetary authorities attach much importance to proper management of a country’s foreign exchange since its behaviour is said to determine the behaviour of several other macroeconomic variables (Oyejide, 1989). It is even more so for Nigeria which had embarked on a course of rapid economic growth with its attendant high import dependency. An exchange rate, as a price of one country’s money in terms of another’s, is among the most important prices in an open economy. It influences the flow of goods, services, and capital in a country, and exerts strong pressure on the balance of payments, inflation and other macroeconomic variables. In this way, the choice and management of an exchange rate regime is a critical aspect of economic management to safeguard competitiveness, macroeconomic stability, and growth (Cooper, 1999).

Macroeconomic performances under different exchange rate regimes have been a subject of continuing research and controversy. Ghosh, et. al., (1996) using a three-way classification analyzed the link between exchange rate regimes, inflation and growth. The result indicates that pegged exchange rates are associated with lower inflation and less variability. They therefore argued that this was due to a discipline effect the political costs of failure of defending the peg induce disciplined monetary and fiscal policy and a confidence effect to the extent that the peg is credible, there is a stronger readiness to hold domestic currency, which reduces the inflationary consequences of a given expansion in money supply. The study also found that pegged rates are associated with higher investment but correlated with slower productivity growth. On net, output growth is slightly lower under pegged exchange rates compared to floating and intermediate regimes (Ghosh, et. al., 1996)

A study by IMF that extends the period of analysis to mid-1990s reports similar findings (IMF 1997). However, in an analysis of experience with increasing capital market integration and the replacement of fixed exchange rates in the 1990s, Caramaza and Aziz (1998) found that the differences in inflation and output growth between fixed and flexible regimes are no longer significant.

Also, using data from 159 countries for the 1974-99 periods, Levy-Yeyati and Sturzenegger (2000) reclassified the exchange rates into three groups (float, intermediate, fixed) and estimated....

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