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The main objective of the study is to examine the effect of Exchange Rate Fluctuation on manufacturing sector in Nigeria within the study period (2007-2016). Specifically, the study examined the extent to which the Nigeria manufacturing sector is sensitive to exchange rate volatility and investigated the macroeconomic factors influencing exchange rate fluctuation in Nigeria within the study period.

All secondary data used were obtained from published annual report of Central Bank of Nigeria for the period of 2007 to 2016. Both descriptive and inferential statistical tools were employed in this study. Descriptive tools include minimum, maximum, mean and standard deviation. For the inferential statistics, the study employed multiple regression model and Pearson pairwise correlation to analyze the secondary data.

Results of the study shows that exchange rate (RER), Interest Rate (INTR), Inflation Rate (INFLR), Liquidity Ratio and Balance of payment (BOP) jointly determine Manufacturing sector output (MGDP) with F-value of 43.238, p-value of 0.004 and adj-R square of 55.4%.

Gross Domestic Product (GDP), Interest Rate (INTR), Inflation Rate (INFLR), Liquidity ratio and Balance of payment (BOP) were found to have joint significant effect on exchange rate fluctuation in Nigeria with F-value of 61.226, p-value of 0.034 and adj-R square of 51.1%.

It is concluded that real exchange rate had significant effect on manufacturing sector in Nigeria within the period covered by the study. The study recommended that government should ensure stable electricity, good roads, water, telecommunication etc. And more importantly as regards this study, the exchange rate appreciation is what the Government should intensify efforts to achieve in Nigeria.



1.1       Background to the study

Efficient foreign exchange management, financial intermediation and resources mobilization is key to the economic growth and development of developing countries, Nigeria inclusive and this role is the responsibility of the Central Monetary Authorities and financial sub-sectors of every economy. The sector does this by providing funds for the investors or producers to use as capital input to other sectors of the economy particularly the manufacturing sector. Commercial and Merchant banks, participate actively in financial intermediation. They do this by mobilizing savings from the surplus units for investment to the deficit units. These savings that are mobilized by paying interest (savings deposit rate) to economic agents that are willing to deposit part of their income. These deposits, on the other hand are given out to economic agents demanding capital as an interest or lending rate (Uzoma 2015).

No country around the globe can exist in autarky or self-production and consumption of goods and services produced within its boundaries. On this note, Exchange rate is defined as the price of one currency in terms of other. In other words it is the rate at which one currency is exchanged for another (Afolabi 1999).The importance of exchange rate in International Trade and Finance can never be over emphasized. More so exchange rate volatility is one of the greatest challenges being faced by most of the underdeveloped and developing economies around the globe. This research work seeks to examine the effects of foreign exchange and interest rates variations on the manufacturing of Nigeria.

The structure of an economy refers to the totality of the complex relationship existing between the resources of the very economy and the resultant outputs of the resources. The manufacturing and financial sectors are amongst the indispensable sectors of the Nigerian economy. The manufacturing sector precisely and globally is the engine of economic growth and development as it diversifies the economy and makes it more broad based. This sector consists of industries that convert raw materials into finished consumer goods or intermediate or producer goods (Anyanwu, 1993). It also consists of industries that are involved in the making of goods and articles traditionally or with machinery with wide range of products.

Interest rate is the cost of borrowing: hence, the linkage that exists between the financial and manufacturing sectors is made possible through the developmental role of interest rate. Lending rates otherwise known as interest rate, which are cost of capital, directly affects investment. When lending rates are high, investment borrowings are discouraged and vice versa. On the other hand when savings rate are high, savings are encouraged. It has a negative relationship with investment. The irony however is that high savings rates can lead to high lending rates which will have an adverse effect on investment (Acha et al, 2011).

The difference between the interest rate paid by commercial banks on deposit by savers and that charged on loans to borrowers is known as interest rate spread or interest rate intermediation. High interest rate generally constrains efficiency of financial intermediation as it discourages potential savers and borrowers and ultimately reduces investment and growth of the economy (Chigbu, 2007). The central Bank of any country is saddled with the responsibility of ensuring the rate of interest is not too low enough to discourage savings and also give room for inflation but also not high enough to discourage borrowing for investment (Komolafe, 2012). To achieve the desired interest rate, the CBN uses the Monetary Policy Rate (MPR) (which is the interest rate the CBN charges on monies lent to commercial banks). The Central Monetary Authorities can influence the market cost of funds by either increasing or reducing the MPR and invariably create impact on output from the manufacturing sector (Onoh, 2007). This study examined the effect of exchange rate fluctuation on manufacturing sector in Nigeria for eleven years (2006-2016).

1.2       Statement of the Problem

            There are numerous empirical studies that have assessed the relationship between exchange rate variability and manufacturing sector performance as well as economic growth. However, contrasting results emanated from the researches. For instance, Azeez et al. (2012) find that oil revenue and balance of payment exert negative effects while exchange rate volatility contributes positively to GDP in the long run. Also, Ehinomen and Olodipo (2012) find that in Nigeria, exchange rate appreciation has a significant relationship with domestic output and will promote the growth of the manufacturing sector. Ubok-Udom (1999) examined the relationship between exchange rate changes and the growth of domestic output in the Nigerian economy from 1971 to 1995 and found that exchange changes have a negative sign in the estimated equations. He asserted that the rate of growth of total GDP and non-oil GDP tends to fall or rise with nominal Naira/US dollar exchange rate. This implies that the Nigerian economy apparently requires exchange rate appreciation for it to achieve high growth rate. Similarly, Ukoha (2000) carried out an empirical study of the determinants of capacity utilization in the Nigerian manufacturing industry between 1970 and 1998 and his results revealed that exchange rate had a positive effect on manufacturing capacity utilization.

Again, Kandilov and Leblebicioðlu (2011) find a robust negative impact of exchange rate volatility on plant investment. Goldberg (1993) finds that a real depreciation (appreciation) of the U.S. dollar was likely to generate an expansion (reduction) in investment in the 1970s, but that the opposite pattern prevailed during the 1980s.Using an error correction methodology, Landon and Smith (2009) estimated the aggregate and sector-level investment equations for a panel of 17 OECD countries. The authors found that real currency depreciation may reduce aggregate investment and investment of nine sectors in the short run. Furthermore, it causes reduction of aggregate investment in the long run.

However, Campa and Goldberg (1999) compare the investment sensitivity to exchange rate in the United States, United Kingdom, Japan, and Canada for the period 1970-1993, and find investment in Canada to be the least responsive to exchange rate movements. The empirical evidence so far on the effects of exchange rate fluctuations on manufacturing sector performance is inconclusive and so country-specific studies are the best possible option to guide policy directions. Ezeanyeji and Onwueteka (2016) echoed that the poor performance of the Nigerian manufacturing sector and its vulnerability to negative external shock suggests the urgent need for a reappraisal of the focus of the development policies and commitments to their implementation. They advocate for an immediate change in the policy focus of the Nigerian government and a shift in the industrialization strategy, if the Nigerian economy must be returned to the path of sustainable growth and external viability. To this end this study intends to examine the determinants of exchange rate and the effect of exchange rate fluctuation on manufacturing sector in Nigeria within a period of ten years (2007-2016).

1.3       Research Questions

In line with the statement of the problem, this work will address the following questions:

  1. To what extent is the Nigerian manufacturing sector sensitive to exchange rate volatility within the study period (2007-2016)?
  2. To what extent do macroeconomic factors influenced the exchange rate fluctuation in Nigeria within the study period (2007-2016)?

1.4       Objectives of the Study

            The general objective of this study is to examine the effect of Exchange Rate Fluctuation on manufacturing sector in Nigeria within the study period (2007-2016).  The following specific objectives are formulated for further examination.

  1. To examine the extent to which the Nigeria manufacturing sector is sensitive to exchange rate volatility within the study period (2007-2016).
  2. To investigate the macroeconomic factors influencing exchange rate fluctuation in Nigeria within the study period (2007-2016).

1.5       Study Hypothesis

            The following hypotheses are stated and tested in null form.

HO1: There is no significant relationship between exchange rate volatility and Nigerian manufacturing sector.

HO2: There is no significant relationship between macroeconomic factors and exchange rate volatility in Nigeria.

1.6      Significance of the Study

            The outcome of this study is hoped to be useful to the Government, professional practitioners, the policy makers both in the private and public sectors in their attempt to address the challenge of exchange rate volatility. Government will find the study useful in the quest to develop and prioritize policies to stabilize the economy through monetary, fiscal and other policies. The Central bank of Nigeria will find the study useful as it attempts to provide a framework for understanding the mechanism of exchange rate.

It will as well contribute to the existing literatures on exchange rate fluctuation and manufacturing sector growth. Finally, this research study is expected to stimulate research interests in other aspects of exchange rate and development in the manufacturing sector.

1.7       Scope of the Study

            The study will be carried out on the effect of exchange rate fluctuation on manufacturing sector in Nigeria within a period of ten years (2007-2016). Specifically, the study intends to examine the extent to which the Nigeria manufacturing sector is sensitive to exchange rate volatility within the study period as well as investigate the investigate the macroeconomic factors influencing the exchange rate fluctuation in Nigeria.

1.8       Definition of Terms

Balance of Payment: It is the record of all economic transactions between the residents of the country and the rest of the world in a particular period.

Economic growth: This is the sustained increase in the value of economic activities within a country over a period of time.

Exchange rate policy: refers to the manner in which a country manages its currency in respect to foreign currencies and the foreign exchange market.

Exchange rate: is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in relation to another currency.

Exchange rate: The exchange rate is regarded as a value of National currency in terms of a foreign currency.

Exports: They goods and services produced in one country and services produced in one country and purchased by citizens of another country. If it is produced domestically and domestically and sold to someone from a foreign country, it is an export.

Imports: They are foreign goods and services brought into one’s domestic country.

Inflation rate: It is the annual percentage change in the consumer prices compared with previous period’s consumer prices.

Inflation: It is a sustained increase in the general price level of goods and services in an economy over a period of time.

Interest rate: is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed. It is defined as the proportion of an amount loaned which a lender charges as interest to the borrower, normally expressed as an annual percentage.