EXCHANGE RATE VARIABILITY AND MANUFACTURING SECTOR PERFORMANCE IN NIGERIA
Abstract
This study empirically examines the effect of exchange rate variability on the performance of the manufacturing sector in Nigeria from 1987 to 2021, using annual data. The low level of development in the sector has often been attributed to an increasing dependence on the external sector for importing essential manufacturing inputs in Nigeria. The study employs the Vector Error Correction Model (VECM) technique and other econometric procedures, including a unit root test that utilizes the Augmented Dickey Fuller (ADF) test, followed by the Johansen and Juselius (1990) trace and maximum Eigen statistics, to ascertain the presence of co-integrating correlation between the variables. The study variables include manufacturing capacity utilization (MCU) as a proxy for measuring manufacturing sector performance, exchange rate fluctuations (EXFL), broad money supply (MS2), nominal interest rate (INTR), and inflation rate (INFL) as measures of exchange rate fluctuation, alongside the degree of trade openness (TOP) as a control variable. The findings of the study indicate that the joint effect of exchange rate fluctuation measures reveals a non-significant negative effect on manufacturing sector performance in Nigeria. In contrast, the long-run joint effect was positive and significant. Conversely, the individual exchange rate fluctuation variables (INFL, INTR, MS2) exerted positive effects in both the long and short run, but significance was only observed in the long run. However, money supply, inflation rate, and interest rate, as controlled by the degree of trade openness, exerted significant negative effects. At the same time, in the short run, they all had a non-significant positive effect on manufacturing sector performance in Nigeria. As recommendations, the study suggests, among other things, that the government should implement policies on export strategies to encourage exports and discourage unnecessary imports to achieve a favorable balance of payments, as this will result in currency appreciation rather than depreciation, thus enhancing manufacturing output.