THE EFFECTIVENESS OF EXCHANGE RATE VOLATILITY ON INDUSTRIAL OUTPUT IN NIGERIA
Abstract
This study investigates the effect of exchange rate volatility on industrial output in Nigeria from 1986 to 2022. The persistent Volatility of the Naira driven largely by oil price shock import dependence and structural weakness has raised concern about it’s implication for industrial performance. Guided by the Balance of Payments (BOP) theory, the study specifies industrial output, inflation rate, foreign direct investment, and money supply as key determinants of industrial sector performance. Secondary data sourced from the Central Bank of Nigeria (CBN) and World Development Indicators (WDI) were employed.
Methodologically, the study employed Augmented Dickey-Fuller (ADF) unit root tests, Johansen co-integration tests, and a Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model to capture both short-run and long-run dynamics.
The results reveal that exchange rate volatility and money supply exert significant positive effects on industrial output, suggesting that industry may benefit from exchange rate movement throu.gh improved export competitiveness and liquidity expansion. Conversely, commercial bank loan to the industrial sector shows a significant negative effect indicating inefficiency in credit allocation and utilization. Inflation and foreign direct investment were found to have the stastically insignificant effect. The cointegration test confirm the existence of long run relationship among the variables, implying that the exchange rate fluctuation and industrial output are structurally linked.
The study concludes that exchange rate volatility, though risky, has supported industrial growth in Nigeria while structural bottlenecks in credit utilization that undermine potential gains . The study therefore recommends that government should promote export competitiveness, strengthen credit guarantee schemes to improve the efficiency of foreign direct investment, and adopt moderate expansionary monetary policies to stimulate sustainable industrial growth.
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