EFFECT OF REAL EXCHANGE RATES ON ECONOMIC GROWTH OF NIGERIA (1960-2016)

Abstract

This study on the effect of real exchange rates on economic growth of Nigeria was conducted for the period 1960 - 2016 to determine the nature of the relationship between real exchange rates and economic growth as well as ascertain the causal relationship between them. Annual time series data sourced from World Development Indicators and Central Bank of Nigeria Statistical Bulletins were used in this study. The problem was that the real exchange rate of Naira was far from being competitive and was both unstable and unsustainable to the economic growth of Nigeria as it had neither substantially promoted exports nor reduced imports. Ordinary least squares were employed to estimate the multiple regression models with the aid of Eviews application software for windows version 9, followed by Pairwise Granger causality test and robustness tests. Major findings were that real exchange rates had insignificant relationship with economic growth under the fixed exchange rates regime; but had significant negative effect on economic growth; significant negative relationship with savings and significant positive relationship with real interest rates under the free exchange rates regime. Granger Causality results showed that no causal relationship existed between real exchange rates and economic growth under both fixed and real exchange rates regimes and for the whole period.  The conclusion was that real exchange rates had neither a significant effect nor a causal relationship with economic growth.   The main recommendations are: to sustain free exchange rates regime as it has been more beneficial to our economic growth; not to reintroduce fixed exchange rates regime again; to maintain competitive real interest rates and continually promote savings to attract investments and promote economic activities.