Analysis of the Impact of Exchange Rate Volatility on Manufacturing Output in Nigeria: 1986 – 2016

Abstract

Since September 1986, adoption of structural adjustment programme (SAP) brought about flexible exchange rate regime which led to continuous depreciation and instability of naira. This instability and continue depreciation has resulted to downturn in manufacturing output in Nigeria. This study sought to examine the assessment of exchange rate volatility on manufacturing output using secondary quarterly data from 1986:1 to 2016:4. Autoregressive conditional heteroscedasticity (ARCH) and Generalized Autoregressive conditional heteroscedasticity (GARCH) model was used to find out whether there is stability in exchange rate in Nigeria. Traditional flow and Monetary approach was the theoretical framework on which this work was based; unit root test was conducted using Augmented Dickey fuller (ADF) and Philip Perron (PP) tests, Autoregressive distributed lag (ARDL) cointegrated test was used to test for the long-run relationship amongst the variables. Empirically, exchange rate volatilities are found to have a negative and insignificant impact on manufacturing output, this result demonstrates that exchange rate volatility create problem of shocks and consequently forces a number of manufacturers out of operation. Inflation and interest rates were found to be negative significant and insignificant respectively, all the variables were all in conformity with the theoretical expectations (appriori). However, this study recommended that, the gap between official and parallel exchange rate market should be breached, also that manufacturers should begin to look inward by sourcing their raw material locally.