IMPACT OF EXCHANGE RATE FLUCTUATION ON ECONOMIC GROWTH IN NIGERIA

Abstract

This study investigates the impact of exchange rate fluctuations on Nigeria’s economic growth using annual time 
series data spanning 1985–2023. The Autoregressive Distributed Lag (ARDL) model was employed to capture both 
short-run and long-run dynamics. The results show that past values of GDP significantly influence current growth, 
with LGDP (-1) having a strong positive effect (0.7800, p < 0.01), while LGDP (-4) exerts a negative influence (
0.3992, p < 0.01), confirming persistence and adjustment dynamics in growth. Exchange rate fluctuations display a 
mixed effect: the contemporaneous coefficient is negative (-0.00018, p < 0.10), but its lag [EXR (-1)] is significantly 
positive (0.00035, p < 0.01), suggesting short-run disruptions followed by adjustment gains. Inflation is found to be 
volatile, alternating between positive and negative effects across lags, with INF (-2) showing a strong negative effect 
(-0.00080, p < 0.01). Interest rates exert mostly positive influences, particularly INT (0.00077, p < 0.05), though 
INT (-3) turns negative (-0.00080, p < 0.01), highlighting possible adverse long-term effects. Foreign direct 
investment (FDI) demonstrates both negative and positive contributions, with immediate effects being negative (
0.00993, p < 0.01), but later lags [FDI (-2) = 0.00576, p < 0.05; FDI (-3) = 0.01093, p < 0.01] significantly positive, 
confirming its delayed but vital role in growth. The model exhibited strong explanatory power (R² = 0.999, F
statistic = 1684.26, p < 0.01) and robustness (Durbin-Watson = 2.05; Jarque-Bera probability = 0.597). However, 
the ARDL bounds test (F-statistic = 1.785 < I0 bound = 2.45 at 10%) indicates no evidence of a long-run 
relationship among the variables. These findings suggest that exchange rate movements, inflation, and FDI influence 
Nigeria’s growth largely in the short run, while long-run equilibrium remains absent. The study underscores the 
importance of exchange rate stability, inflation targeting, and policies that attract sustainable FDI to achieve resilient 
economic growth.