The effect of exchange rate fluctuations on the Nigerian manufacturing sector

Abstract

This paper examines the impact of exchange rate fluctuations on the Nigerian manufacturing sector during a twenty (20) year period (1986 – 2005). The argument is that fluctuations in exchange rate adversely affect output of the manufacturing sector. This is because Nigerian manufacturing is highly dependent on import of inputs and capital goods. These are paid for in foreign exchange whose rate of exchange is unstable. Thus, this apparent fluctuation is bound to adversely affect activities in the sector that is dependent on external sources for its productive inputs. The methodology adopted for the study is empirical. The econometric tool of regression was used for the analysis. In the model that was used, manufacturing output employment rate and foreign private investment were used as the explanatory variables. The result of the regression analysis shows that coefficients of the variables carried both positive and negative signs. The study actually shows adverse effect and is all statistically significant in the final analysis. Some recommendations for policy were made based on the findings. Amongst others is the need to strengthen the link between agriculture and the manufacturing sector through local sourcing of raw materials thereby reducing the reliance of the sector on import of inputs to a reasonable level. Key words: Nigeria manufacturing sector, exchange rate, fluctuations.

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