Foreign Exchange Management and Economic Development in Nigeria

The choice and management of an exchange rate regime is a critical aspect of economic management to safeguard competitiveness, macroeconomic stability, and sustainable development. However, the country has continued to be at a disadvantage in terms of macroeconomic performance, as the different regimes have been accompanied by instability and uncertainties. This situation necessitated the present study, which examined the relationship between exchange rate regimes and output growth in Nigeria over different periods from 1970 to 2021.

The study employed the Ordinary Least Squares (OLS) method to estimate the economic growth equation in view of endogeneity problems. The Engle–Granger Residual Root Test of cointegration was used to estimate the long-term relationships among the variables, while the Granger Causality test was applied to examine the direction of the relationships between the variables.

In contrast with previous findings, the study strongly suggests that exchange rate regimes indeed matter in terms of real economic performance in Nigeria. The results reveal that deregulated exchange rate regimes spur economic growth in Nigeria when compared with the entire period and the fixed exchange rate regime. Overall, the findings indicate that fixed exchange rates constrain the performance of the Nigerian economy, as the real exchange rate depicts an inverse relationship with economic growth during both the whole period and the period of the fixed exchange rate regime.

Against this background, the study recommends the sustainability of the exchange rate liberalization regime that has been in operation since 1986.