Exchange Rate Changes and Manufacturing Output: An Empirical Assessment on Nigeria
This study examined the relationship between Exchange Rate Changes and Manufacturing Output over the period 1980-2015. Specifically, the Engle-Granger (1987) two step modeling (EGM) procedure involving: cointegration analysis and error correction of parameter estimates were used. Additionally, Granger causality test was carried out to determine the direction of causation between Exchange Rate Changes and Manufacturing Output. It was discovered that Exchange rate has a significant effect on manufacturing growth in the long and short-run.; this relationship is statistically significant in the long run and in the short run. A 0.002 per cent nominal devaluation would result in a 1 per cent fall in the growth of the manufacturing sector in Nigeria in the long run while in the short run, 0.003 per cent nominal devaluation would result in a 1 per cent fall in the growth of the manufacturing sector. The findings is in contrast to the theoretical expectation that depreciation will promote manufacturing export, encouragement of local use of input and growth in the manufacturing sector. On the basis of these findings, the study concludes that the exchange rate management policy which presently tends towards exchange rate depreciation has not contributed significantly to the growth of the manufacturing sector in Nigeria. This may be due to the fact that the machineries and equipment’s as well as significant percentage of the raw materials, being used in the Nigerian manufacturing sector are imported to the country. It could also be ascertained from the estimated regression line that there is a positive relationship between the manufacturing growth and federal government capital expenditure in the long and short-run. The study recommends that as long as the manufacturing sector depends largely on foreign inputs, government should always embark on exchange rate appreciation until the level of technology and electricity improves.
Keywords- Economic Growth, Manufacturing, Exchange Rate and Inflation