EFFECT OF EXCHANGE RATE VOLATILITY ON MANUFACTURING SECTOR PERFORMANCE IN NIGERIA

Abstract

The performance of the manufacturing sector of the Nigerian economy has remained visibly unimpressive over the years. Efforts directed by various stakeholders and the government to revive the sector have proved abortive. Empirical evidences suggest that the volatile nature of the country’s exchange rate has been the major challenge impeding the performance of the sector. It is against this backdrop that this study investigated the impact of exchange rate volatility on the Nigerian manufacturing sector from 1981 to 2018. The study employed the vector autoregressive (VAR) model in analyzing the annual time series data. The GARCH (1, 1) model was used to ascertain the prevalence of exchange rate volatility persistency and to extract exchange rate volatility series. The VAR model was used to estimate the impact of exchange rate volatility on the manufacturing sector. The GARCH (1,1) estimates obtained showed that there is persistent of volatility associated with exchange rate. Manufacturing output was further disaggregated into oil-related manufacturing output and non-oil related manufacturing output. The empirical results obtained from the VAR estimation show that exchange rate volatility has significant negative effect on aggregate manufacturing output in Nigeria. The study therefore recommended that firms should identify the types and measurement of exchange rate risk exposed to them so as to develop particular exchange rate risk exposure management strategies to cushion its negative effects.