Exchange Rate Volatility and the Performance of Manufacturing Sector in Nigeria: An Econometric Analysis

Abstract This study examined the impact of exchange rate volatility on the performance of manufacturing sector in Nigeria from 1981 to 2020 using ARCH/GARCH model and Autoregressive Distributed Lag Model (ARDL). The ARCH/GARCH model confirms that there is a high exchange rate volatility which was validated by their coefficients which were positive and statistically significant at 1% level. The Augmented Dickey Fuller (ADF) unit root test results showed that all the variables were stationary at first difference and the Bound test confirmed a long run relationship among the variables. The ARDL results show that exchange rate volatility, interest rate and inflation rate has a negative impact on the performance of manufacturing sector in the long run while import and gross capital formation have a positive effect on manufacturing performance in the long run. Also, exchange rate volatility, gross capital formation and interest rate were found to have a significant impact on manufacturing performance while import and inflation were found to be non-significant. The findings also show that in the short run that volatility in exchange rate is negatively and significantly related to the performance of manufacturing sector in Nigeria. Furthermore, the coefficient of error correction term shows that about 66 percent of the disparity between the actual and the equilibrium value of manufacturing performance is corrected every year. The study concludes that monetary authorities should formulate a policy framework that will be targeted at improving and stabilizing naira exchange rate. Also, Nigerian government should appropriate more funds to the manufacturing sector. Finally, interest on lending should be reduced to barest minimal to encourage investment both locally and internationally.