NEAR EAST UNIVERSITY GRADUATE SCHOOL OF SOCIAL SCIENCES ECONOMIC DEPARTMENT MASTER’S PROGRAMME MASTER’S THESIS AN ANALYSIS OF THE IMPACT OF EXCHANGE RATE FLUCTUATIONS ON ECONOMIC GROWTH OF NIGERIA UMAR ALIYU SHUAIBU NICOSIA 2017 NEAR EAST UNIVERSITY GRADUATE SCHOOL OF SOCIAL SCIENCES ECONOMIC DEPARTMENT MASTER’S PROGRAMME MASTER’S THESIS AN ANALYSIS OF THE IMPACT OF EXCHANGE RATE FLUCTUATIONS ON ECONOMIC GROWTH OF NIGERIA PREPARED BY UMAR ALIYU SHUAIBU 20156331 THESIS SUPERVISOR DR. BEHIYE ÇAVUŞOĞLU NICOSIA 2017 NEAR EAST UNIVERSITY GRADUATE SCHOOL OF SOCIAL SCIENCES Economics Master’s Program Thesis Defence An Analysis of the Impact of Exchange Rate Fluctuations on Economic Growth of Nigeria Prepared by Umar Aliyu Shuaibu 20156331 We Certify the Thesis Is Satisfactory for the Award of the Degree of Master of Science in Economics Examining Committee Assoc. Prof. Dr. Hüseyin Özdeşer Chairman, Department of Economics, Near East University. Dr. Behiye Çavuşoğlu Supervisor, Department of Economics, Near East University. Dr. Berna Serener Department of Economics, Near East University. Approval of the Graduate School of Social Sciences Assoc. Prof. Dr. Mustafa Sağsan Acting Director iv DEDICATION This research work is above all dedicated to Almighty Allah who through his infinite mercy guides and protects me throughout my programme. The project is therefore dedicated to my sincere beloved parents, Late Alhaji Shuaibu Aliyu and Hajiya Khadija (Mama) Umar, as an abstract reward for the foundation they laid in me from my non- existing to what I am presently. v ACKNOWLEDGEMENT In the name of Allah, the most beneficent and the most merciful. All praises are due to Allah the Lord of the worlds. May the peace and blessings of Allah be upon our beloved Prophet Muhammad (SAW), his companions, and those who follow his guidance up to the Hereafter. I thank Allah for giving me the life, time and opportunity to undertake this programme as well as this research work, and also who has been so merciful by seeing me through to the completion. My next profoundest and special gratitude goes to my well-behaved, devoted and dedicated supervisor Dr. Behiye Çavuşoğlu, whose suggestions, advice, and constructive guidance aided me in the completion of this research work, thereby increasing the scope of my knowledge. To her (Dr. Behiye Çavuşoğlu) I say thank you. May you have a successful ending in this challenging academic environment and may Allah reward you with high place in paradise, amen. I must appreciate the patience and support of my Head of Department and my course advisor Assoc. Prof. Dr. Hüseyin Özdeşer for his guidance and tolerance to the end of my program. A hearty thank you goes to all my lecturers and non academic staff in the Department of Economics and the faculty at large, Near East University Cyprus. Especially Prof. Irfan CIVCIR, Vur Yektaoğlu, Prof. Dr. Çelik Aruoba, Faisal sher (PhD in view) Nese Gerçek and Tijen Özügüney. Your generous and knowledgeable contributions toward my academic pursuit helped me a lot. A caring mind doesn’t forget special people like you. My family you have been too helpful to me for the whole years of my studies, I am mindful of your efforts and we are very much a family. My friends/course mates especially Abdullahi Nuhu Bukar and Kabiru Musa Awak who have touched my life in one way or the other, my friends you are simply too numerous, may God reward you abundantly, thank you and best regards. vi A special thanks to Mrs Verda Ozatach for P.A to the Deputy founding rector Near East University, Cyprus for Her assistance towards my studies. Finally, I wish to express my special thanks to Kano State Government for awarding me a fully-funded Msc. scholarship. May Allah reward you abundantly for this great success. vii ABSTRACT This study empirically analyses the impact of exchange rate fluctuations on economic growth for Nigeria for the period of 1980A:2016A using vector error correction model (VECM). The study is interested in investigating whether exchange rate fluctuations have effect on growth performance in Nigeria with the adoption of flexible exchange rate regime than the other exchange rate regimes adopted over the years in Nigeria. The study confirms the long run cointegration among the variables of interest and in all there is a positive effect of exchange rate fluctuations on economic growth of Nigeria. Another finding of the research reveals that the results of the Granger causality test confirm a unidirectional short run causality that runs from real effective exchange rate (REER) to economic real economic growth (RGDP). Nevertheless, a unidirectional that runs from oil price (OPR) to real interest rate (RIR) in Nigeria also exists. Accordingly, the results for variance decomposition reveal that an increase or decrease in one RGDP is the result of a corresponding increase or decrease in REER, OPR, RIR and INF (cpi) within the observed period in the study. The study recommends some form of government intervention in the foreign exchange market. In addition, the government should diversify the export base of other economic sectors against the oil sector that serves as the main source of Nigeria foreign exchange earnings. Keywords: Economic growth, Exchange rate fluctuations, Foreign exchange market Cointegration, vector error correction mechanism. viii ÖZ Bu çalışma, vektör hata düzeltme modelini (VECM) kullanarak 1980A: 2016A döneminde döviz kuru dalgalanmalarının Nijerya'daki ekonomik büyüme üzerindeki etkisini ampirik olarak analiz etmektedir. Çalışma, döviz kuru dalgalanmalarının Nijerya'daki büyüme performansı üzerinde esnek döviz kuru rejiminin benimsenmesiyle Nijerya'daki yıllar boyunca kabul edilen diğer döviz kuru rejimlerinden etkilenip etkilenmediğini araştırmakla ilgilenmektedir. Çalışma, ilgili değişkenler arasındaki uzun dönem eşbütünleşmeyi teyit etmektedir ve tümünde, Nijerya'nın ekonomik büyümesi üzerinde kur dalgalanmalarının olumlu bir etkisi olduğunu savunmaktadır. Araştırmanın bir diğer bulgusu, Granger nedensellik testi sonuçlarına göre, reel efektif döviz kuru (REER) 'dan ekonomik reel ekonomik büyümeye (RGDP) uzanan tek yönlü kısa vadeli nedenselliğin doğrulandığını ortaya koymaktadır. Bununla birlikte, Nijeryada petrol fiyatından (OPR) gerçek faiz oranına (RIR) geçen tek yönlü bir nedensellik de vardır. Buna göre, varyans ayrıştırması sonuçları, RGDP'deki bir artış veya azalmanın, çalışmada gözlemlenen süre içerisinde REER, OPR, RIR ve INF (cpi) 'de karşılık gelen artış veya azalmayı açıklamaktadır. Çalışma, döviz piyasasına devlet tarafından müdahale edilmesini öneriyor. Buna ek olarak çalışma, hükümetin diğer ekonomik sektörlerin ihracat tabanını, Nijerya'nın döviz kazançlarının ana kaynağı olan petrol sektörüne karşı çeşitlendirmelisi de öneriyor. Anahtar Kelimeler: Ekonomik büyüme, Döviz kuru dalgalanmaları, Döviz piyasası Eş bütünleşme, vektör hata düzeltme me ix TABLE OF CONTENTS DEDICATION .................................................................................................................. iv ACKNOWLEDGEMENT ................................................................................................. v ABSTRACT ..................................................................................................................... vii ÖZ ...................................................................................................................................viii TABLE OF CONTENTS .................................................................................................. ix LIST OF TABLES ..........................................................................................................xiii LIST OF FIGURES ........................................................................................................ xiv LIST OF ABBREVIATIONS .......................................................................................... xv CHAPTER ONE ................................................................................................................ 1 BACKGROUND OF THE STUDY .................................................................................. 1 1.1 Introduction ......................................................................................................... 1 1.2 Statement of the Research Problem .................................................................... 3 1.3 Statement of the Research Question .................................................................... 4 1.4 Statement of Hypothesis ...................................................................................... 4 1.5 Aims and Objectives of the Study ....................................................................... 5 1.6 Significance of the Study .................................................................................... 5 1.7 Originality of the Study ....................................................................................... 5 1.8 Scope and Limitations of the Study .................................................................... 6 1.9 Organization of the Study ................................................................................... 6 CHAPTER TWO ............................................................................................................... 7 NIGERIAN ECONOMY AND EXCHANGE RATE REGIMES .................................... 7 2.1 Introduction ......................................................................................................... 7 2.2 Economic Background of Nigeria: