Long-Run Impact of Exchange Rate Fluctuations on Economic Growth in Nigeria

This study examined the long-run impact of exchange rate fluctuations on Nigeria’s economic growth between 1987 and 2024, with particular attention to Foreign Direct Investment (FDI), inflation, and interest rate dynamics. Motivated by Nigeria’s high exposure to global commodity shocks and persistent macroeconomic volatility, the research employed a Generalised Autoregressive Conditional Heteroskedasticity (GARCH) model to capture both mean effects and volatility clustering. Using annual time-series data and appropriate unit root tests, the study found that FDI exerted a positive and statistically significant effect on growth (coefficient = 0.0013, p < 0.001), though its magnitude was small, reflecting sectoral inefficiencies. Inflation showed a strong negative influence (coefficient = –0.0957, p < 0.01), while interest rates also depressed growth (coefficient = –0.0208, p < 0.01), confirming that price instability and high borrowing costs were persistent constraints. Past shocks and volatility (RESID(–1)² = 0.1499, p = 0.036; GARCH(–1) = 0.5999, p = 0.0052) significantly affected present output dynamics, underscoring the relevance of volatility management in policy design. The model showed adequate fit (Adjusted R² = 0.4582; DW = 1.99), and post-estimation diagnostics revealed no remaining heteroskedasticity. The study recommended targeted FDI incentives, stronger inflation-targeting frameworks, and interest rate reforms to mitigate exchange rate shocks and foster sustainable growth in Nigeria.