Exchange Rate Volatility and Manufacturing Sector Performance in Nigeria: A dynamic Approach

ABSTRACT: Exchange rate instability has been a defining feature of Nigeria’s economy especially in relation to international competitiveness and domestic output. This paper examines the dynamic effects of exchange rate volatility on the performance of Nigeria’s manufacturing sector, a key engine of industrialization and employment. Using annual data spanning 1970–2024 from the Central Bank of Nigeria, we employ a Vector Error Correction Model (VECM) and a Bi-variate GARCH framework to capture both short-run dynamics and long-run volatility spillovers between exchange rates, price levels, and manufacturing output. The results indicate that exchange rate volatility exerts a significant and negative impact on manufacturing performance. In the long run, a 1 percent increase in volatility reduces manufacturing output by about 8.6 percent while short-run effects are immediate and also adverse. Volatility transmission analysis reveals that exchange rate shocks spill over to both manufacturing output and aggregate prices, suggesting that currency instability undermines industrial performance partly through inflationary pressures. These findings highlight the structural vulnerabilities of Nigeria’s manufacturing sector and reinforce the importance of strong exchange rate management policies along with stable macroeconomic policies as the major tools for promoting manufacturing industrial growth. Strategies that prioritise domestic input sourcing can also aid in minimizing the negative impacts of exchange rate shocks in the long run. The paper concludes that restoring exchange rate stability and reducing dependence on imported inputs are critical to positioning the sector as a driver of sustainable economic diversification.