Exchange Rate Volatility and Its Implications for Economic Growth in Developing Economies — A Case Study of Nigeria within 1993 to 2023

Abstract Exchange rate volatility signifies the movement of exchange rate of countries which is an important macroeconomic phenomenon that affects trade competitiveness, inflation, investment flows and long-run growth of countries. This paper examines the impact of exchange rate fluctuation on the economic growth of Nigeria within 1993 to 2023. The study examined the analysed key macroeconomic variables including foreign direct investment (FDI), crude oil prices, export value, import value, inflation rate, and electricity distribution. The analysis employed descriptive statistics, Augmented Dickey–Fuller (ADF) to determine unit root tests, Johansen cointegration techniques to establish the relationship between the variables in the study, and a Vector Error Correction Model (VECM) to capture both long-run equilibrium relationships and short-run adjustment dynamics. Findings suggest that the generalized autoregressive conditional heteroscedasticity - based measure of nominal and real exchange rate volatility has a negative impact on economic growth, because the country’s dependent mostly on foreign exchange from oil export. Also, the effect of exchange rate volatility depends on the crude oil price movement, exchange rate regimes and macroeconomic policies implemented by the government since Nigeria is majorly a crude oil export nation. For Nigeria to enjoy a stable exchange rate it has to address the challenges in its transmission channels, to avoid short-run shocks which hinders the realization of long-run economic potential through export diversification, infrastructure development, and policies that attract sustainable FDI for both local consumption and export as well as an assured positive economic growth it is necessary the government diversify the economy to encourage multi-culture foreign exchange inflow nation, where several sectors would earn steady export proceeds from her products and services.