EXCHANGE RATE VOLATILITY AND THE PERFORMANCE OF

MANUFACTURING SECTOR IN NIGERIA

Ibeinmo, Friday Cookey1 (PhD),

Oladosu, Isaac Olubiyi2
1
Department of Economics, Rivers State University, Nkpolu-Orowurokwo, Port Harcourt,
Nigeria ibeinmocookey@[Link], [Link]@[Link] , 08037683600

2
Department of Economics, University of Port Harcourt, Nigeria.
oluisaac19@[Link]

ABSTRACT
This study examined the effect of exchange rate volatility on the performance of manufacturing sector in
Nigeria from 1985 to 2022. Exchange rate, trade openness and external reserve were used as proxies of
exchange rate volatility while manufacturing sector GDP was used as proxy of performance of
manufacturing sector. The study made use of annual time series data which were sourced from Central
Bank of Nigeria (CBN) statistical bulletin. Augmented Dickey-Fuller (ADF) statistic, Error Correction
Model (ECM) approach and Granger causality were the techniques of data analysis adopted. The result
of the ADF unit root test showed that all the variables were integrated of order one [i.e. I(1)]. Also, the
results of the ECM estimation indicated that exchange rate has significant negative relationship with the
manufacturing sector GDP in Nigeria while trade openness and external reserve have a positive and
significant effect on manufacturing sector GDP in Nigeria. Lastly, the result of the Granger causality test
showed that exchange rate and external reserve have unidirectional causation with manufacturing sector
GDP in Nigeria while there is no causation between trade openness and manufacturing sector GDP in
Nigeria. Based on the findings, the study concluded that exchange rate volatility has a significant effect
on the performance of manufacturing sector in Nigeria. It was recommended among others that
government and its relevant agencies should formulate and implement sound exchange rate policy that
will promote greater exchange rate stability and promote greater openness of the economy.

Keywords: Exchange Rate Volatility, Manufacturing Sector GDP, Exchange Rate, Trade Openness,
External Reserve

1.0 INTRODUCTION
Exchange rate policy has been an important tool for macroeconomic management in Nigeria,
having been frequently used in the past to preserve the value of the naira, maintain a comfortable
external reserves position, and assure price stability. Historically, multiple exchange rate policies
have been employed depending on the economic situation at the time, as well as in response to
changing exchange rate policies with the rest of the globe. These regulations are frequently

1
aimed at restricting or rationing the use of foreign exchange at officially defined rates, but recent
policy adjustments have mirrored a move towards market-driven exchange rate (Agu, 2012).
This is why Akpan and Atan (2017) asserted that in developing economies, exchange rate
decisions are frequently delicate and divisive. This is mostly due to the type of structural
adjustment that is required, which calls for a decline in the nominal exchange rate. These
domestic changes are seen as detrimental to the economy because of their immediate effects on
demand and prices.

In Nigeria, exchange rate policy has seen significant changes throughout the years, starting with
the fixed parity with the British pound era and continuing through the oil boom of the 1970s and
1986 currency floating. The political and economic factors that shaped exchange rate policy
during each of these periods had a significant impact on real income, inflation, the balance of
payments, and the structural development of the [Link] summersault and inconsistency in
policies and lack of continuity in exchange rate policies aggravated the unstable nature of naira
rate. Hence, no matter the type of exchange rate regime adopted by the country, it has an effect
on business firm productivity and the performance of manufacturing sector in that particular
country (Gbosi, 2015). Ugwu (2017) opined that Nigerian manufacturing companies' reliance on
foreign exchange rates for the importation of spare parts, raw materials, and other inputs for
manufacturing and output is significant. The incapacity to import these input materials due to the
exchange rate problem has a detrimental impact on the performance of manufacturing sector
overall and on the performance of manufacturing firms in particular(Nnamocha, Obioma,
Igwemma& Nwoko, 2017).

Consequently, the performance of the manufacturing sector is dependent on a positive foreign

market along with a stable exchange rate in international trade. Many scholars have reported that
the Nigerian exchange rate is highly volatile and vulnerable to international shocks. Given this
fact, the country's manufacturing sector, which deals with the production of oil and non-oil
goods, cannot be immune to these external shocks and exchange rate volatility (Mary &Fagite,
2014). Furthermore, fluctuations in the exchange rate cause prices of Nigerian items to rise or
fall in local currency terms all over the world. A rising naira boosts the price of Nigerian goods
on the international market, whereas a falling naira lowers these prices. The fluctuation of
currency rates makes exports/imports pricier or cheaper, and the unstable nature of this variable
adds a level of uncertainty or risk to trade, which in turn affects the performance of
manufacturing sector (Uduakobong &Enobong, 2015). Furthermore, substantial exchange rate
volatility increases uncertainty and dangers for economic agents, disrupting industrial activity
and the macro-economy overall. Operators of manufacturing sector are concerned regarding the
exchange rate since it affects their portfolios and may result in capital gains or losses. Thus,
exchange rates influence price incentives, fiscal viability, production of products and services,
export competitiveness, resource allocation efficiency, balance of payments equilibrium as well
asinternational confidence all of which have a substantial impact on the performance of the
manufacturing sector (Amassoma&Odeniyi, 2016). In furtherance, Aidi, Saidu and Suleiman

2
(2018) established that the exchange rate has an impact on both the manufacturing sector's
performance and Nigeria's economic growth. The exchange rate influences domestic prices by
affecting aggregate supply and demand. When a currency depreciates, exports fall and imports
rise, and when it appreciates, exports rise and imports fall. The possibly greater cost of imported
inputs associated with an exchange rate depreciation raises marginal costs and drives up the price
of domestically produced goods. Furthermore, import-competing enterprises may raise their
pricing in reaction to foreign competitor price hikes to improve profit margins, which will also
affect the prices at which domestically manufactured items are exported (Omoke&Opuala–
Charles, 2021).

Statement of the Problem

Nigeria's history of industrial production serves as a prime example of how inconsistent policies
and diversions brought on by the discovery of oil may cause a country to overlook an important
industry. For example, several firms and industries in Nigeria have been deprived of their main
source of raw materials due to the almost total neglect of agriculture. Low levels of
industrialization are the result of inputs not being sourced locally. Additional difficulties include
the intermittent availability of electricity and the rising cost of diesel pumps, which are mostly
used by companies in the manufacturing sector. In addition, the performance of Nigeria's
manufacturing industry has been linked to high production costs brought on by high foreign
exchange costs. Thus, the exchange rate crisis is a key limitation on the development of Nigeria's
manufacturing sector, making planning of the sector more difficult and investments more
hazardous. For example, if potential foreign investors in Nigeria are risk averse, higher exchange
rate volatility may limit total foreign direct investment inflows by increasing uncertainty about
the rewards on a given investment. Potential investors will only invest in a distant place if the
potential returns outweigh the risks. Furthermore, if the exchange rate in Nigeria is overvalued, it
will result in an unsustainable balance of payments deficit, stimulate capital flight, and increase
the external debt stock, which would lead to a decline in investment and poor performance of the
manufacturing sector.
Objectives of the Study
The main objective of this study is to examine the effect of exchange rate volatility on the
performance of manufacturing sector in Nigeria. Other specific objectives which are prioritized
to:
i. analyze the effect of exchange rate on the performance of manufacturing sector in
Nigeria;
ii. evaluate the effect of trade openness on the performance of manufacturing sector in
Nigeria; and
iii. ascertain the effect of trade openness on the performance of manufacturing sector in
Nigeria.
2.0 LITERATURE REVIEW
Theoretical Framework

3
For the purpose of this study, Purchasing Power Parity (PPP) theory andOptimal Currency Area
(OCA) theoryare adopted for this study. These theories are discussed below:
Purchasing Power Parity (PPP) Theory
Professor Gustav Cassel of Sweden first proposed the Purchasing Power Parity (PPP) idea in
1918. Although Purchasing Power Parity (PPP) theory has been around for several centuries, the
term was first used in the aftermath of World War I to refer to the level at which major
industrialized countries should set their nominal exchange rates in light of the massive inflations
that occurred both during and after the war (Cassel, 1918). Purchasing Power Parity (PPP) is a
theory of economics that asserts that the nominal value of the exchange rate between two
currencies should be equal to the ratio of aggregate price levels between the two countries,
ensuring that a unit of money from one country has the same purchasing power in another. The
exchange rate between two currencies equals the ratio of their purchasing power. The theory
presumes that in certain situations (for example, as a long-run tendency), it would cost precisely
the same amount of, say, US dollars to buy Euros and then use the earnings to buy a market
basket of goods as it would cost to use those dollars directly in purchasing the market basket of
goods. A fall in either currency's purchasing power would lead to a proportional decrease in that
currency's valuation on the foreign exchange market (Ohiria, Saliu & Schuller, 2008). The notion
of purchasing power parity permits one to determine what the exchange rate between two
currencies should be in order for the exchange to be equal to the purchasing power of the two
countries' currencies. Given the unpredictable nature of exchange rates, this theory is relevant to
this study because it allows one to estimate what the exchange rate between the Nigerian
currency (Naira) and other countries' currencies ought to be in order for the exchange to be at
level with the purchasing power of the Nigerian currency and that of other countries for desired
effect on the economy.

b. Optimal Currency Area (OCA) Theory

The Optimal Currency Area (OCA) theory was developed by Mundell (1961) and McKinnon
(1963) and it has served as the theoretical foundation for the choice of exchange rate regimes in
different countries. This theory addresses business cycle stabilization and commerce. It
determines the exchange rate by taking into account trade openness, labor market mobility, and
shock symmetry. The theory suggests that lowering the uncertainty of foreign currency rates can
boost commerce and output such as that of manufacturing sector. It stipulates that in a fixed
exchange rate regime, the cost of hedging is lowered, and investment is promoted by lowering
the currency premium on interest rates. However, due to the delay in the adjustment of essential
relative prices, trade can decrease and production growth of manufacturing sector can be
stopped, postponed, or retarded.
Empirical Literature
Olukemi and Tayelolu (2023) employed Neo-Classical theory with financial intervention using
Cobb Douglas growth model in assessing the effect of exchange rate volatility on manufacturing
productivity in Nigeria using the time series data from 1981 to 2020. Using Johansen Co-

4
integration test and error correction model approach. This study found out there is a significant
relationship between exchange rate volatility variables andmanufacturing productivity in Nigeria.
In 2022, Orji and Ezeanyaeji (2022) carried out a study to ascertain the effect of exchange rates
on the performance of the manufacturing sector in Nigeria from 1990 to 2020. The study adopted
canonical cointegrating regression (CCR) framework and its finding revealed that exchange rate
devaluation and exchange rate fluctuation constrains and hampers manufacturing sector and
manufacturing output respectively.
Covering 1981 to 2018, Irene, Obi, Ezenekwe and Ukeje (2020) empirically examined the effect
of exchangerate volatility on manufacturing sector in Nigeria. Using vector autoregressive
(VAR) model in analyzing the annual time series data and the GARCH (1, 1) model to ascertain
the prevalence of exchange rate volatility persistency and to extract exchange rate volatility
series, the study found thatexchange rate volatility has significant negative effect on aggregate
manufacturing output in Nigeria.
In 2019, Godwin and Idaraobongdetermined the effect of exchange rate deregulation onoutput of
manufacturing sector in Nigeria. Using annual time series data from 1986-2017 and
Autoregressive Distributed Lag (ARDL) framework, the study found that exchange rates
deregulation has a negative effect on the manufacturing output in Nigeria.
Celina, Eze and Atuma (2018) conducted a study on the link between exchange rate policy and
manufacturing output in Nigeria from 1981 to 2016. Annual time series data on manufacturing
output (MOP), exchange rate (EXR), import (IMP) and manufacturing sector capacity utilization
(MCU) were used and sourced from Central Bank of Nigeria (CBN) statistical
[Link] cointegration test and Vector Error Correction (VECM) model, the study
found thatincrease in in growth the quantity of naira exchanged for the dollar led to an
insignificant fall in the manufacturing output in Nigeria.
By employing firms’ profitability as a proxy for manufacturing firms’ performance for the period
from 1986 to2016 through the application of Ordinary Least Squares (OLS) regression
technique, Ugwu (2017) investigated the effect of exchange rate fluctuation on manufacturing
firms’ performance in Nigeria. Finding showed that exchange rate fluctuation has a long run
relationship with profitability of manufacturing firms in Nigeria while exchange rate fluctuation
has a significant effect on profitability of manufacturing firms in Nigeria.
Nwokoro (2017) studied the impact of foreign exchange and interest rates variations on the
manufacturing output in Nigeria from1983 to 2014. The variables used in the study are
manufacturing output, capacity utilization, government expenditure on manufacturing sector,
foreign exchange rate, investment in industrial production and interest rate. Using Ordinary Least
Square (OLS), co-integration and Error Correction Modeling, the study found that foreign
exchange rate and interest rates have negative and significant influence on manufacturing output
while capacity utilization and government expenditure on manufacturing sector have negative
and significant influence on manufacturing output.
In 2017, covering ten East African countries, Fetene examined the effect of real exchange rates
on manufacturing exports. The study applied Autoregressive Distributed Lag (ARDL) model

5
indetermining four classes of manufacturing exports. The finding revealed, real exchange rate
depreciation has significant effect on exports of labour intensive, low skill and medium skill
technology intensive manufacturing in the short run.
In Nigeria, Nnamocha, Obioma, Igwemma and Nwoko (2017) studied the effect of foreign
exchange onthe growth of industrial sector. Using time series data from 1981 to 2015 as sourced
Central Bank of Nigeria statistical bulletin, the study found that foreign exchange availability
was found to have a positive but insignificant effect on the Nigerian industrial sector growth
while foreign exchange rate was found to have positive and significant effect on the growth of
industrial sector in Nigeria.
For the period from 1986 to 2014, using Autoregressive Distribution Lag (ARDL) model, Lawal
(2016) empirically determined the effect of exchange rate fluctuations on manufacturing sector
output in Nigeria. The study variables used include manufacturing output, government capital
expenditure, real effective exchange rate and consumer price index. The finding showed that
exchange rate has positive and significant effect on manufacturing sector output while exchange
rate has positive effect on manufacturing sector output.
Evaluation of Literature Reviewed
This study has theoretically and empirically reviewed literature that are related to the effect of
exchange rate volatility on the performance of manufacturing sector in Nigeria. Based on the
empirical literature reviewed, it was observationally discovered related studies generated
conflicting results and failed to reach a consensus on the nature of relationship that exists
between exchange rate volatility and the performance of manufacturing sector. Also, none of the
studies made use of external reserve which is one of the important determinants of exchange rate
volatility. Lastly, none of the studies reviewed made use of time series data that covered up to
2022. These created gap in literature that this study sought to bridge. Therefore, this study aimed
to determine the effect of exchange rate volatility on the performance of manufacturing sector in
Nigeria from 1985 to 2022, using exchange rate, trade openness and external reserve as a proxies
of exchange rate volatility.
3.0METHODOLGY
The research design that adopted in this study is ex-post facto research design. An ex-post-facto
research design isa systematic empirical inquiry that requires the use of variables which the
researcher does not have the capacity to change its state or direction in the course of the study.
Also, this study made use of annual time series data on exchange rate, trade openness, external
reserve and manufacturing sector Gross Domestic Product. These annual time series data were
obtained from Central Bank of Nigeria (CBN) Statistical Bulletin of various issues. The data
covered a period of thirty-eight years (1985 – 2022).
However, the model of this study was built on the work of Olukemi and Tayelolu (2023) with a
slight modification. The model is functionally stated as:
MGDP = (EXR, TPN, ERV) (3.1)
The explicit form of the model is expressed as:
𝑀𝐺𝐷𝑃 = α + α 𝐸𝑋𝑅 + α 𝑇𝑃𝑁 + α 𝐸𝑅𝑉 + 𝑈 (3.2)

6
The explicit form of the model specified above is transformed to a logarithmic model as follows;
𝐿𝑂𝐺𝑀𝐺𝐷𝑃 = α + α 𝐿𝑂𝐺𝐸𝑋𝑅 + α 𝐿𝑂𝐺𝑇𝑃𝑁 + α 𝐿𝑂𝐺𝐸𝑅𝑉 + 𝑈 (3.3)
A Priori Expectation: α < 0,α > 0, α > 0.
Where; MGDP = manufacturing sector GDP; EXR = exchange rate; TPN = trade openness; ERV
= external reserve; α0 = regression intercept; α = coefficients or parameters attached to exchange
rate (EXR), trade openness (TON) and external reserve (ERV); t = time, LOG = Logarithm/log
linear;𝑈 = Stochastic or error term which captures the effect of variables that are not included in
the model.

Equation (3.3) was estimated using the Error Correction Model (ECM) estimator to derive the
relationship between the manufacturing sector performance indicator and exchange rate volatility
measures. This estimator was employed as unit root test showed that all the variables of interest
were integrated of order one, that is I(1), and this method is considered appropriate due to its
flexibility and ability to give efficient estimates when small samples are used. For unit root
testing, the Augmented Dickey-Fuller (ADF) procedure was used and this was followed by
cointegration test by means of Johansen cointegration test. This was followed by post-estimation
testing of the coefficients and errors to ensure meaningful prediction. It is important to note that
the Akaike Information Criterion (AIC) was used to determine the lag length of the ECM model
by using a lag length of one (1) both for the regressors and regress. In estimating the short-run
dynamics, error correction model was formed thus:

∆LOG(𝑀𝐺𝐷𝑃 ) = α ∆𝐿𝑂𝐺(𝑀𝐺𝐷𝑃 )+ α ∆𝐿𝑂𝐺(𝐸𝑋𝑅 )+ α ∆𝐿𝑂𝐺(𝑇𝑃𝑁 )

+ α ∆𝐿𝑂𝐺(𝐸𝑅𝑉 ) + δ𝐸𝐶𝑀 +𝑈 (3.4)

Where: α1 - α3= short-run parameters. ECM is the lagged error correction term estimated from
the long-run dynamics. It shows the adjustment in the coefficient, and it is usually negative and
most times statistically significant in order to confirm the existence of cointegration relationship.
4.0 DATA ANALYSIS AND DISCUSSION
Descriptive Statistics
The descriptive statistics were used to estimate the behavioural trends of the variables employed
in this study. These include: Mean, Median, Maximum, Minimum, Standard Deviation,
Skewness, Kurtosis, and Jacque-Bera and Probability of each of the variables as presented in
Table 4.1:
Table 4.1: Descriptive Statistics of Manufacturing Sector GDP (MGDP),
Trade Openness (TPN), Exchange Rate (EXR) and External Reserve (ERV)
MGDP EXR TPN ERV
Mean 4906.578 128.1018 31.37066 21037.07
Median 1801.805 123.4000 32.51000 11170.12
Maximum 27508.52 435.7600 55.02100 58472.88
Minimum 39.55000 0.890000 7.521000 981.8083
Std. Dev. 7038.042 119.5970 10.15611 17568.61

7
 Skewness 1.919607 0.948045 -0.229638 0.359238
Kurtosis 5.960073 3.128836 3.004576 1.593000
Jarque-Bera 37.21086 5.718614 0.334011 3.951776
Probability 0.000000 0.057308 0.846195 0.138638
Sum 186450.0 4867.870 1192.085 799408.6
Sum Sq. Dev. 1.83E+09 529227.4 3816.419 1.14E+10
Observations 38 38 38 38
Source: Authors’ Computation, 2023 (EViews 12.0).

The results of the descriptive statistics as presented in Table 4.1 showed that manufacturing
sector GDP (MGDP) recorded an average value of N4906.6 billion. Also, manufacturing sector
GDP (MGDP) has maximum and minimum values of N27508.5 billion and N39.6 billion
respectively. The standard deviation of manufacturing sector GDP (MGDP) which is N7038.0
billion is an evidence of high deviation of manufacturing sector GDP (MGDP)from the mean.
Also, exchange rate (EXR) recorded an average value of 128.1 with maximum and minimum
values of 435.8 and 0.9 respectively. The standard deviation of exchange rate (EXR) which is
119.6 is an evidence of low deviation of exchange rate (EXR)from the mean. Moreover, trade
openness (TPN) recorded an average value of 31.4% with maximum and minimum values of
55.0% and 7.5% respectively. The standard deviation of trade openness (TPN) which is 10.2%is
an evidence of high deviation of trade openness (TPN)from the mean. Lastly, external reserve
(ERV) recorded an average value of N21037.1 billion with maximum and minimum values of
N58472.9 billion and N981.8billion respectively. The standard deviation of external reserve
(ERV) which is N17568.6 billion is an evidence of high deviation of external reserve (ERV)from
the mean.

Unit Root Test

The unit root was tested using the Augmented Dickey-Fuller (ADF) statistic. The summary of
results of the unit root tests is presented in Table 4.2:
Table 4.2: Augmented Dickey-Fuller (ADF) Test Results
At Levels At First Difference
Variables ADF 5% Critical Decision ADF 5% Critical Decision Order of
Statistic Value Statistic Value Integration
LOG(MGDP) -1.296420 -2.951125 Not Stationary -3.217506 -2.951125 Stationary at 1 st I(1)
Difference
LOG(EXR) 2.719241 -2.943427 Not Stationary -3.525903 -2.943427 Stationary at 1 st I(1)
Difference
LOG(TPN) -2.154015 -2.943427 Not Stationary -8.935621 -2.945842 Stationary at 1 st I(1)
Difference
LOG(ERV) -0.861695 -2.954021 Not Stationary -3.456304 -2.951125 Stationary at 1 st I(1)
Difference
Source: Authors’ Computation, 2023 (EViews 12.0).

Table 4.2 presents the summary results of the ADF Unit root tests carried out on all the variables
in our model. Evidently, manufacturing sector GDP (MGDP), trade openness (TPN), exchange

8
rate (EXR) and external reserve (ERV) were stationary after first differencing, indicating that
manufacturing sector GDP (MGDP), trade openness (TPN), exchange rate (EXR) and external
reserve (ERV) are I(1) variables. Conclusively the stationarity of the variables at first differences
presents sufficient evidence to estimateError Correction Model.

Lag Order Selection Criteria

In econometric analysis, the number of lags included in a model has a hugeeffect on the result of
the study. Therefore, it becomes very necessary to include the accurate optimal lag in estimating
our models as shown in Table 4.3:

Table 4.3: VAR Lag Order Selection Criteria

Lag LogL LR FPE AIC SC HQ

0 -1042.143 NA 1.08e+21 59.77962 59.95738 59.84098

1 -896.4004 249.8451* 6.54e+17* 52.36574* 53.25451* 52.67254*
2 -882.3745 20.83843 7.62e+17 52.47854 54.07833 53.03079
3 -871.1358 14.12866 1.11e+18 52.75062 55.06142 53.54831
Source: Authors’ Computation, 2023 (EViews, 12.0 Output).

Table 4.3indicated that the appropriate optimal lag length that will leads to an accurate result
based on Akaike Info Criterion (AIC) statistic is lag [Link] a result, other subsequent analyses
were carried out using the optimal lag length one.

Cointegration Test
The cointegration test was performed based on the Johansen Juseliusframework. The aimwas to
ascertainthe presence or absence of long-run relationship among the variables using Trace and
Maximum Eigen tests. The results obtained are presented in Table 4.4:
Table 4.4: JohansenCointegration Test Results
Trace
Hypothesized Eigen Statistic 0.5 Critical Prob.**
No. of CE(s) Value Value
None * 0.569692 57.89443 47.85613 0.0043
At most 1 0.351744 27.53730 29.79707 0.0892
At most 2 0.226455 11.93241 15.49471 0.1602
At most 3 0.071964 2.688656 3.841465 0.1011
Max-Eigen Statistic
Hypothesized Eigen Statistic 0.5 Critical Prob.**
No. of CE(s) Value Value
None * 0.569692 30.35713 27.58434 0.0215
At most 1 0.351744 15.60488 21.13162 0.2488
At most 2 0.226455 9.243759 14.26460 0.2664

9
 At most 3 0.071964 2.688656 3.841465 0.1011
Source: Authors’ Computation, 2023 (EViews 12.0).

The Trace statistic and Max-Eigen statistic from theJohansen cointegration test results in Table
4.4 indicate one cointegrating equation. The implication of this is that there exists cointegration
or long-run relationship among the variables of the model (manufacturing sector GDP, exchange
rate, trade opennessand external reserve) over the research period (1985 to 2022). Hence, given
the result of cointegration test in line with the aim of this study which focused onthe relationship
between the explained and explanatory variables as depicted inour model, we therefore
proceeded to estimate the Error Correction Model (ECM) so as to reconcile the short-run
dynamics with long-run disequilibrium of the variables.
Error Correction Model (ECM) Analysis
The results of the estimation of Error Correction Model (ECM) are presented in Table 4.5:
Table 4.5: Error Correction Model (ECM) Results
Variable Coefficient Std. Error t-Statistic Prob.
C 0.066383 0.037831 1.754754 0.0939
DLOG(MGDP(-1)) 0.478966 0.170843 2.803538 0.0094
DLOG(EXR) -0.771631 0.188761 -4.087867 0.0005
DLOG(EXR(-1)) 0.087430 0.062783 1.392572 0.1755
DLOG(TPN) 0.084414 0.041001 2.058796 0.0497
DLOG(TPN(-1)) 0.033319 0.058231 0.572176 0.5721
DLOG(ERV) 0.149426 0.059359 2.517310 0.0200
DLOG(ERV(-1)) -0.078410 0.038206 -2.052266 0.0503
ECM(1) -0.444462 0.080289 -5.535799 0.0000
Adjusted R2 = 0.612496; Prob(F-statistic) = 0.000422; Durbin-Watson stat
2.100342
Source: Authors’ Computation, 2023 (EViews 12.0).

The result of the ECM model estimation as shown in Table 4.5 revealed that exchange rate
(EXR) negatively but significantly relates with the manufacturing sector GDP at initial level.
This is evidenced by the negative coefficient value (-0.771631) of exchange rate (EXR) and its
p-value (0.0005) which is less than 0.05 respectively. This implies that an increase in the
exchange rate (EXR) by 1 percent will lead to 77.2% decrease in manufacturing sector GDP
while a decrease in the exchange rate (EXR) by 1 percent will lead to 77.2% increase in
manufacturing sector [Link], trade openness (TPN) has a positive and significant
effect on manufacturing sector GDP at initial level. This is evidenced by the positive coefficient
value (0.084414) of trade openness (TPN) and its p-value (0.0497) which is less than 0.05
respectively. This indicates that manufacturing sector GDP will increase by 8.4% given a 1
percent increase in trade openness (TPN) while manufacturing sector GDP will decrease by 8.4%
given a 1 percent decrease in trade openness (TPN).Additionally, there is a positive and
significant relationship between external reserve (ERV) and manufacturing sector GDP at initial
level. This is evidenced by the positive coefficient value (0.149426) of external reserve (ERV)
and its p-value (0.0200) which is less than 0.05 respectively. This implies that an increase in the

10
external reserve (ERV) by 1 percent will lead to 14.9% increase in manufacturing sector GDP
while a decrease in the external reserve (ERV) by 1 percent will lead to 14.9% decrease in
manufacturing sector GDP

The value of the Adjusted R-squared (0.612496) indicates that the estimated model is well fitted
as the systematic changes in explanatory variables (exchange rate, trade openness and external
reserve) explained approximately 61 percent variation in the explained variable (manufacturing
sector GDP) while other variables not included in the model explained the remaining 39%
percent variation in manufacturing sector GDP. In furtherance, the Prob (F-statistic) of 0.000422
which is less than 0.05 shows that exchange rate, trade openness and external reservejointly
exerted statistically significant effect on manufacturing sector GDP. This also indicates that the
estimated model is statistically [Link] addition, Durbin-Watson stat of 2.100342 which is
approximately 2 indicates the absence of serial correlation in the [Link], the result in
Table 4.5 shows that the expected negative sign of ECM is highly significant. This confirms the
existence of the long run relationship among the variables with their various significant lags. The
coefficient of ECM which is -0.444462 implies that deviation from the long-term growth rate in
manufacturing sector GDP (MGDP) is corrected by 44.4% by the following year.

Causality Tests
The results of the Granger causality test are presented in Table 4.6.
Table 4.6: Pairwise Granger Causality Tests

Null Hypothesis: Obs F-Statistic Prob. Remark Decision

LOG(EXR) does not Granger Cause LOG(MGDP) 36 4.68675 0.0167 EXR→ MGDP Reject H0
LOG(MGDP) does not Granger Cause LOG(EXR) 2.12699 0.1363 MGDP≠ EXR Do not Reject H0

LOG(TPN) does not Granger Cause LOG(MGDP) 36 0.26706 0.7674 TPN ≠ MGDP Do not Reject H0
LOG(MGDP) does not Granger Cause LOG(TPN) 0.85352 0.4357 MGDP≠ TPN Do not Reject H0

LOG(ERV) does not Granger Cause LOG(MGDP) 36 5.50260 0.0090 ERV → MGDP Reject H0
LOG(MGDP) does not Granger Cause LOG(ERV) 1.20033 0.3147 MGDP≠ ERV Do not Reject H0

LOG(TPN) does not Granger Cause LOG(EXR) 36 2.46449 0.1016 TPN ≠ EXR Do not Reject H0
LOG(EXR) does not Granger Cause LOG(TPN) 0.49607 0.6137 EXR ≠ TPN Do not Reject H0

LOG(ERV) does not Granger Cause LOG(EXR) 36 0.34184 0.7131 ERV ≠ EXR Do not Reject H0
LOG(EXR) does not Granger Cause LOG(ERV) 4.00407 0.0284 EXR→ ERV Reject H0

LOG(ERV) does not Granger Cause LOG(TPN) 36 1.77120 0.1869 ERV ≠ TPN Do not Reject H0
LOG(TPN) does not Granger Cause LOG(ERV) 0.01670 0.9835 TPN ≠ ERV Do not Reject H0

Source: Authors’ Computation, 2023 (EViews 12.0).

As shown in the results in the Table 4.6, there is unidirectional causation between exchange rate
(EXR) and manufacturing sector GDP (MGDP) in Nigeria while there is also unidirectional
causation between external reserve (ERV) and manufacturing sector GDP (MGDP) in Nigeria.

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 On the other hand, there is no causation between trade openness (TPN) and manufacturing sector
GDP (MGDP) in Nigeria.

Post Estimation (Diagnostic) Tests

To further ensure that the model is adequate for adoption and policy formulation, post-estimation
tests were conducted. The results of the diagnostic tests are presented n Table 4.7:

Table 4.7: Post-Estimation Test Results

Test Statistics P-Value Null Hypothesis Decision
Jarque Bera (Normality) Test 0.855855 0.651859 Ho: Normal distribution Do not reject H0
Breusch-Godfrey Serial 2.032703 0.1529 H0: No serial correlation Do not reject H0
Correlation LM Test
ARCH Heteroskedasticity Test 1.178524 0.3489 H0: Homoscedasticity Do not reject H0
Ramsey RESET test 1.225897 0.2787 H0: Correctly specified Do not reject H0
Source: Authors’ Computation, 2023 (EViews 12.0).

The ECM model was subjected to diagnostic tests in order to ensure the model is devoid of any
classical linear regression problem such as normality, serial dependence,heteroscedasticity and
stability issues. The summary of the tests as reported in Table 4.7 revealed that the model used in
examining how exchange rate volatility affect performance of manufacturing sector in Nigeria
has series that are normallydistributed, serially independent, has homoscedastic errors and
correct functional form of the model.
15

10

-5

-10

-15
96 98 00 02 04 06 08 10 12 14 16 18 20

CUSUM 5% Significance

Figure 4.1: Cusum Test

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Also, the estimates which are used for forecast are stable as indicated by the CUSUM plot in
Figure 4.1.

Discussions of Findings
Having empirically analysed the time series data sourced with respect to the effect of exchange
rate volatilityon the performance of manufacturing sector in Nigeria, the findings generated are
discussed in this section as follow:
The results of this study revealed that exchange rate has significant negative relationship with the
manufacturing sector GDP in Nigeria. In addition to this, the study found that trade openness has
a positive and significant effect on manufacturing sector GDP in Nigeria while the effect of
external reserve on manufacturing sector GDP in Nigeria is positive and significant. The result
showed consistency with the earlier findings of Olukemi and Tayelolu (2023). Olukemi and
Tayelolu (2023) in their study found that there is a significant relationship between exchange rate
volatility variables and manufacturing productivity in Nigeria. Our finding equally concurs with
that of Irene, Obi, Ezenekwe and Ukeje (2020) who provided empirical evidence that exchange
rate volatility has significant negative effect on aggregate manufacturing output in Nigeria.
Lastly, our finding is also in agreement with the finding of Ugwu (2017) who established that
significant relationship exists between exchange rate fluctuations and the profitability of
manufacturing firms in Nigeria
5.0 CONCLUSION AND RECOMMENDATIONS
Conclusion
Empirically, this has study determined the effect of exchange rate volatility on the performance
of manufacturing sector in Nigeria. The result of the study showed that exchange rate, trade
openness and external reserve have long run significant relationship with the performance of
manufacturing sector as measured by manufacturing sector GDP. Based on the findings, the
study concludes that exchange rate volatility has a significant effect on the performance of
manufacturing sector in Nigeria.

Recommendations
Based on the findings of this study, the following policy recommendations are made:
1. Government and relevant agencies should formulate and implement sound exchange rate
policy that will promote greater exchange rate stability and promote greater openness of
the economy.
2. Government and relevant agencies should put measures in place that will encourage
exports of manufacturing sector products in order to improve the performance of
manufacturing sector in Nigeria.
3. The government should encourage domestic production and consumption of goods and
services in order to curtail the effects of exchange rate volatility on manufacturing sector
in Nigeria.

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