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Advances in Social Sciences Research Journal – Vol. 8, No. 8
Publication Date: August 25, 2021
DOI:10.14738/assrj.88.10652. Adefabi, R. A. (2021). Exchange Rate Management and Disaggregated Manufacturing Sector Output in Nigeria (1986-2019).
Advances in Social Sciences Research Journal, 8(8). 526-537.
Services for Science and Education – United Kingdom
Exchange Rate Management and Disaggregated Manufacturing
Sector Output in Nigeria (1986-2019)
Rasak Adetunji ADEFABI
Department of Economics
Emmanuel Alayande College of Education, Oyo
ABSTRACT
This study investigated the effect of exchange rate management on disaggregated
manufacturing sector outputin Nigeria from 1986-2019. Secondary data used in the
analysis were sourced from Central Bank of Nigeria Statistical Bulletin, (2020) and
World Development Indicators, (2020). Stationarity and orders of integration of the
variables were examined with both Augmented-Dicky-Fuller (ADF) and Philip- Perron (PP) unit root tests. Having disaggregated manufacturing sector output into
oil and non-oil sources, two separate models emerged. The results of
Autoregressive Distributed Lag (ARDL) Bound test for co-integration revealed that
the variables under oil sector output model were co-integrated, while there was no
evidence of co-integration in non-oil model. ARDL technique of estimation results
showed that, both in the short-run and long-run, real exchange rates negatively and
significantly impacted on oil manufacturing sector output, while real interest rate
negatively and significantly influenced the dynamics of the sector in the short-run.
In the non-oil model, it was found that, both in the short-term and long-term, real
exchange rate negatively and significantly impacted on the sector, while inflation
produced positive and significant effect. Authority in Nigeria should reduce the
disparities between foreign and domestic currencies to improve on manufacturing
sector performance.
Keywords: ARDL, exchange rate, management, manufacturing sector, Nigeria
INTRODUCTION
Manufacturing sector has become one of the key drivers of sustainable economic growth of
modern economies with diverse benefits crucial for economic transformation and
development. In most of modern economies, manufacturing sector serves as a catalyst for
development of other sectors because it thrusts the production of goods and services which in
turn generates new employment opportunities, leading to improvement in national income.
According to Fakiyesi (2005), “manufacturing sector is a leading sector that increases
productivity in relation to import substitution and export expansion, creating foreign exchange
earnings, raising employment and promoting the growth of investments at a faster rate than
any other sector of the economy, ... an efficient linkage among different sectors”. For instance,
manufacturing sector is popular for its contributions to the growth of gross domestic product
in economies like Japan, China, Singapore, India, South Korea and Taiwan (Orji, Ogbuabor,
Okeke & Anthony-Orji, 2018). However, the failure or success of manufacturing sector’s
performance, to a large extent, is a function of the optimal and stability of exchange rate
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Adefabi, R. A. (2021). Exchange Rate Management and Disaggregated Manufacturing Sector Output in Nigeria (1986-2019). Advances in Social
Sciences Research Journal, 8(8). 526-537.
URL: http://dx.doi.org/10.14738/assrj.88.10652
(Opaluwa, Umeh, & Abu, 2010; Abdul-Mumuni, 2016; Ayobami 2019). Exchange rate is the
value of a country’s currency that goes after other nations’ currencies.
One of the fundamental features of a dynamic economy is her effective exchange rate with the
particular objective of becoming industrialised nation. The realisation of this feat creates a
problem except there is a mechanism through which such economy develops the efficiency of
capital formation via exchange rate management to realise sustainable growth (Iyeli, & Utting
(2017). Exchange rate is a significant macroeconomic variable used in determining the foreign
competitiveness of a country. It is a veritable economic variable since its appreciation or
depreciation influences the direction (negative or positive) and magnitude of performance of
the entire sectors of the economy, most especially the manufacturing sector (Hashim, & Zarma,
1996; Odili, 2014). Since four decades ago, though with particular interest in exchange rate
stability, Nigerian authority has adopted several policy measures which include import
substitution, export promotion and interest rate deregulation with the objective of improving
the manufacturing sector’s productivities. This is with a view to bringing about rapid economic
growth and development. Similarly, authority has been employing different exchange rate
policy regimes to attract foreign direct investment directly into the manufacturing sector. Thus,
the development has heightened the discussion on the nexus between exchange rate
management and manufacturing sector performance.
As part of the efforts to improve the productivity of the manufacturing sector in the economy
and remove other inhibiting factors that influence the sector’s output, the Structural
Adjustment Programme (SAP) was introduced by the authority in Nigeria in 1986. A critical
component of SAP was the exchange rate deregulation “intended to make foreign exchange
more accessible for production, thereby increasing manufacturing output” (CBN, 2003). Also, a
prime objective of the SAP was to restructure the production base of the economy with a view
to improving exports (oil and non-oil) via the cumulative depreciation of the effective exchange
rate. However, the development resulted to an upward swing in exchange rate movement with
attendant fallouts on every sector of the economy in Nigeria. In a bid to revert exchange rate
volatility ensued from SAP, the authority has adopted exchange rate deregulation policy regime
since 1986.
Based on the aggregate and variant channels such as trade, inflation, investment,
unemployment and exports, extant studies have examined the effect of exchange rate
management and manufacturing sector performance in Nigeria with conflicting findings (see
Adelowokan, 2012; Adeniran, Yusuf, Adeyemi, 2014; Okoronta, & Odoemena, 2016; Nwosu,
2016; Nsofo, Takson, & Ugwuegbe, 2017 and Iyeli, & Utting, 2017). However, the manufacturing
sector output which should be studied at disaggregated level have been largely ignored in
empirical studies in Nigeria. Thus, scant attention paid to decomposing manufacturing sector
performance into oil and non-oil for investigation in Nigeria has motivated this study. Hence,
this study fills this gap. Having introduced the study, the sub-sequent following gives the
literature review, section three discusses the methodology, and section four shows the
presentation and the analysis of the result while the last section offers the conclusion of the
study.
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Advances in Social Sciences Research Journal (ASSRJ) Vol. 8, Issue 8, August-2021
Services for Science and Education – United Kingdom
EMPIRICAL REVIEW
Persistent upward swing in the movement of domestic currency against foreign currencies has
been a topical issue among policymakers and economists in developing economies, Nigeria
inclusive. This bothers on whether the progressive depreciation or devaluation of local
currencies has been aiding the developing economies to achieve improved manufacturing
sector output, balance of trade and sustainable economic growth. However, while some studies
concentrated on the relationship between the exchange rate movement or volatility and entire
economic growth, others have narrowed down the discussion to the nexus between exchange
rate volatility and manufacturing sector performance with the prime aim of investigating the
causality or effect (even both) of one variable on the other. In this regard, the common approach
adopted by most of the study on this subject was to study manufacturing sector performance
in aggregation without serious attention being given to disaggregating the sector, while the
entire sector may not be affected with the same magnitude. For instance, Ehinomen, & Oladipo
(2012) investigated the impact of exchange rate management on the growth of the
manufacturing sector in Nigeria from 1986-2010. The study used ordinary least squares (OLS)
technique of estimation and the findings revealed that exchange rate appreciation was a key to
promoting manufacturing sector output in Nigeria. Using Nigerian dataset of annual basis and
OLS method, King-George (2013) explored the effect of exchange rate volatility on the Nigerian
manufacturing sector from 1986-2010. Contrary to Ehinomen, & Oladipo (2012)’s findings, the
outcomes showed that exchange rate was not a determinant factor in the growth of
manufacturing sector output in Nigeria.
Furthermore, as a clear demonstration of serious interest by the economists to exhume the
relationship between exchange rates movement and manufacturing sector performance in
developing areas, and to assist the policy makers to formulate informed policies, more
empirical studies have ensued. Abdul-Mumuni (2016) examined the effect of exchange rate
fluctuations on manufacturing sector output in Ghana from 1986-2013. The study employed
autoregressive distributed lag (ARDL) technique of estimation. Findings revealed that, both in
the short-run and long-run, there was positive association between an exchange rates
movement and manufacturing sector output in Ghana. Again, Lawal (2016) studied the effect of
exchange rate instabilities on the manufacturing sector productivity in Nigeria from 1986-
2014. The study implemented ARDL technique and the outcomes showed that exchange rate
variability had positive effect, though not statistically significant, on manufacturing sector both
in long-run and short-run. Okafor, Adegbite, & Abiola (2018) investigated exchange rate
variations, inflation and industrial output in Nigeria from 1981:q1-2015:q4 and structural
vector autoregressive method was used. The study obtained that positive shocks from exchange
rates negatively influenced output growth, likewise positive shocks from inflation. Similarly,
Oseni, Adekunle & Alabi, (2019) investigated the association between exchange rate volatility
and industrial output growth in Nigeria from 1986-2017. Using AR(k)-EGARCH(p,q) method to
determine the volatility in the exchange rates and ARDL approach to study short-run and long- run dynamics of industrial performance in Nigeria. The results showed that exchange rate
volatility was a key determinant of industrial output in Nigeria.
Basically there are some other studies which explored exchange rate and other macroeconomic
variables, among them are: Azu, & Nasiri (2015) analysed the exchange rate variabilities and
sustainable economic growth in Nigeria from 2004-2014. The study employed vector
autoregression (VAR) technique. The study discovered that real exchange rates variabilities
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Adefabi, R. A. (2021). Exchange Rate Management and Disaggregated Manufacturing Sector Output in Nigeria (1986-2019). Advances in Social
Sciences Research Journal, 8(8). 526-537.
URL: http://dx.doi.org/10.14738/assrj.88.10652
were positively connected to import but negatively related to FDI and real GDP in Nigeria. Solely
(2013) studied the impact of macroeconomic factors on manufacturing sector in Nigeria from
1975-2011. Using error correction model discovered that loans, advances and FDI flowing into
the manufacturing sector enhanced the level of productivity of the sector. Ilechukwu, &
Nwokoye (2015) assessed the effect of exchange rate steadiness on industry in Nigeria from
1980-2013, using OLS procedure. The study found that real exchange rates, foreign direct
investment and population growth rate enhanced growth in industrial output in Nigeria in the
reference period.
Ismaila (2016) examined an exchange rate decline and GDP in Nigeria before- and post- Structural Adjustment Programme era. The study employed ECM technique of estimation and
obtained that net export, broad money and public expenditure significantly influence real
output in the long-run, while exchange rates no significant effect on GDP in Nigeria in both
short-run and long-run respectively. The implications are that exchange rate depreciation
during the SAP period has no significant impact on Nigeria’s financial performance. In the same
vein, Nsofo, Takson, & Ugwuegbe (2017) investigated the effect of exchange rate variations on
Nigeria GDP from 1981 to 2015 with generalized autoregressive conditional heteroscedasticity
and generalized method of moments. The study discovered that persistent variations in
exchange rate and foreign direct investment had negative influence Nigerian GDP during the
period reviewed. Using Johansen Co-integration test and Normalized Co-integration, Kenny
(2019) examined the manufacturing sector output, exchange rate instabilities and inclusive
growth in Nigeria from 1981-2015. Findings obtained showed that there was long run
association between the variables of interest and that manufacturing sector output exerted
long-run impact on per capita income in the economy.
METHODOLOGY
Analytical Model
The model specification of this study follows Mumuni (2016) with modifications by removing
gross fixed capital formation and manufacturing capital utilization rate from the original model.
Thus, the Auto Regressive Distributed Lag (ARDL) model is adopted, using Nigerian dataset
from 1986-2019. The ARDL (p, q) model is stated as;
�! = �" + �#! +%ɸ#�!$%
&
%'#
+ %�(
�!$%
)
%'"
+ ɛ! (1)
Where �! represents manufacturing sector output and X stands for real exchange rates. In the
context of relationship among exchange rate, interest rate and inflation, the interest rate
differentials provides that the variables may move together. The monetary authority in the
economy, by manipulating interest rate, exercises influence on both exchange rate and inflation,
i.e. changing interest rate affects inflation and currency values. This scenario implies that a
higher interest rate offers creditors in an economy a higher returns relative to other economies.
Thus, a higher interest rate attracts foreign investment and causes the rate of exchange to rise.
However, the effect of higher interest rate is eased out if inflation rate in the domestic economy
is much higher relative to other countries and the reverse holds for decreasing interest
rate where a lower interest rate tends to decrease exchange rate. Therefore, this theoretical
background has provided room for taking real interest rate and inflation rate as control
variables the analysis of exchange rate and manufacturing sector output (Ebiringa & Anyaogu,
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Advances in Social Sciences Research Journal (ASSRJ) Vol. 8, Issue 8, August-2021
Services for Science and Education – United Kingdom
2014; Monfared & Akın 2017). Decomposing the equ. (1) to bear the variables of interest, the
model is stated thus;
∆�����! = �" + �#�����!$# + �*�����!$# + �+����!$# + �,���!$# + %Г%������!$%
&
%'#
+%�%������!$%
-
%'"
+%�%�����!$%
.
%'"
+ %�%����!$%
/
%'"
+ ɛ! (2)
where �#, �*, �+ and �, are long-run coefficients, Г%, �%, �% and �% provide short-run dynamic
coefficients and is the first difference. p, n, m and y are extreme lag orders determined by
lag order selection criteria. From Equ. (2), long-run interaction is verified using ARDL Bounds
testing co-integration offered by Pesaran, Shin & Smith (2001) which gives its null hypothesis
as follow; Ho: �#= �*= �+ = �,= 0, suggesting no co-integrating equation against the alternative
H1: �# ≠ �* ≠ �+ ≠ �, ≠ 0, indicating evidence of a co-integrating relationship. If long-run
relationship occurs among the variables, then error correction model is stated as follow;
∆�����! = �" + %Г%������!$%
&
%'#
%�%�����!$%
-
%'"
+%�%�����!$%
.
%'"
+ %�%����!$%
/
%'"
+ ʎ%���($#) + ɛ! (3)
If otherwise, only short-run model must be estimated and equation (4) is stated as follows;
∆�����! = �" +%�%������!$%
&
%'#
+ %�%�����!$%
-
%'"
+%�%�����!$%
.
%'"
+ %�%����!$%
/
%'"
+ ɛ! (4)
Method of Estimation
Auto Regressive Distributed Lag-Error Correction Method (ARDL-ECM) was used to examine
the effect of exchange rate management on manufacturing sector in Nigeria from 1986-2019.
Co-integration relationship among variables of interest was examined using ARDL Bounds
Testing procedure. ARDL Bound Testing co-integration approach, being a dynamic condition
relates lag of dependent variable with the contemporaneous and lagged values of regressors
through which the short-run impact could be estimated and the long-run influence could be
indirectly assessed (Ukoro & Uko, 2016). This technique has some benefits compared to other
co-integration test methods as it allows the equilibrium link to be examined via Ordinary Least
Square and it has the capability to pool variables with I(0) and I(1) together and test for co- integration. Similarly, ARDL-ECM method delivers effective results when small size of
observations are considered for analysis (Chandio, Jiang & Rehman, 2019).
Data Description and Source
Annual data used for this study included manufacturing sector contribution to GDP. However,
this was disaggregated into oil and non-oil series. For oil series, the data was provided
separately in the Central Bank of Nigeria Data & Statistics, (2020) and the series were
subtracted from entire manufacturing sector contribution to GDP, while the rest was taken as
non-oil manufacturing sector contribution. Other variables were real exchange rate (REXH),
real interest rate (RINT) and inflation (INF) which were obtained from World Development
D