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The exchange rate, whether fixed or floating, affects macroeconomic performance such as import, export, national price level, output, interest rate etc as well as economic units such as individuals’ purchasing power, firms’ performance etc. Chong and Tan (2008) empirical analysis revealed that the exchange rate volatility is responsible for changes in macroeconomic fundamentals for the developing economies. The volatility and unpredictability of exchange rate is due to the confluence of the factors that affect it (Anoruo et al, 2006; Benita and Lauterbach, 2007; Hanias and Curtis, 2008). As such, the issue of exchange rate sensitivity and determinacy is controversial and has been a subject of much debate. A large number of studies and articles addressed the issue both theoretically and empirically and found different results, which have fueled the debate further controversial. The traditional view is that fluctuations in exchange rates affect relative domestic and foreign prices, causing expenditures to shift between domestic and foreign goods (Khan et al, 2010; Benita and Lauterbach, 2007; Betts and Kehoe, 2005). The new view is that relative prices are not much affected by exchange rate fluctuations in the short-run (Cheong, 2004; Kohler et al, 2014).

Exchange rate fluctuations influence domestic prices through their effects on aggregate supply and demand. In general, when a currency depreciates it will result in higher import prices if the country is an international price taker, while lower import prices result from appreciation. The potentially higher cost of imported inputs associated with an exchange rate depreciation increases marginal costs and leads to higher prices of domestically produced goods (Kandil, 2004; Kohler et al, 2014). Further, import-competing firms might increase prices in response to foreign competitor price increases to improve profit margins. The extent of such price adjustment depends on a variety of factors such as market structure, the relative number of domestic and foreign firms in the market, the nature of government exchange rate policy and product substitutability (Fouquin et al, 2001; Sekkat and Mansour, 2000). So, it is evident that changes in exchange rates have an impact on domestic and international corporations that can be defined as the ‘exposure’ of the corporation to fluctuating foreign exchange rates (Alssayah and Chandrasekhar, 2013; Kohler et al, 2014). However, Sukor (2014) notes that exchange rate exposure varies depending on country, time, and industry sector.

Most Nigerian manufacturing companies depend on imported inputs in the form of equipment, plant and machinery and other materials and given the fact that bulk of the country’s foreign earnings is from oil earnings which accounts for over 85.3 per cent of the foreign exchange earnings in 2013 (CBN, 2013a), thus revealing the extent of the vulnerability of these companies to swings in the exchange rate which is greatly affected by fluctuations in the oil price in the international market. Mohammad (2010) notes that the risks associated with volatile exchange rates are major impediments for countries such as Nigeria that attempt to develop through export expansion strategy and financial liberalization. Besides, Chong and Tan (2008) hint that the impact of exchange rate volatility on economic fundamentals is substantially great if an economy does not provide possible tools in hedging currency risk in its market place which unfortunately, is the case in Nigeria. Furthermore, Chong and Tan (2008) argue that exchange rate volatility has a catalytic effect to various parties as well as countries.

One of the most dramatic events in Nigeria over the past two decades was the devaluation of the Nigerian Naira with the adoption of a Structural Adjustment Programme (SAP) in 1986. A cardinal objective of the SAP was the restructuring of the production base of the economy with a positive bias for the production of agricultural exports. The foreign exchange reforms that facilitated a cumulative depreciation of the effective exchange rate were expected to increase the domestic prices of agricultural exports and therefore boost domestic production. Significantly, this depreciation resulted in changes in the structure and volume of Nigeria’s exports and imports. However, the volatility, frequency and instability of the exchange rate movements since the beginning of the floating exchange rate raise a concern about the impact of such movements on Nigerian manufacturing companies.

Nigerian manufacturing sector has remained underdeveloped and is not showing significant growth despite the implementation of Structural Adjustment Programme (SAP). According to Delude (1999), apart from objectives not realized, exchange rate policy and management under Structural Adjustment Programme (SAP) have left some issues unresolved and/or created some distortions in the economy, one of which is deindustrialization. A close look at the relative contribution of manufacturing production to Gross Domestic Product (GDP) before and after SAP shows that SAP, indeed, triggered a shrinking of the manufacturing sector in Nigeria. In 1981, manufacturing accounted for 5.6% of Gross Domestic Product (GDP) (CBN, 2013b). This relative share rose to 6.4% in 1982, and was still 4.5% in 1986 (CBN, 2013b). With the adoption of SAP, the manufacturing sector’s relative share in GDP rose initially between 1987 and 1990 but began to fall and reached a low of 3.9% in 1995 and fell further to 3.4% of the GDP in 1998 (CBN, 2013b). However, since enthronement of democracy in 1999, the contribution of the sector to the GDP increased slightly to 3.5% in 2001 and then to 4.0% in 2007 and even higher to 4.2% in 2013 (CBN, 2013b). Apart from structural rigidity, poor quality of labour force, high interest rate, corruption etc (Delude, 1999) that is responsible for the poor performance of the sector, exchange rate volatility is also a major factor that affects its performance.

The year 2009 was overcast by the global financial and economic crisis, which was precipitated in August 2007 by the collapse of the sub-prime lending market in the United States. The crisis led to the crash of most other sectors and markets across Europe with consequent effect on developing economies especially oil-export dependent countries like Nigeria. The impact was aggravated by the reduction in crude oil production due to the persistent restiveness in the Niger Delta region.

The effect of the global economic meltdown on Nigerian exchange rate was phenomenon as the Naira exchange rate vis-à-vis the dollar rose astronomically from about N120/$ to more than N180/$ (about 50% increase) between 2008 and 2009. This is attributable to the sharp drop in foreign earnings of Nigeria as a result of the persistent fall of crude oil price, which plunged from an all time high of US$147 per barrel in July 2007 to a low of US$45 per barrel in December 2008.

The renewed emphasis on the production of alternatives to fossil-fuel energy, such as solar, wind and bioenergy in the advanced economies, has reduced crude oil demand, and consequently caused its price to slump from about $110 per barrel to below $50 per barrel between mid-2014 and early 2015, and further weaken Nigeria’s foreign earnings. This and other factors like the declining external reserve, and political uncertainty that surrounded the postponement of the 2015 presidential election pushed the Dollar-Naira exchange rate to cross the 200 Naira mark in first week of February 2015 for the first time in history of the nation.

It is evident from the foregoing that the recent global economic crisis and economic slowdown have further revealed that Nigerian economy is excessively exposed to external shocks. Although various factors have been adduced to Nigeria’s poor economic performance, the major problem has been the economy’s continued excessive reliance on the fortunes of the ever unstable oil market for foreign exchange thereby causing frequent volatility in the country’s exchange rate.

Thus, in the absence of concerted efforts to shore-up and widen the revenue base, there will be reduction in crude oil revenue, excess crude oil receipts savings and foreign exchange earnings in the coming years. This will spell doom for the manufacturing companies in the country who rely on foreign exchange for the purchase of most of their inputs. The fact that crude oil is an exhaustible asset makes it unreliable for sustainable development of the Nigerian economy (Utomi, 2004).
The continued unimpressive performance of the Nigerian manufacturing sector and the vulnerability of the external sector thus dictate the urgent need for a reappraisal of the thrust and contents of the development policies and commitments to their implementation. Indeed, the need for a change in the policy focus and a shift in the industrialization strategy is imperative, if Nigerian economy is to be returned to the path of sustainable growth and external viability. This raises the question of the sensitivity of Nigerian manufacturing companies to exchange rate fluctuation, which is the essence of this dissertation.

The specific objectives of the study are as follows:
1. to examine exchange rate volatility in Nigeria;
2. to investigate the impact of exchange rate fluctuation on Nigerian manufacturing sector;
3. to evaluate the effect of macroeconomic factors on the Nigerian exchange rate.

According to the objectives stated above, the research questions that would be examined in the course of the study are as follows:
1. How volatile has the exchange rate of Nigeria been over the years?
2. To what extent is the Nigerian manufacturing sector sensitive to exchange rate fluctuations?
3. What are the macroeconomic factors that are responsible for the exchange rate fluctuations in Nigeria?

Based on the research questions stated above, the hypotheses to be tested in the course of this research are stated below:
H0 - That Nigeria’s exchange rate fluctuations does not significantly affect her manufacturing sector.
H1 - That Nigeria’s exchange rate fluctuations significantly affect her manufacturing sector.

H0 - That Nigeria’s exchange rate is not significantly determined by her macroeconomic factors.
H1 - That Nigeria’s exchange rate is significantly determined by her macroeconomic factors.

The analysis that will be made in this project shall be based on time series data for the Nigerian exchange rate and macroeconomic data such as manufacturing index of ordinary shares listed on The Nigerian Stock Exchange, average manufacturing capacity utilisation rates, interest rate, inflation rate, Balance of Payment (BoP) and Gross Domestic Product. Due to the simultaneous nature of the model formulation, Two-Stage Least Square (TSLS) estimation method would be employed in obtaining the numerical estimates of the coefficients in the first two models while Least Square (LS) estimation method would be employed in the third model using E-Views statistical software. The estimation technique shall be based on the co-integration theory that was developed to overcome the problems of spurious correlation often associated with non-stationary time series data.

Three multiple regression models shall be used in the estimation. The first regression model shall seek to investigate the sensitivity of Nigerian manufacturing companies’ share index to exchange rate fluctuations. This is a follow up on previous studies that have examined the impact of exchange rate sensitivity on Turkish companies’ stock returns (Yucel and Kurt), effect of exchange rate fluctuations on stock returns of U.S. multinationals (Choi and Prasad, 1995), sensitivity of S&P 500 non-financial firm’s stock return to exchange rate exposure (Allayannis and Ofek, 1997), relationships between exchange rate and stock prices in Vietnam (Chang et al. 2009). The second model seeks to investigate the effect of exchange rate fluctuations on mmanufacturing capacity utilisation rate, which is a better measure of the performance of manufacturing companies than their share returns that is subjected to speculation. The estimation period shall be restricted to the period between 1991 and 2013 due to non-availability of needed data. The third model seeks to identify the determinants of exchange rate in Nigeria with data spanning from 1970 to 2013.

Besides the regression analysis, tables, charts and ratio analysis shall also be used to examine the volatility of Nigerian exchange rate and consequence effect on the manufacturing sector taking note of the time lag effect. The data for this study would be obtained mainly from secondary sources; particularly from Central Bank of Nigeria (CBN) publications such as the CBN Statistical Bulletin, CBN Annual Reports and Statements of Accounts, CBN Economic and Financial Review Bullion and Bureau of Statistics publications.

The models that would be estimated in the course of this study are stated below:
mist = c + c1exrt + c2neert + c3Yt-1 + Ei
Where mist - Manufacturing Index of Ordinary Shares Listed on The Nigerian Stock Exchange for current year
exrt - Average Official Exchange Rate of Naira vis-à-vis US Dollar
neert - Nominal Effective Exchange Rate Indices for Nigeria
Yt-1 - Real Gross Domestic Product for previous year
c, c1, c2, c3 - Constants
Ei - Error term

mcut = d + d1exrt + d2neert + d3Yt-1 + Ei
Where mcut - Manufacturing Capacity Utilisation Rate for current year
exrt - Average Official Exchange Rate of Naira vis-à-vis US Dollar
neert - Nominal Effective Exchange Rate Indices for Nigeria
Yt-1 - Real Gross Domestic Product for previous year
d, d1, d2, d3 - Constants
Ei - Error term

exrt = e + e1intt + e2inft + e3BoPt + e4Yt-1 + Ei
Where exrt - Average Official Exchange Rate of Naira vis-à-vis US Dollar
intt - Interest Rate for current year
inft - Inflation Rate for current year
BoPt - Balance of Payment surplus/deficit for current year
Yt-1 - Real Gross Domestic Product for previous year
e, e1, e2, e3, e4- Constants
Ei - Error term

The effects of the recent global economic crisis on Nigeria have reaffirmed the urgent need for economic diversification in the country. Although, no country is immune to such global crisis, the over-reliance on oil export revenue by Nigeria exposes her exchange rate and economy excessively to external shocks. Therefore, there is the need to conduct a research of this nature to examine Nigeria’s exchange rate sensitivity.

This study would further provide an econometric assessment of the impact of exchange rate fluctuations on the performance of manufacturing companies with the view of ascertaining their exposure to exchange rate risk. This would go a long way in helping to design policies and measures to protect these companies as well as other sectors of economy from exchange rate risk and other external shocks.

In order to understand exchange rate fluctuations better, this study would go further to identify the economic factors that are responsible for exchange rate volatility. Once we are able to identify the factors behind the fluctuations, then it would be easier for policy makers to influence the exchange rate through the price system in favour of their countries.

This project focuses on the effect of exchange rate fluctuations on performance of manufacturing companies in Nigeria as necessitated by the devastating effect of the recent global economic crisis. Despite the liberalization of the exchange rate in Nigeria since the introduction Structural Adjustment Programme (SAP) in 1986, no meaningful progress has been made in the manufacturing sector. Therefore, this project would examine the fluctuations in Nigeria exchange rate with the view of identifying the factors that are responsible for it. The study would also investigate empirically, the sensitivity of Nigerian manufacturing companies to exchange rate fluctuations with data spanning from 1991 to 2013 due to non-availability of needed data.

This project shall be divided into five chapters. The first chapter provides the background of the subject matter justifying the need for the study. Chapter two shall present related literature concerning exchange rate volatility and its effect on the performance of manufacturing companies. The chapter shall also discuss the determinants of exchange rate among other issues. Opinions on exchange rate regimes and management shall also be reviewed.

The research methodology, which includes the research design, sources of data, model formulation, estimation techniques and methodological issues, shall be stated in chapter three while data presentation and analysis shall be made in chapter four. Concluding comments in chapter five shall reflect on the summary, conclusion and recommendations based on the findings of the study.

Allayannis, G. and Ofek, E. (1997) “Exchange Rate Exposure, Hedging and the use of Foreign Currency Derivatives”. Department of Finance, New York University Working Paper Series. No. FIN-98-002.
Alssayah, A. and Chandrasekhar, K. (2013) “Theoretical Framework of Foreign Exchange Exposure, Competition and the Market Value of Domestic Corporations”. International Journal of Economics and Finance. Vol. 5, no. 2, pp. 1-14.
Anoruo, E., Liew, V. K. and Elike, U. (2006) “Nonlinear Real Exchange Rate Behaviour: Are the African Currencies Exceptional?” International Research Journal of Finance and Economics. Issue I.
Benita, G. and Lauterbach, B. (2007) “Policy Factors and Exchange Rate Volatility: Panel Data versus a Specific Country Analysis”. International Research Journal of Finance and Economics. Issue 7.
Betts, C. M. and Kehoe, T. J. (2005) “U.S. Real Exchange Rate Fluctuations and Relative Price Fluctuations”. Federal Reserve Bank of Minneapolis Research Department Staff Report. No. 334, May.
Central Bank of Nigeria (2010a) Annual Report and Financial Statement for the Year Ended 31st December.
Central Bank of Nigeria (2010b) Statistical Bulletin. Abuja, December.
Chang, H. L., Su, C. W. and Lai, Y. C. (2009) “Asymmetric Price Transmissions between the Exchange Rate and Stock Market in Vietnam”. International Research Journal of Finance and Economics. Issue 23.
Cheong, C. (2004) “Does the risk of exchange rate fluctuation really affect international trade flows between countries?” Economics Bulletin. Vol. 6, no. 4 pp. 1-8.
Choi, J. J. and Prasad, A. (1995). “Exchange Risk Sensitivity and its Determinants: A firm and industry analysis of U.S. multinationals”. Financial Management Association. Autumn.
Chong, L. L. and Tan, H. B. (2008) “Exchange Rate Risk and Macroeconomic Fundamentals: Evidence from Four Neighbouring Southeast Asian Economies”. International Research Journal of Finance and Economics. Issue 16.
Delude, P. (1999) “Sustainable Growth in Nigeria”. Social Science. Vol. 410, November.
Fouquin, M., Sekkat, K., Mansour, J. M., Mulder, N. and Nayman, L. (2001) “Sector Sensitivity to Exchange Rate Fluctuations”. CEPII Working Paper.
Hanias, M. P. and Curtis, P. G. (2008) “Time Series Prediction of Dollar\Euro Exchange Rate Index”. International Research Journal of Finance and Economics. Issue 15.
Kandil, M. (2004) “Exchange rate fluctuations and economic activity in Developing countries: theory and evidence”. Journal of Economic Development. Vol. 29, no. 1, June.
Khan, M. L., Mohammad, S. D. and Alamgir, (2010) “The Sources of Real Exchange Rate Fluctuations in Pakistan”. European Journal of Social Sciences. Vol. 14, no. 1.
Mohammad, S. D. (2010) “The Euro - Dollar Exchange Rates and Pakistan Macroeconomics Dynamics. European Journal of Scientific Research. Vol. 42, no.1, pp.6-15.
Sekkat, K. and Mansour, J. K. (2000) “Imperfect Competition and Sectoral Sensitivity to Exchange Rate Fluctuations in Europe”. Dulbea, Ecare, Université Libre de Bruxelles, February.
Sukor, M. E. (2014) “Exchange rate exposure of developed and emerging markets: A review”. International Review of Research in Emerging Markets and the Global Economy (IRREM). Vol. 1, Iss. 2, pp. 59-65.
Utomi, P. (2004) “The Curse of Oil”. A Paper delivered for Heinrich Böll Foundation Oil-Conference by Lagos Business School, May.
Yucel, T. and Kurt, G. (n.d). “Foreign Exchange Rate Sensitivity and Stock Price: Estimating Economic Exposure of Turkish Companies”.


Thesis Status
Number of Chapters
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Thesis Level
N20,000 (Non-Negotiable)
Abstract, Regression Data and Results are included
How to Pay for this Thesis. . . .CLICK HERE

Keywords: exchange rate sensitivity, exchange rate, what is exchange rate, foreign currency exchange rate, exchange rate determinant




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