The Impact of Exchange Rate Fluctuations on Private Domestic Investment Performance in Nigeria

Abstract

Since September 1986, when market determined exchange rate system was introduced, the naira exchange rate has exhibited the features of continuous depreciation and instability. This instability and continued depreciation of the naira in the foreign exchange market has resulted to declines in investments as a result of high degree of uncertainty in the Nigeria business environment, standard of living of the populace and increased cost of production which leads to cost push inflation. Against this background, this research seeks to undertake an empirical analysis of the link between exchange rate fluctuations and private domestic investment in Nigeria. Descriptive statistics and econometric method were employed. Thus, simple averages of descriptive statistics, and Error Correction Model (ECM) technique within the Ordinary Least Square estimation were employed to analyze the various trends in the data. The descriptive statistics of the variables included in the model shows the existence of wide variations in the variables as depicted by the standard deviation of the exchange rate variable that was unusually high. This depicts a high degree of volatility in the exchange rate during the period under investigation. The findings suggest that, the depreciation of the currency and interest rate does not stimulate private domestic investment activities in Nigeria. On the other hand, infrastructures, government size and inflation rate had a positive effect on private domestic investment in Nigeria. It is thus recommended that monetary authorities should adopt appropriate policy in appreciating the value of the naira as devaluation has been a mistake since 1986, reduce borrowing and lending charges to boast the performance of private domestic investment through stable macroeconomic environment.