Real Exchange Rate and Manufacturing Performance in Nigeria

Abstract

The efficacy of currency devaluation to improve output in Nigeria is under debate, and coupled with an unsatisfactory result in the behaviour of the manufacturing sector performance regenerated interest of this study to investigate the impact of exchange rate on output and employment in the sector. The work uses Structural Vector Autoregression, ECM and Canonical Co-integrating Regression to examine the shock effect, short and long-run elasticities of exchange rate on the manufacturing performance. While employment and output are used as a proxy for manufacturing sector performance. The findings show that changes in the exchange rate are fairly elastic with output and employment both in short and long-run. However, changes in the exchange rate are insignificant with employment in the short run. The variance decomposition form the SVAR shows that forecast error shock of the exchange rate is more prolong on employment than output. Consequently, the result of the estimation of the Impulse Response Function from the Monte Carlos shows that one standard deviation of the exchange shock adversely affect employment. The outcome of the result indicates that the Nigerian exchange rate has not improved output and employment in the manufacturing sector. Several factors may be accounted for this, although, it may be due to cost-push inflationary pressure and unfavourable competitiveness. The study suggests the need to encourage long-term supply-side policies among others to improve the situation.

Received: 7 June 2020 / Accepted: 9 January 2021 / Published: 5 March 2021