The aim of this chapter was to review the key macroeconomic indicators vis-a-vis exchange rate policy regimes in Nigeria from 1960-2013. The review also included the level of consumer price inflation under the different exchange rate policy regimes in Nigeria. The analysis revealed that in the sub-period 1960-1970 the GDP growth was slow but steady, especially before the political unrest and civil war from 1966 to 1970. There was relatively low inflation, but the real interest rate was still negative. The country maintained a restrictive trade and financial policies during the period which was aimed at protecting and developing the local industries. Unsurprisingly the foreign direct investment during the period was also low. The
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exchange rate policy then was aimed at preserving the value of external reserve and maintain stable exchange rate. The country’s currency was pegged to the Great Britain’s pound sterling. During the sub-period, 1971-1977 Nigeria witnessed a huge GDP growth due to the oil boom and the relative political stability during the period. However, the boom leads to an escalation of the consumer price inflation and neglect of other previously important sectors like the agriculture and manufacturing. The real interest rate remained negative throughout the period 1971-1977, and the foreign direct investment remained low. Due to the foreign exchange crisis of the 1970s that led to the collapse of the Bretton wood system Nigeria had tried switching the Naira pegging to from Pound sterling to US dollar and back to pound sterling and later to basket of some currency of trading partner countries. By 1978, the oil boom era is over, and Nigerian economy went in to a recession. The economy witnessed a downturn after the collapse of oil price. Nigeria recorded negative GDP growth in the period 1978-1986. During the period 1978-1986, the country borrowed hugely to finance its budget deficits. The real interest rate remained negative over the 1978-1986 periods. The foreign direct investment also remained relatively low during the period 1978-1986.The structural imbalance was evident which compelled the government to adopted IMF’s Structural Adjustment Programme (SAP) in 1986. Consequently, Nigeria switched to floating exchange rate regime and relaxed its restrictive trade and financial policies. However, five years after the adoption of the SAP no tremendous success was achieved. The Naira exchange rate kept depreciating due to huge pressure on the foreign exchange market. There was higher demand from importers for foreign currencies as the trade restrictions were relaxed. On the other hand, the supply to the foreign exchange market was less due to the low oil price which is the key export product and the
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main source of foreign exchange earnings. The exchange rate pass-through to the consumer prices was evident. However, during the period 1987-1993 a significant GDP growth was observed but the soaring inflation rates due to the pass through from the Naira exchange rate depreciation was glaring. The government of Nigeria was compelled in 1994 to peg the Naira to US dollar which lasted up to 1998. The period 1994-1998 saw a drop in the GDP growth, but the consumer price inflation was drawn down. In 1995 the country witnessed its peak inflation rate of 73%. However, by 1997 the inflation rate was down to 9%. The real interest rate remained negative, though slightly improved. However, there was a tremendous improvement in the foreign direct investment (FDI) as the 1994-1998 periods average FDI doubled compared to the average of the period 1978-1993. By 1999 Nigeria reverted to the floating exchange rate regime. The Central bank of Nigeria only intervenes in the foreign exchange market whenever necessary. During the period 1999-2013 Nigeria recorded an impressive GDP growth with a period average of 7.5%. The inflation rate was also drastically reduced to the period average of 11.6%. The period average real interest rate is also positive 3.3%. However, the foreign direct investment dropped during the period 1999-2013 to a period average of 2.87% from the 5.37% of the 1994-1998 period.
The impact of the exchange rate shocks on the consumer prices was apparent in the period under review. The review reveals how the country battled with the persistent inflation rates under almost all the regimes though more pronounced during high currency exchange rate depreciation than low currency exchange rate depreciation period. The impact of ERPT, particularly under the policy regimes with a less firm stance on import is apparent. In chapter six and of this thesis we examined the speed and magnitude of exchange rate pass-through in Nigeria. The result of this study
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will, therefore, contribute to the literature in this context.
The review also shows that the exchange rate pass-through effect of the Naira depreciation after 1986 introduction of the floating exchange rate system seems to be more profound than the effect seen during the re-introduction in 1999 which could be due to nonlinearity and/or asymmetries in the ERPT. In 1986 when the country was already in recession with the high inflation rate and excessive depreciation of Naira the ERPT seem to be greater than in 1999 when the growth and the inflation rate were relatively stable. Therefore, it is important to examine the potential nonlinearities and asymmetries in the ERPT in Nigeria. The aim is to see if the inflation rate, the exchange rate changes and the output growth rate induce the nonlinearities and asymmetries in the ERPT and impact on the level and speed of ERPT in Nigeria. Accordingly, in chapter seven of this thesis, we examined the asymmetry and nonlinearity in ERPT in Nigeria. The relevance of understanding the dynamics of ERPT and most especially of the asymmetric and nonlinear pass through of exchange rate which was not much explored in the literature is essential.
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