Exchange rate depreciation and government policy is Nigeria: an empirical evidence

The study examines exchange rate depreciation and government polices in Nigeria. Government policy of the early 1980 that led to ‘gradual depreciation’ of the naira exchange rate was to encouraged exports and reduces the high import dependence of the economy. The situation seems, however, to be out of control. The actual consequences have turn out to be a nightmare: it resulted to structural imbalances in the system, depleting external reserves; unfavourable balance of payments; high inflation rate; low capacity utilization; increase imports and low rate of the naira. In an effort to contain these abnormalities, the government has adopted different exchange rate regimes and pricing methods yet the naira continues to depreciate. This study is aimed at determining among a set of possible factors and the major determinants of exchange rate depreciation in Nigeria. Some of these factors that have played major impact in exchange rate depreciation include: government policy; the external sector and macroeconomic performance, but this paper has been narrow down to government policy. The study uses the method of regression analysis with Ordinary Least Squares (OLS) econometric technique and a time series secondary data from 1980 – 2011. . The data was first examined for unit roots using the Augmented Dickey Fuller (ADF) and Phillips-Perron (PP) tests. A co-integration regression was then used to examine the long run relationship among the variables. The short-run Vector Error Correction (VEC) model was also used to determine the speed of the adjustment to equilibrium. It was empirically shown that, there is significant relationship between government fiscal and monetary policies and exchange rate depreciation. The results further revealed high explanatory power of the coefficient of multiple determination (R 2 ) and the overall model was significant. Hence, government can curtail the naira depreciation by adopting a flexible exchange rate regime, reducing external trade imbalances and checking the performance of some macroeconomic variables.