Exchange rate and industrial output in Nigeria: sectoral analysis

Purpose- The Nigerian manufacturing sector is performing below expectations despite government’s proactive measures to address critical issues in the sector. A key driver of performance in this sector is the volatile exchange rate, but the direction of this effect is unknown. To shed more light on it, this study considers two types of exchange rates, namely effective and interbank exchange rates and studies manufacturing sector based on product classification. Methodology: An Auto Regressive Distributed Lag estimator was adopted to estimate the relationship between sectoral output and volatile exchange rate using quarterly data from 2010:1 to 2023:4. Findings- The volatility of each of the exchange rates is computed by utilizing eGARCH(1,1) based on monthly exchange rate data from 2010:1 to 2023:12. With the aid of autoregressive distributed lag (ARDL), the result indicates that interbank exchange rate volatility matter more than effective exchange rate in the Nigerian manufacturing sector. Further, exchange rate volatility in the manufacturing subsectors is more of a short-run than long-run phenomenon. Specifically, textiles, electrical & electronics, and wood & wood products are adversely affected by interbank exchange rate volatility. Textile, chemicals and oil refining are adversely affected by effective exchange rate volatility. Interbank exchange rate volatility encourages oil refining (up to three lags) and vehicle assembly. In the long run, interbank exchange rate volatility facilitates the performance of electrical & electronics, textile and vehicle assembly while effective exchange rate significantly affects electrical & electronics. Nonmetallic, iron & steel, plastic, cement products are affected negatively by both interbank and effective exchange rate volatility while interbank exchange rate volatility drags the activity in the oil refining products. Economic implications and recommendations are offered based on the findings. Conclusion- It is therefore concluded that interbank exchange rate volatility matter more than effective exchange rate in the product categories of the manufacturing sector in Nigeria. Further, interbank exchange rate has detrimental effect on most of these products, both in the short and long runs. Keywords: Industry studies, manufacturing, generalized autoregressive conditional heteroskedasticity, foreign exchange