Does Exchange-Rate Volatility Constrain Manufacturing Growth? Evidence from Nigeria, 1981–2024

In the complex world of economics, the value of a country's money is never just a number on a screen; it is a force that shapes how businesses plan, invest, and survive. For manufacturers, who build the goods that fill shelves and power industries, the stability of their currency is a matter of daily life. When a currency loses value, the cost of imported machines and raw materials rises, squeezing profits. But there is a second, often more paralyzing factor: uncertainty. If a business owner cannot predict when or how much the currency will change, they hesitate to spend money on new equipment or expansion, fearing a sudden shift in costs that could wipe out their budget. This hesitation, driven by the fear of the unknown rather than the known cost, is what economists call volatility. In nations where the exchange rate is managed by the government rather than set freely by the market, these shifts can be sudden and sharp, creating a fog of uncertainty that makes long-term planning nearly impossible. Understanding whether this fog actually stops factories from growing is a question that matters deeply to policymakers and business leaders alike, as it determines whether the solution lies in stabilizing the currency or looking elsewhere for growth.

A team of researchers from Osun State University in Nigeria set out to answer this question by looking at the country's manufacturing sector over a period of more than forty years, from 1981 to 2024. They focused on a time when the Nigerian currency, the naira, experienced long periods of being fixed at one price followed by sudden, large adjustments. The researchers gathered monthly data on the official exchange rate against the US dollar and combined it with annual records of how much the country's manufacturing sector actually produced. Their goal was to separate the simple act of the currency losing value from the unpredictable swings in its price, and to see if those unpredictable swings were the reason manufacturing output was struggling. To do this, they used a sophisticated statistical method to measure the "noise" or uncertainty in the currency's movement every single month, then averaged that noise to see how it related to the yearly growth of factories.

The study began by mapping the behavior of the currency itself. The researchers found that when a shock hit the exchange rate—such as a sudden policy change or a large adjustment—the resulting uncertainty did not disappear quickly. Instead, the effects of that shock lingered for a long time, with the uncertainty taking roughly sixteen months to fade away by half. This means that once the currency became volatile, manufacturers had to live with that uncertainty for over a year before the market settled down again. This persistence confirmed that the Nigerian currency environment was indeed characterized by long-lasting periods of unpredictability, creating a challenging backdrop for business planning.

However, when the researchers turned their attention to the factories, the story became much less clear. They built a model to see if years with high currency uncertainty were followed by years of slow manufacturing growth. The results showed a negative trend, suggesting that when uncertainty was high, growth did tend to be lower. Yet, the data was too noisy to say this with any real confidence. The statistical tools they used, which are designed to handle small datasets and irregular patterns, indicated that the link between currency chaos and factory output was not strong enough to be distinguished from random chance. In other words, while the data pointed in the direction of a negative effect, the evidence was too weak to prove that currency volatility was the specific cause of slow growth. The researchers also tested other factors, such as how open the country was to international trade and how much foreign money the government held in reserve, but found that these too failed to show a clear, reliable connection to manufacturing growth in their analysis.

This lack of a clear connection does not mean that currency volatility is harmless. The researchers explained that the manufacturing sector in Nigeria is a mix of many different types of businesses. Some rely heavily on imported parts and suffer greatly when the currency fluctuates, while others sell mostly to local customers or use local materials and are less affected. Some businesses even benefit when the currency drops because their exports become cheaper for foreign buyers. When all these different reactions are added together into a single national number, the positive and negative effects can cancel each other out, leaving the overall picture looking flat and unconnected. The study explicitly ruled out the idea that there is a simple, stable long-term relationship where currency uncertainty always leads to a specific drop in production. They also found that the currency's value did not predict future manufacturing growth, nor did manufacturing growth predict future currency changes, suggesting that both are driven by other, larger forces like oil prices, energy supply, and global demand.

The authors concluded that while the currency shocks in Nigeria are real and persistent, the annual data available from 1981 to 2024 does not provide enough evidence to say that these shocks are the primary driver of manufacturing growth or decline. The uncertainty is there, and it is long-lasting, but its impact on the total output of the manufacturing sector is hidden by the complexity of the economy. For policymakers, this suggests that simply looking at the total amount of foreign money held by the government or the general rate of trade is not enough to understand the problem. Instead, the focus should shift to making the rules of the currency market clearer and more predictable, so that individual businesses can plan their budgets with confidence, regardless of whether the national average shows a direct link to growth. The study serves as a reminder that in a complex economy, the whole is often more than the sum of its parts, and what hurts one factory might help another, making the national picture difficult to read without looking closer at the individual pieces.