ABSTRACT

This study examined the effect of exchange rate volatility on government revenue in Nigeria between 1986 and 2016. The choice of this period is informed by the fact that Nigeria adopted the flexible exchange rate system from 1986 and has continued with it till today. The objectives of the study were to ascertain whether there is a causal relationship between exchange rate volatility and government revenue, to examine the effect of exchange rate volatility on government revenue, and to determine whether long-run relationship exists between both variables. The study obtained secondary data from the Statistical Bulletin of the Central Bank of Nigeria 2012 and 2016 editions and estimated a multivariate autoregressive regression model where the growth rate of total federally collected revenue is dependent on the growth rates of exchange rate volatility (EXHV), world oil price, value of imports, real GDP growth rate, inflation rate and one-year lag of total government revenue. In addition to the ordinary least squares (OLS) result, the study also tested for causal and long-run relationships using Granger causality and Johansen cointegration tests respectively. The findings are that there is no causal relationship between exchange rate volatility and total federally collected revenue in Nigeria; in the short run, exchange rate volatility had regression coefficients -0.019 and -0.017 for EXHV_t and EXHV_t-1 respectively but the results are not statistically significant at the 5% level; and exchange rate volatility had positive effect on government revenue in the long run with regression coefficient 0.03 but the result is not statistically significant at conventional levels given a high p-value of 0.25. However the coefficient of the error correction mechanism (ECM) in the short-run model is -0.337 which means that the speed of adjustment of the model back to long-run equilibrium is about 34% per annum which implies a full adjustment period of about 3 years and the result is statistically significant. The study concludes that without appropriate monetary policies, exchange rate volatility may retard the growth of government revenue in Nigeria. To prevent exchange rate volatility from having adverse effect on government revenue in the long run, the government should seriously embrace the need to diversify the Nigerian economy away from oil dependence through economic policies that favour non-oil export promotion in the short and long run.