Evaluating the Impact of FDI on Exchange Rate Volatility in Nigeria
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Background of the Study
Exchange rate volatility poses a significant challenge to economic stability, affecting trade, investment, and consumer confidence. In Nigeria, fluctuations in the naira are often attributed to various macroeconomic factors including oil price shocks, fiscal imbalances, and external capital flows. FDI is considered a potential stabilizer, as it provides a steady stream of foreign currency, improves investor confidence, and contributes to the overall resilience of the financial system (Oluwaseun, 2023). The theoretical basis for this study lies in international finance theories which suggest that sustained FDI inflows can reduce currency volatility by increasing foreign exchange reserves and stabilizing capital markets. Empirical research from other emerging economies supports the idea that higher levels of FDI are associated with lower exchange rate fluctuations. However, in Nigeria, the relationship between FDI and exchange rate stability is complex, as external shocks, speculative capital flows, and domestic policy uncertainties often interfere with these stabilizing effects (Akinola, 2024).
This study seeks to evaluate the impact of FDI on exchange rate volatility in Nigeria by analyzing historical data on FDI inflows, currency fluctuations, and macroeconomic indicators. The aim is to determine whether FDI contributes to a more stable exchange rate environment and to identify the conditions under which its impact is most pronounced (Ibrahim, 2025).
Statement of the Problem
Despite the theoretical benefits of FDI in reducing exchange rate volatility, Nigeria continues to experience significant fluctuations in the value of its currency. The expected stabilizing influence of FDI is often offset by external factors such as global commodity price volatility and domestic policy challenges, including inconsistent monetary policies and fiscal deficits (Chinwe, 2023). Additionally, the sectoral composition of FDI may limit its effectiveness, as investments in non-export sectors might not contribute substantially to foreign exchange reserves. This persistent volatility creates uncertainty for businesses, hinders international trade, and complicates economic planning. The disconnect between FDI inflows and exchange rate stability highlights the need for a deeper understanding of the mechanisms at work and for policy measures that can enhance the stabilizing role of FDI.
Objectives of the Study
• To analyze the relationship between FDI inflows and exchange rate volatility in Nigeria.
• To identify moderating factors that influence the effectiveness of FDI in stabilizing the exchange rate.
• To propose policy interventions that maximize the stabilizing effects of FDI on currency fluctuations.
Research Questions
• How do FDI inflows affect exchange rate volatility in Nigeria?
• What external and internal factors moderate the impact of FDI on exchange rate stability?
• Which policy measures can enhance the positive role of FDI in reducing currency volatility?
Research Hypotheses
• H1: FDI inflows are negatively correlated with exchange rate volatility in Nigeria.
• H2: External factors such as global commodity prices moderate the FDI–exchange rate relationship.
• H3: Integrated monetary and fiscal policies enhance the stabilizing effect of FDI on exchange rates.
Scope and Limitations of the Study
The study employs macroeconomic data from Nigerian central banks and international databases covering the past decade. Limitations include isolating FDI effects from other volatile factors and potential data inconsistencies.
Definitions of Terms
• Exchange Rate Volatility: The degree of fluctuation in the value of a currency over time.
• FDI: Foreign Direct Investment from international sources.
• Monetary Policy: Government or central bank actions aimed at controlling the money supply and interest rates.
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