An Analysis of Government Spending’s Effect on Exchange Rate Movements in Nigeria
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Background of the Study
Government spending plays a pivotal role in shaping macroeconomic outcomes, including exchange rate stability. In Nigeria, fiscal policies—especially government expenditures—affect economic fundamentals such as inflation, interest rates, and the balance of payments, which in turn influence exchange rate movements (Chukwuma, 2023). Expansive government spending, particularly when financed by borrowing or money creation, can lead to higher inflation and depreciate the domestic currency. Conversely, prudent fiscal management may stabilize exchange rates by fostering a conducive environment for economic growth. Recent studies have explored how fiscal deficits and public debt affect the exchange rate, highlighting the sensitive interplay between fiscal imbalances and currency volatility (Oladipo, 2024). The Nigerian economy, characterized by fluctuating oil revenues and external shocks, is particularly vulnerable to such dynamics. Government spending that exceeds revenue generation can widen fiscal deficits, trigger inflationary pressures, and ultimately lead to exchange rate depreciation. This study examines the causal relationship between government spending and exchange rate movements in Nigeria, seeking to determine whether fiscal expansion contributes to volatility in the foreign exchange market. By employing econometric models and analyzing time-series data from recent fiscal years, the research aims to isolate the effects of government expenditure from other macroeconomic factors. This analysis will contribute to a deeper understanding of fiscal policy transmission mechanisms and offer insights for policymakers seeking to achieve exchange rate stability through balanced fiscal management (Adewale, 2025).
Statement of the Problem
Nigeria’s exchange rate has been highly volatile in recent years, a situation often attributed to unsustainable levels of government spending. Excessive public expenditure, combined with revenue shortfalls, has led to fiscal deficits that exert downward pressure on the domestic currency (Chukwuma, 2023). Such fiscal imbalances not only undermine investor confidence but also fuel inflation and erode the purchasing power of households. The resulting depreciation of the naira complicates external trade and increases the cost of imported goods, further straining the economy. Despite efforts to contain spending, government expenditure continues to be a significant factor affecting exchange rate stability. The problem is compounded by the lack of a coordinated fiscal framework that aligns spending with revenue generation and macroeconomic objectives (Oladipo, 2024). This study aims to analyze the relationship between government spending and exchange rate movements, identifying the key channels through which fiscal imbalances impact currency stability. It will assess whether periods of fiscal expansion are followed by significant depreciations of the naira and determine the extent to which external factors mediate this relationship. Addressing these issues is critical for devising fiscal strategies that can mitigate exchange rate volatility and enhance macroeconomic stability.
Objectives of the Study
- To analyze the relationship between government spending and exchange rate movements in Nigeria.
- To identify the fiscal channels that impact currency stability.
- To propose fiscal policy recommendations that promote exchange rate stability.
Research Questions
- How does government spending affect exchange rate volatility in Nigeria?
- What are the key fiscal channels influencing exchange rate movements?
- Which policy measures can reduce the adverse impact of fiscal imbalances on the currency?
Research Hypotheses
- H1: Increases in government spending significantly depreciate the domestic currency.
- H2: Fiscal deficits are a major determinant of exchange rate volatility.
- H3: Coordinated fiscal discipline can enhance exchange rate stability.
Scope and Limitations of the Study
The study focuses on macroeconomic data from Nigerian fiscal years over the past decade. Limitations include the challenge of isolating government spending effects from external economic shocks.
Definitions of Terms
• Government Spending: Public expenditure by the government on goods, services, and capital projects.
• Exchange Rate Movements: Fluctuations in the value of a country's currency relative to foreign currencies.
• Fiscal Deficit: The shortfall when government spending exceeds revenue.
• Currency Volatility: The degree of variation in the exchange rate over time.
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