An Assessment of the Impact of GDP and FDI on Exchange Rate Stability in Nigeria
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Background of the Study:
Exchange rate stability is crucial for economic predictability and investor confidence, particularly in emerging markets such as Nigeria. The combined impact of GDP growth and Foreign Direct Investment (FDI) plays a pivotal role in shaping exchange rate dynamics. Over recent years, Nigeria has experienced significant fluctuations in its currency value, prompting a closer examination of how domestic economic growth and external investment flows interact to influence exchange rate stability (Okoro, 2023). A robust GDP growth rate typically signals a strong economy, which can attract higher FDI inflows, thereby supporting a stable exchange rate. Conversely, volatility in either GDP performance or FDI levels may trigger currency depreciation or erratic exchange rate movements (Ibrahim, 2024). Academic literature suggests that macroeconomic fundamentals, including GDP and FDI, are intertwined with exchange rate regimes and can serve as effective stabilizers when managed properly. This study explores the mechanisms by which GDP and FDI affect the exchange rate in Nigeria, analyzing historical data, policy initiatives, and current economic trends. The research situates these relationships within the broader context of fiscal and monetary reforms designed to foster economic stability and resilience in the face of external shocks (Obi, 2025).
Statement of the Problem:
Despite concerted efforts to promote GDP growth and attract FDI, Nigeria continues to experience instability in its exchange rate. The volatility undermines investor confidence and complicates international trade and finance. Discrepancies in policy implementation, combined with external market pressures, have contributed to erratic currency movements (Chinwe, 2023). The failure to achieve a stable exchange rate despite positive indicators in GDP and FDI points to underlying structural issues in the economy. This study seeks to identify these challenges and analyze how the interaction between GDP growth and FDI affects exchange rate stability, thereby providing insights into more effective stabilization strategies (Udo, 2024).
Objectives of the Study:
- To investigate the relationship between GDP growth, FDI, and exchange rate stability.
- To identify the key factors contributing to exchange rate volatility in Nigeria.
- To recommend policy measures for achieving a stable exchange rate.
Research Questions:
- How do GDP and FDI influence exchange rate stability in Nigeria?
- What are the main factors causing exchange rate volatility?
- What policies can stabilize the exchange rate in the context of GDP and FDI dynamics?
Research Hypotheses:
- H1: Higher GDP growth is associated with increased exchange rate stability.
- H2: Increased FDI inflows contribute positively to stabilizing the exchange rate.
- H3: Structural economic reforms enhance the stabilizing effects of GDP and FDI on the exchange rate.
Significance of the Study:
This study is significant as it assesses the impact of GDP and FDI on exchange rate stability in Nigeria. The findings will inform policymakers on how to better harness domestic growth and foreign investment to create a more stable currency environment, ultimately improving economic predictability and investor confidence (Adeniyi, 2024).
Scope and Limitations of the Study:
The study is limited to examining the direct impact of GDP and FDI on exchange rate stability in Nigeria and does not include other international monetary factors.
Definitions of Terms:
• GDP Growth: The increase in a nation’s economic output.
• FDI: Foreign Direct Investment, representing cross-border investments.
• Exchange Rate Stability: The consistency and predictability of a nation’s currency value relative to other currencies.
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