Assessing the Role of GDP, FDI, and Inflation in Shaping Exchange Rate Volatility in Nigeria
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Background of the Study:
Exchange rate volatility is a critical indicator of economic stability in emerging markets like Nigeria. The interaction between GDP, FDI, and inflation plays a central role in influencing currency stability. Strong GDP growth is typically associated with a stable economic environment that can attract FDI, thereby supporting the national currency. Conversely, high inflation erodes investor confidence and can lead to significant fluctuations in exchange rates (Afolabi, 2023). In Nigeria, efforts to attract FDI and stimulate GDP growth have been met with challenges arising from persistent inflationary pressures. Recent studies have shown that while FDI and robust GDP growth have the potential to stabilize exchange rates, unchecked inflation can disrupt this balance (Babatunde, 2024). This study seeks to assess how these three variables interact to shape exchange rate volatility in Nigeria. By reviewing historical trends, policy interventions, and empirical data, the research aims to provide a nuanced understanding of the factors that contribute to currency fluctuations and to recommend strategies for enhancing exchange rate stability (Chinaza, 2025).
Statement of the Problem:
Nigeria continues to experience significant exchange rate volatility despite efforts to boost GDP growth and attract FDI. The persistent inflationary environment undermines these positive influences, leading to unpredictable currency movements that affect trade and investment. This volatility raises concerns regarding the overall macroeconomic stability of the country and highlights the need for integrated policy measures. The study addresses the problem of reconciling the stabilizing effects of GDP and FDI with the destabilizing impact of inflation on the exchange rate, thereby informing policy adjustments (Ibrahim, 2023).
Objectives of the Study:
- To investigate the influence of GDP, FDI, and inflation on exchange rate volatility in Nigeria.
- To analyze the interaction between these variables and their net effect on currency stability.
- To propose policy measures that can reduce exchange rate volatility.
Research Questions:
- How do GDP, FDI, and inflation interact to affect exchange rate volatility in Nigeria?
- What is the net effect of these variables on currency stability?
- What policy interventions can effectively stabilize the exchange rate?
Research Hypotheses:
- H1: Higher GDP growth is associated with reduced exchange rate volatility.
- H2: Increased FDI inflows contribute positively to exchange rate stability.
- H3: High inflation significantly increases exchange rate volatility.
Significance of the Study:
This study is significant as it elucidates the combined effects of GDP, FDI, and inflation on Nigeria’s exchange rate volatility. The insights gained will assist policymakers in designing comprehensive economic strategies that stabilize the currency, enhance investor confidence, and foster sustainable economic development (Obi, 2025).
Scope and Limitations of the Study:
This study is limited to assessing the direct impact of GDP, FDI, and inflation on exchange rate volatility in Nigeria and excludes other international monetary influences.
Definitions of Terms:
• GDP: The total value of goods and services produced within Nigeria.
• FDI: Investments from foreign sources into Nigeria’s economy.
• Exchange Rate Volatility: The fluctuations in the value of Nigeria’s currency relative to other currencies.
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