IMPACT OF EXCHANGE RATE FLUCTUATIONS IN VALUE ADDED TAX ON ECONOMIC GROWTH OF NIGERIA

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY

Exchange rate is the price of one country’s currency expressed in terms of some other currency. It determines the relative prices of domestic and foreign goods, as well as the strength of external sector participation in the international trade. Exchange rate regime and interest rate remain important issues of discourse in the International finance as well as in developing nations, with more economies embracing trade liberalization as a requisite for economic growth (Obansa, Okoroafor, Aluko and Millicent, 2013). In Nigeria, exchange rate has changed within the time frame from regulated to deregulated regimes. Ewa, (2011) agreed that the exchange rate of the naira was relatively stable between 1973 and 1979 during the oil boom era and when agricultural products accounted for more than 70% of the nation’s gross domestic products (GDP).

In 1986 when Federal government adopted Structural Adjustment Policy (SAP) the country moved from a peg regime to a flexible exchange rate regime where exchange rate is left completely to be determined by market forces but rather the prevailing system is the managed float whereby monetary authorities intervene periodically in the foreign exchange market in order to attain some strategic objectives (Mordi, 2006). This inconsistency in policies and lack of continuity in exchange rate policies aggregated unstable nature of the naira rate (Gbosi, 2005).

One of the means by which government increases its internally generated revenue is Value Added Tax (VAT). This is a tax on the supply of goods and services which is eventually borne by the final consumer, but collected at each stage of the production and distribution chain. Exchange rate fluctuation do have significant effect on prices of goods and services, hence, the value added tax is affected by exchange rate fluctuation.

Exchange rate fluctuation had its bitter toll on the Nigerian economy, and monetary and fiscal policies among others have been developed to reduce it. The Central Bank of Nigeria (CBN) has the statutory responsibility of formulating and implementing monetary policy with an emphasis on exchange rate stability. The inflationary trend has been cyclical since the mid-1970s, peaking in 1988, 1989, 1992, 1993, 1994, 1995, 1996, 2001 and 2005.

Aliyu (2011) asserted that appreciation of exchange rate results in increased imports and reduced export, and then reduced income will be generated from value added tax to drive economic growth while depreciation would expand export and discourage import. Also, depreciation of exchange rate tends to cause a shift from foreign goods to domestic goods, in this case, more income will be generated by the government through the value added tax to drive economic growth. Hence, it leads to diversion of income from importing countries to countries exporting through a shift in terms of trade, and this tends to have impact on the exporting and importing countries’ economic growth.

In the same vein, Hossain (2002) agreed that exchange rate helps to connect the price systems of two different countries by making it possible for international trade and also effects on the volume of imports and exports, as well as country’s balance of payments position. Rogoffs and Reinhartl (2004) also opined that developing countries are relatively better off in the choice of flexible exchange rate regimes.

1.2   STATEMENT OF THE PROBLEM

Previous research on the impact of exchange rate and value added tax on economic growth has reached contrasting results. For instance, Empirical evidence showed that real exchange rate variations can affect growth outcomes. Edwards and Levy Yeyati (2003) found evidence that countries with more flexible exchange rate with increased value added tax grow faster. Faster economic growth is significantly associated with real exchange rate depreciation argued that real undervaluation promotes economic growth, increases the profitability of the tradable sector, and leads to an expansion of the share of tradable in domestic value added. A real exchange rate undervaluation works as a second-best policy to compensate for the negative effects of these distortions by enhancing the sector’s profitability. Higher profitability promotes investment in the tradable sector, which then expands, and promotes economic growth.

1.3   OBJECTIVES OF THE STUDY

The following are the objectives of this study:

1. To examine the impact of exchange rate fluctuation on economic growth of Nigeria.
2. To examine the relationship between exchange rate fluctuation and the value added tax.
3. To examine the impact of value added tax on the economic growth of Nigeria.

1.4   RESEARCH QUESTIONS

1. What is the impact of exchange rate fluctuation on economic growth of Nigeria?
2. What is the relationship between exchange rate fluctuation and the value added tax?
3. What is the impact of value added tax on the economic growth of Nigeria?

1.5   HYPOTHESIS

H_O: There is no significant relationship between exchange rate fluctuation and value added tax

H_A: There is significant relationship between exchange rate fluctuation and value added tax

1.6   SIGNIFICANCE OF THE STUDY

The following are the significance of this study:

1. This study will educate the stakeholders in the financial sector and the general public on the relationship between exchange rate fluctuation and value added tax and how both of them influence the economic growth of Nigeria.
2. This research will be a contribution to the body of literature in the area of the effect of personality trait on student’s academic performance, thereby constituting the empirical literature for future research in the subject area.

1.7   SCOPE/LIMITATIONS OF THE STUDY

This study will cover the relationship between exchange rate fluctuation and value added tax and how the duo influence economic growth in Nigeria.

LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

 Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work