Project Materials

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

Chapter one

INTRODUCTION

1.1 Background of the Study

The exchange rate is the value of one currency in relation to another. It determines the relative prices of domestic and foreign commodities, as well as the extent to which the external sector participates in international trade.

Exchange rate regimes and interest rates continue to be hot topics in international finance and developing countries, with more economies embracing trade liberalisation as a necessary condition for economic progress (Obansa, Okoroafor, Aluko, et Millicent, 2013).

Nigeria’s exchange rates have shifted from regulated to deregulated regimes over time. According to Ewa (2011), the naira exchange rate was very stable between 1973 and 1979, during the oil boom period when agricultural products contributed for more than 70% of the nation’s GDP.

When the Federal Government implemented the Structural Adjustment Policy (SAP) in 1986, the country transitioned from a peg regime to a flexible exchange rate regime in which exchange rates are completely determined by market forces, rather than the prevailing system of managed float, in which monetary authorities intervene in the foreign exchange market on a regular basis to achieve strategic objectives (Mordi, 2006).

Inconsistency in policies and a lack of continuity in exchange rate policies contributed to the naira’s instability (Gbosi 2005).

Value Added Tax (VAT) is one method used by the government to raise internal revenue. This is a tax on the supply of goods and services that is ultimately borne by the end user, but is collected at each stage of the manufacturing and distribution chain.

Exchange rate fluctuations have a substantial impact on the prices of products and services; thus, value added tax is affected by exchange rate fluctuations.

Exchange rate fluctuations have had a negative impact on the Nigerian economy, and various monetary and fiscal policies have been developed to mitigate them.

The Central Bank of Nigeria (CBN) is officially responsible for developing and implementing monetary policy, with a focus on exchange rate stability. Inflation has been cyclical since the mid-1970s, peaking in 1988, 1989, 1992, 1993, 1994, 1995, 1996, 2001, and 2005.

According to Aliyu (2011), an appreciation of the exchange rate leads in increased imports and decreased exports, resulting in less income from value added tax to promote economic growth, whereas depreciation expands exports and discourages imports.

Furthermore, an exchange rate depreciation causes a shift from imported goods to domestic goods, in which case the government generates more revenue through the value added tax to drive economic growth.

Hence, it leads to diversion of wealth 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 spirit, Hossain (2002) concurred that exchange rate serves to connect the price systems of two distinct countries by making it feasible for international trade and also influences on the amount of imports and exports

As well as country’s balance of payments situation. According to Rogoffs and Reinhartl (2004), developing countries benefit more from flexible exchange rate regimes.

1.2 Statement of the Problem

Previous research on the impact of exchange rates and value-added taxes on economic growth produced conflicting conclusions. For example, empirical evidence has shown that real exchange rate fluctuations can influence growth outcomes. Edwards and Levy Yeyati (2003) discovered evidence that nations with more flexible exchange rates and higher value-added taxes grow quicker.

Faster economic growth is significantly associated with real exchange rate depreciation. It has been stated that real undervaluation stimulates economic growth, boosts the profitability of the tradable sector, and leads to an expansion of the tradable share of domestic value added.

A real exchange rate undervaluation acts as a second-best strategy to compensate for the negative consequences of these distortions by boosting the sector’s profitability. Higher profitability supports investment in the tradable sector, which then increases, and promotes economic growth.

1.3 Objectives of the Study

The aims of this investigation are as follows:

Examine the impact of exchange rate fluctuations on Nigeria’s economic growth.

To investigate the relationship between exchange rate fluctuations and the value-added tax.

To investigate the impact of the value-added tax on Nigeria’s economic growth.

1.4 RESEARCH QUESTIONS

How do exchange rate fluctuations affect Nigeria’s economic growth?

What is the relationship between exchange rate fluctuations and value-added tax?

What impact does value added tax have on Nigeria’s economic growth?

1.5 Hypothesis.

HO: There is no significant association between exchange rate fluctuations and value added taxes.

HA: There is a considerable association between exchange rate fluctuations and value added taxes.

1.6 Significance of the Study

The following are the implications of this study:

This study will educate financial industry stakeholders and the general public about the relationship between exchange rate fluctuations and value added tax, as well as how both influence Nigeria’s economic growth.

This study will contribute to the corpus of literature on the effect of personality traits on student academic achievement, thereby serving as the empirical foundation for future research in the field.

1.7 SCOPE/LIMITATIONS OF THE STUDY

This study will look at the relationship between exchange rate fluctuations and value added tax, as well as how the two affect economic growth in Nigeria.

Limitations of the study

Financial constraints- Insufficient funds tend to restrict the researcher’s efficiency in accessing relevant resources, literature, or information, as well as in data collecting (internet, questionnaire, and interview).

Time constraints: The researcher will conduct this investigation while also working on other academic projects. This will reduce the amount of time spent on research.