Analysis of the impact of Exchange rate depreciation and Imports on inflationary trend in Nigeria.

Abstract

This study examined the effects of persistent exchange rate depreciation and volume of imports on inflationary trend in Nigeria. It was motivated by the quest to ascertain how exchange rate depreciation and dependency on foreign made goods and services affected government effort to control inflation. The study employed the autoregressive distribution lag (ARDL) technique to test the short-run and long-run effects of exchange rate depreciation and volume of imports on inflationary trend using annual time series data from 1986 to 2021. The empirical result revealed that the exchange rate has negative and insignificant effect on inflation rate. The result also
revealed that imports have positive and significant impact on inflation rate. The result further revealed that import Granger causes inflation within the period of the study. By implication, the net effect of this study established that depreciation of exchange rate and over dependency on imports contributes in the worsening inflation rate in Nigeria’s economy. On the premise of the
empirical findings, this study recommends; that there is great need for government to encourage people to consume locally made goods as a way of reducing imported inflation in the country and formulation and proper management of exchange rate policy that will help reduce continuous depreciation of naira as it may trigger over supply of domestic currency. If the recommendations are utilized it would help make government effort towards inflationary control more effective by reducing the adverse effects of depreciating foreign exchange system and over dependency on imports.