EXCHANGE RATE VARIATION AND BALANCE OF PAYMENTS POSITION IN THE NIGERIAN ECONOMY.
ABSTRACT
This study analyses the relationship between exchange rate and balance of payments position in Nigeria for the period 1986 – 2020. Using regression analyses, the coefficient of exchange rate shows a positive relationship with balance of payments. The government should protect infant industries by raising high tariffs on those goods produced outside the country in order to encourage consumption of domestically produced goods and services.
TABLE OF CONTENTS
Cover page - - - - - - - - i
Title page - - - - - - - - ii
Certification - - - - - - - iii
Dedication - - - - - - - iv
Acknowledgements - - - - - - - v
Abstract - - - - - - - viii
CHAPTER ONE: Introduction
1.1 Background to the Study - - - - 1
1.2 Statement of Research Problem- - - - 4
1.3 Objectives of the Study - - - - - 5
1.4 Significance of the Study - - - - 5
1.5 Research Hypothesis - - - - 5
1.6 Scope of the Study - - - - - 6
1.7 Organization of Study - - - - - 6
CHAPTER TWO: Literature Review
2.1 Introduction - - - - - 7
2.2 A Historical Overview - - - - - 7
2.3 Theoretical Framework - - - - - 9
2.4 Empirical Literature - - - - - 16
2.5 Exchange Rate Management - - - - 16
2.6 Exchange Rate System - - - - - 18
2.7 Policy Measures of Balance of Payments - - 19
2.8 Causes of Disequilibrium in Balance of Payments 20
2.9 Measures to Correct Deficit in Balance of Payments 20
CHAPTER THREE: Research Method
3.1 Research Design - - - - - 22
3.2 Model Specification - - - - - 22
3.3 Estimation Technique - - - - - 25
3.4 Method of Data Collection - - - - 26
CHAPTER FOUR: Presentation, Analysis of Data and Discussion of Findings
4.1 Presentation of Data - - - - - 27
4.2 Analysis of Data - - - - - - 27
4.3 Discussion of Findings - - - - - 28
CHAPTER FIVE: Summary of Major Findings, Policy Implications and Concluding Remarks
5.1 Summary - - - - - - - 32
5.2 Policy Implications of Major Findings of the Study 33
5.3 Conclusion - - - - - - - 34
5.4 Recommendations - - - - - 34
5.5 Contribution to Knowledge - - - - 36
References - - - - - - - 37-38
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Exchange rate plays a key role in the international economic transaction. Generally, exchange rate is a strong indicator for assessing the overall performance of an economy. It is one of the macro economic variables that reflect the strength or the weakness of an economy. A persistently strong exchange rate reflects a strong economy, conversely, a persistently weak exchange rate is a reflection of a weak economy.
Exchange rate refers to the price of one currency (the domestic currency) in terms of another foreign currency (Anyanwu, 1995). Exchange rate variation could be said to have effect on the economic growth of an economy and could also have direct effect on demand and supply of goods, investment, employment as well as distribution of income and wealth. On the other hand, balance of payments are accounts showing the accounting records of all monetary transactions between a country and the rest of the world. These transactions include payments for the country’s export and import of goods and services, financial capital and financial transfer. There are two basic balance of payments accounts; they are current account and capital account. This study aims to identify the factors that influence exchange rate and balance of payments position in Nigeria.
In order to achieve macro economic stability, Nigeria’s monetary authorities have adopted various exchange rates over the years. It shifted from a fixed exchange rate regime in the 1960’s to the pegged arrangement between 1970’s and the mid 1980’s and finally to various types of floating exchange rate regime since 1986.
In 1986 at the inception of flexible exchange rate about N4 was exchanged for one US Dollar in parallel market. But today, the same currency is exchanged for about N163 to one US Dollar. Within the period of 1975 – 1998, the magnitude of various in exchange rate was very alarming. The high degree of variation in exchange rate distortion affected the pattern of consumption, production, investment and employment. The fixed exchange rate regime included an over variation of the naira and was supported by exchanged control regulations that engendered significant distortion in the economy. That gave rise to massive importation of finished good with the adverse consequences of domestic production, balance of payments position and the nations external reserve level. These and other issues brought about the adoption of flexible exchange rate regime in the context of structural adjustment programme (SAP) in 1986, its continued depreciation however, mars the economic performance of the country. The challenged in the combine link in the oil prices and exchange rate instability on macro economic stability and economic growth for oil producing nation’s like Nigeria is really enormous. In order to address the problem of exchange rate variation different policy measures were introduced in the system over the years. These range from the deregulated exchange rate policy, guided deregulation, dual exchange rate system coupled with introduction of different exchange market.
Prior to discovery of oil in 1960’s, the Nigeria government was able to execute investment projects through domestic savings earnings from Agricultural products exports and foreign aids. After the discovery of oil and its massive exportation in the 1970’s, one would expect that more foreign exchange earning would accrue to the economy and the economy would be able to undertake more viable investment projects that will lay a basis for sustainable growth and development. In an attempt to address various macro-economic in the economy, government adopted the demand management policy in 1982 when issues were perceived as demand driven. The persistence of the macro economic issues made the government to adopt the Structural Adjustment Programme in 1986 to further strengthen the demand management policies. The SAP policy package includes trade and payment liberalization which suggests that there were no serious balance of payments constraint during the period of implementation of SAP compared to what was obtained before SAP. Between 1986 and 1993, the ratio of investment to GDP ranged between 11.0 and 18.5 percent, while the ratio of savings to GDP was between 10.0 and 28.5 percent. The savings-investment gap- GAP ratio was negative, between 1986 and 1987, became positive in the subsequent years. This suggest that the SAP period was characterized by relatively low level absorptive capacity of the economy continued in the subsequent period (after SAP) as the savings –investment – GDP ratio was positive while the external trade performance indicator did not show significant improvements. The ratio fiscal deficit to GDP reached a peak of 11.0 percent in 1994, while the real GDP growth rate was less than 4.0 percent in the period 1994-2000.
All these are used to inform governmental authorities of the international position of the country to aid governmental authorities in reaching decisions on monetary and fiscal policy on one hand and trade and payment on the other, it is used to measure the resources that flows between one country and another information on payments and receipts in foreign exchange goods and meeting payments in foreign currency when they become due and its is used to measure the influence of foreign transactions on national income.
The term balance of payments itself entered the English economic literature during the mercantilist period. After 1570, the balance of payment developed showing in response to the rise of mercantilism and the desire on the part of English business men and government officials to be informed of the quantitative aspect of foreign commerce. Every nation has an international balance of payment problem. The difference between developed and developing nations is that developing nations suffer the impact of the balance payments is that due to deterioration in their term of trade, the developing nations suffers the impact of the balance of payments deficits more than the developed ones.
1.2 Statement of the Research Problem
As a matter of fact, foreign exchange policy is an important policy in any country of the world. Up to the time of SAP it appeared that Nigeria exchange rate tended to encourage imports and discouraged non-oil export and over dependence on imported input. The overriding exchange rate management was made concerned with apparently with medium and long term balance of payments objectives. Exchange rate policy was not geared towards the attainment of long term and equilibrium rate that would equilibrate the balance of payments in the medium and long term balance of payments objectives. Exchange rate policy was not geared towards the attainment of long term equilibrium rate that will equilibrate the balance of payments in the medium and long term and facilitate the achievements of certain structural adjustment objectives e.g. export diversification.
Balance of payments issues have been a concern in Nigeria for some decades. There has not been substantial economic growth in the nation despite that more than sixty percent of the counting’s population are engaged in Agriculture, the country still import food item to support those ones produced in the country. Unemployment has been a basic problem in balance of payment disequilibrium. It is therefore necessary to examine how variation in exchange rate and instability in balance of payments position would affect the economic growth and development of Nigeria.
1.3 Objectives of the Study
The main objectives of the study is to examine the effects of exchange rate on Nigeria’s balance of payments (BOP). While the specific objectives are to:
a. examine the effect of exchange rate on balance of payments in Nigeria.
b. evaluate the effect of domestic credit on balance of payments in Nigeria.
c. evaluate the effect of index of openness on balance of payments in Nigeria
d. evaluate the effect of inflation on balance of payments in Nigeria
e. Determine the effects of interest rate on balance of payments in Nigeria.
1.4 Research Hypotheses
The hypotheses to be tested in the study are stated below:
Ho: There is no significant positive relationship between exchange rate behaviour and balance of payments in Nigeria.
Ho: There is no significant positive relationship between domestic credit and balance of payment in Nigeria.
Ho: There is no significant positive relationship between index of openness and balance of payment in Nigeria.
Ho: There is no significant positive relationship between inflation and balance of payment in Nigeria.
Ho: There is no significant positive relationship between interest rate on balance of payments in Nigeria.
1.5 Significance of the Study
The effect of the recent economic global crisis in Nigeria’s exchange rate has the urgent need for protection of the economy from exchange rate risk. Although no country is immune to such global crisis, the over-reliance on oil export revenue by Nigeria exposes her exchange rate and economy excessively to external shocks. Therefore, there is need to conduct a research of this nature to examine the effect of exchange rate variation under different exchange rate regimes on Nigeria’s economic growth.
On the other hand, the study of balance of payments will be useful in understanding the distributions and adjustments on international transactions and thus help policy makers and implementers. The study will also help in evaluating the degree of Nigeria’s International Solvency. In addition to the above, the study will reveal the influence of National income on foreign transactions and its importance in appraisal of Nigeria’s short-term international economic prospect.
1.6 Scope of the study
This study will span 1986-2020, that is for thirty-five years (35 Years). Balance of payments comprises mainly of two accounts: The current and capital accounts. In order to cover both aspects comprehensively, other instrumental variables apart from exchange rate that are capable of affecting balance of payments are also tested empirically so as to arrive at a reliable conclusion in the end.
1.7 Organization of the study
The project shall be divided into five chapters. The first chapter shall provide the background of the subject matter justifying the need for the study. Chapter two shall present related literature concerning foreign exchange rate policy and balance of payments. The research methodology shall be stated in chapter three while data presentation and analysis will be in chapter four. Concluding comments in chapter five shall reflect on the summary, conclusion and recommendations.
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