ABSTRACT
This study examines the effect of foreign exchange variables on balance of payment in Nigeria using time series data from 1981-2014. The data from the study were sourced from various issues of the central bank of Nigeria’s statistical bulletin. The data was subjected to Augmented Dickey Fuller (ADF) unit root test to ascertain the time series properties. Descriptive statistics was used to access the socioeconomic characteristics of the variables. Akaike information criterion was equally utilized to obtain the optimal lag length of the variables. Serial correlation test was employed to verify the possibility of autocorrelation in the regression model using Q-statistic as well as ARDL regression analysis approach. The study found that: exchange rate had positives and significant impact on balance of payments external reserves had positive and significant impact on balance of payments with total exports having positive and significant impact on balance of payments while import data was negative and insignificantly influencing balance of payments in Nigeria. The study recommends that: domestic production should be improved to encourage to encourage export transactions in order to keep balance of payments deficit in check, foreign exchange policies should further strengthen the naira value through increase in export of locally manufactured products in order to build up external reserves, economic activities should be increased by encouraging domestic productivity that breed export transactions to off-set the level of importation into the economy; there should be trade liberalization mostly among countries of interest in order to boost the local economy through exchange of goods and services.
TABLE OF CONTENTS
Title page i
Declaration ii
Certification iii
Dedication iv
Acknowledgments v
Table of Contents vi
List of Tables vii
Abstract viii
CHAPTER
1: INTRODUCTION
1.1
Background of the Study 1
1.2
Statement of the Problem 4
1.3
Objectives of the Study 4
1.4
Research Questions 5
1.5
Research Hypotheses 5
1.6
Scope of the Study 5
1.7
Significance of Study 6
CHAPTER
2: LITERATURE REVIEW
2.1 Conceptual
Framework 7
2.1.1 Conceptual framework on exchange rate 11
2.1.2 Exchange rate policy in Nigeria 12
2.1.3 Types of exchange rate 14
2.1.3.1 Spot rate 14
2.1.3.2
Forward rate 15
2.1.3.3
Long rate 15
2.1.3.4 Flexible rate 15
2.1.3.5 Fixed
rate 15
2.1.4 Currencies swaps 16
2.1.4.1 Foreign exchange futures 16
2.1.4.2 Currencies options 17
2.1.5 Factors affecting rates of exchange 17
2.1.5 Exportation as a tool for economic growth 21
2.2 Theoretical Framework 22
2.2.1 Theory of absolute advantage 23
2.2.2 Theory of comparative advantage 24
2.2.3 Theories on exchange rate behaviour 25
2.2.3.1
Elasticity approaches 25
2.2.3.2 The
monetary approach 26
2.2.3.3 Absorption approach 27
2.2.4 Exchange
rate and trade balance 29
2.3 Empirical
Review 30
2.3.1 Real
exchange rate 35
2.3.2 Empirical
study on balance of payment 45
2.4 Summary
of Literature Review
CHAPTER 3: RESEARCH
METHODOLOGY
3.1 Research
Design 46
3.2 Area
of Study 46
3.3 Sources
of Data 47
3.4 Model
Specification 47
3.4.1 Description
of variables 49
3.4.2 Dependent
variable (BOP) 49
3.4.3 Independent
variables 50
3.5 Techniques
for data Estimation 51
3.5.1 Unit
root test analysis 51
3.5.2 Test
of significance 53
CHAPTER 4: DATA
PRESENTATION, ANALYSIS AND INTERPRETATION
4.1 Data
Presentation 53
4.2 Descriptive
Statistics 54
4.3 Unit
Root Test 56
4.4 Cointegration
Analysis 58
4.5 ARDL
Regression Analysis 61
4.6 Hypotheses
Testing 63
4.6.1 Hypothesis
1 63
4.6.2 Hypothesis
2 63
4.6.3 Hypothesis
3 64
4.6.3 Hypothesis
4 64
4.7 Discussion
of Results/Finding 65
CHAPTER 5: SUMMARY,
CONCLUSION AND RECOMMENDATIONS
5.1 Summary
of Findings 67
5.2 Conclusion 67
5.3 Recommendations 68
5.4 Contributions
to knowledge 68
References 69
Appendices 77
LIST OF TABLES
4.1 Data
presentation 53
4.2 Descriptive
statistics 54
4.3 Unit
root test 56
4.4 Bound
testing 57
4.1 Akaike
information criteria 58
4.5 Cointegration
test 59
4.6 ARDL
regression result 61
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND
OF THE STUDY
In
Nigeria, the fact that the interplay between exchange rate and balance of
payment has become an important economic study for effective making of policies
on exports and imports cannot be underestimated. Exchange rate is the ratio
between a unit of one currency and the amount of another currency for which
that unit can be exchanged at a particular time (Makin, 2005). Exchange rate
plays a vital role in a country’s level of trade, which is critical for every
free market economy in the world. It is therefore not surprising that, exchange
rate is among the most watched, analyzed and government manipulated
macroeconomic indicator (Singh 2010). Most countries attempt to moderate their
domestic currency fluctuations by imposing restrictions on exchange rate movement
(Benita and Lauterbach, 2007). It is a key macroeconomic measure in the context
of general economic reform programmes and because of its importance government
takes active part in its determination (Makin, 2005). Specifically, it is
important as the connection between the price systems of countries, as price in
the allocation of real resources among tradable and non-tradable sectors, as a
promoter or otherwise of imports and exports, and as an instrument in the
design of the balance of payment programme of countries.
Exchange
rate is fundamental macroeconomic variable that guides investors on the best
way to strike a balance between their trading partners (Odili, 2007). Exchange
rate refers to the price of one currency (the domestic currency) in terms of
another (the foreign currency) (Odili, 2014). The balance of payment on the
other hand is a country’s state of affairs in international trade (Beatrice,
2001). A relationship therefore exists between exchange rate and balance of
payment since there cannot be international trade if a country’s currency is
not priced in another country so as to all trade acroos-boarders (Odili, 2014).
Consequently, nations in the pursuit of macro-economic goals of healthy
external balances as reflected in their balance of payment (BOP) positions find
it imperative to enunciate an exchange rate policy (Oladipupo and
Onotaniyohuwo, 2011). The objectives of exchange rate policies were tailored
towards the achievement of the overall macro-economic goal of internal and
external balance in the medium and long term (Odili, 2014). Internal balance
refers to the level of economic activity consistent with the satisfactory
control of inflation, while external balance means balance of payments
equilibrium or sustainable account deficit financed on a lasting basis by
expected capital inflow (Ogbonna, 2011). S
Economic
history has shown that there are two common concepts of exchange rate namely
nominal exchange rate and real exchange rate. The nominal exchange rate (NER)
is a monetary concept which measures the relative price of two countries’
moneys of currencies, e.g., naira in relation to the U.S. dollar and vice versa
(Nawaz et al., 2014). The monetary concept informs on how
much the price level of international goods has risen/fallen relative to
domestic prices as a result of changes in the exchange rate. Real exchange rate
(RER), on the other hand, is the concept that measures the relative price of
two goods – tradable goods (exports and imports) in relation to non-tradable
goods (goods and services produced and consumed locally). There is a link
between the two concepts in that changes in the NER can cause short-run changes
in the RER. It is importance to note that since the introduction of the Second
Tier Foreign Exchange Market (SFEM) under SAP in Nigeria in 1986, the first
definition of exchange rate has been most pronouncedly used (Nawaz et al., 2014).
Exchange
rates submit for the cost of a currency system in position of a different
(foreign currency) exchange rate assumes a part with global investment business
as refusal country preserve stay in a structure of strategy of economic
self-support aimed at removing necessitates for imports because of unreliable
aspect bequest (Nawaz et al., 2014).
The role Balance of Payment position play in the economy of any nation cannot
be over emphasized and Nigeria is no exception. Balance of payments is a
systematic statistical record that summarizes a country international
transaction with the rest of the world for a given period of time say one year
(Imosis, 2012). Balance of Payment records and summarizes international
financial transaction for a specific period (Nawaz et al., 2014).
To
meet this assurance, country supported a load of Federal Reserve as gold or
other currencies forms that they could use to help their currency (Odili,
2014). A decrease in this stock was viewed as a significant balance of payments
deficiency because it undermined the capability of the nation to reach its
obligation (Nawaz et al., 2014).
Besides that specific sort of deficiency, with itself, was never a true
indicator of the nation’s financial postion. The explanation for why is that it
unseen the probability that the nation might be approached to reach its
obligation and the readiness of external or international financial foundations
to support. At 1946; fifty years after amalgamation of Nigeria in 1914, Nigeria
was at the height of her promise: among other promising trends, it was the
world’s largest producer of groundnuts, palm oil, and petroleum was making its
debut in the national accounts (Imosis, 2012).
In
the early 1980s, the oil market substantial external and fiscal imbalances
emerged. These were financed by public sector borrowing, depleting
international reserves and large accumulation on payment arrears on external
trade credits and as such created problems in our Balance of payments. In 1984,
austerity measures were introduced to redress the nagging deficits in the
country’s balance of payments, these included; slashing of budgetary
expenditures, administrative control for import licenses, and upward review of
tariffs. In 1986, the Structural Adjustment Programme (SAP) was introduced,
which amongst other things, combined exchange rates and trade policy reforms to
promote economic efficiency and long term growth in the stabilization polices
designed to restore balance of payments equilibrium and price stability
(Imoisi, 2012).
1.2 STATEMENT
OF THE PROBLEM
The
tropic of exchange rate and how it relates to the affects the balance of
payment position has been the concern of economists and policy makers and has
been subjected to extensive empirical research.
Exchange
rate policy irregularities are fundamental macroeconomic problem that have led
to the domestic investors inability to strike a balance between their trading
partners abroad through export transactions. Balance of payments deficits and
very low level of foreign reserve on the other hand leads to depreciation of
the naira. The intention to undertake this study is to ascertain the effect of
exchange rates and its tendency on balance of payment conditions and
contradiction between them in all the adverse and favourable conditions in
Nigeria.
1.3 OBJECTIVES
OF THE STUDY
The
general objective of this study is investigate the effect of exchange rate
management and balance of payment in Nigeria. The specific objectives are to:
1. Ascertain
the effect of exchange rate on balance of payments in Nigeria.
2. Estimate
the effect of foreign reserve on Nigeria’s balance of payments within the study
period.
3. Determine
the effect of export and import on balance of payments in Nigeria with the
reference period.
4. To
observe the extent to which terms of trade influences balance of payments in
Nigeria within the study period.
1.4 RESEARCH
QUESTIONS
1. To
what measure has exchange rate affected balance of payments in Nigeria?
2. To
what extent do foreign reserve influence balance of payments in Nigeria?
3. How
has export and import affected balance of payments in Nigeria within the
reference period?
4. How
do terms of trade influence balance of payments in Nigeria within the study
period?
1.5 RESEARCH
HYPOTHESES
The
following hypotheses were tested in the study.
H01:
There is no significant effect of exchange rate on balance of payments in
Nigeria.
H02:
Foreign reserve has no significant effect on balance of payments in Nigeria.
H03:
There is no significant effect of export and import on balance of payments
within the study period.
H04:
Terms of trade does not have any significant effect on balance of payments
within the study period.
1.6 SCOPE
OF THE STUDY
This
study is limited to the context as per the exchange rate effect on Nigerian
balance of payments. The study covers the period from 1981 to 2014. Using
annual report and statistical bulletin from central bank of Nigeria (CBN) as
well as the Nigeria bureau of statistics.
1.7 SIGNIFICANCE
OF STUDY
The
issue of foreign exchange management and balance of payments of Nigeria have
posed a fundamental concern and questions in the minds of researchers in recent
times. For this purpose, the present study will be of immense benefit to the
following institution:
1. Monetary
authorities: the findings and recommendations of this study will be of use to
the monetary authorities in formulating lasting monetary policies that will
stand the test of time and remedy balance of payments imbalances.
2. Foundation
for governments’ policy initiative: this study will serve as factors and
reference material for future related studies.
3. This
research will be of immense help to policy makers and balance of payments operators,
and government especially as regards to the transaction of the exchange rate
and balance of payments in Nigeria.
It will equally be of
importance to researchers and serve as a mark of future references for them.
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