study examined exchange rate and Nigeria balance of payment for the
period 1982 – 2014. The study adopted time series econometrics analysis to
determine the impact of exchange rate on Nigeria balance of payment. For
purpose of clarity; model was specified with the following variables; balance
of payment (BOP) as dependent variable, Exchange rate (EXR), Trade openness
(TRN) and Foreign Direct Investment as explanatory variables. In order to avoid
spurious result, some standard econometric tests were conducted. The result
revealed that all the variables: (BOP), (EXR), (TRN) and (FDI) were not integrated
of the same order I(0), I(1) I(1) and I(1) respectively within the period under
study. The result revealed that the variables have long run relationship
because of evidence of bound Test as revealed by ARDL. The ARDL further showed
that exchange rate has an impact on Nigeria balance of payment. Based
on the findings above; the study recommends that it is important
that the exchange rate is not over valued, because this will result in
unsustainable balance of payment and escalating external debt stock . In
contrast, the exchange rate should find its equilibrium level to make balance
of payment position viable.
TABLE OF CONTENTS
of Contents vi
CHAPTER ONE: INTRODUCTION
Background to the Study 1
Statement of the
Research Questions 5
Objectives of the Study 5
Hypotheses of the Study 5
Significance of the Study 6
Scope and Limitations of
the Study 7
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Theoretical Literature 8
Elasticity Approach 9
Absorption Approach 10
Liquidity Preference Theory 11
Rate Policy In Nigeria 12
Effect Of Exchange Rate on The Balance Of
Empirical Literature 19
CHAPTER THREE: RESEARCH METHODOLOGY
Design and Methodology 24
of Data 28
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF
4.1 Unit Root Test 28
Co-integration Result 30
Breusch Godfrey Serial Correlation LM Test 31
Granger Causality 35
Test of Hypotheses 35
Implication of the Study 37
CHAPTER FIVE: SUMMARY, CONCLUSION AND
5.1 Summary of Findings 39
to the Study
Any country that has its
own currency must decide what type of exchange rate arrangement to maintain.
Exchange rate arrangements are broadly classified into three namely, fixed or
pegged arrangements, flexible arrangements, and in-between category of
arrangements with “limited flexibility”. Each variety or alternative have
different implications which determines the extent to which countries
participate in foreign exchange markets. When a monetary authority decides to
fix exchanges rates against other currencies, they make a commitment to
intervene in the market, buying and selling their currency whenever necessary
to keep the exchange rate from changing. When, on the other hand, the monetary
authority abstains completely from intervening in the market for exchange
rates, they are choosing to let their exchange rates float freely.
In practice, by controlling
the extent to which, and conditions under which, they intervene in exchange
markets, Peter (1997); states that countries may attempt to manage their
exchange rates with essentially any degree of flexibility they desire. Exchange
rate policies aim at evolving Real Exchange Rate (RER) that maintains internal
and external balance in any economy. Internal balance is defined in terms of
the level of economic activities consistent with satisfactory control of
inflation and full employment of resources. External balance on the other hand
is defined in terms of Balance of payments equilibrium or sustainable current
account deficit financed on a lasting basis by expected capital inflows (Pondexter,(1981)
and Dernbourg, 1980). Improvements in the international competitive strength of
the economy on the real exchange rates. The implication of this is very clear:
any distortions in the real exchange rate will most probably lead to
distortions in both internal and external balances.
One of the major goals of
macroeconomic policy is rapid economic growth. As demonstrated by Zuvekas
(1979), economic growth is measured by increase in output of goods and services
overtime, and as stated by Akpan (2008), economic growth is said to occur when
a country’s productive capacity is on the increase. Production of goods and
services involve exports and imports which in turn involve transactions in
foreign exchange, and exchange rate has been characterized by instability which
has raised concern about its effect on economic growth. In view of the fact
that exchange rate policy in Nigeria has oscillated basically between the fixed
exchange rate system since the immediate post independence era in 1960 and then
from 1986 when a market based exchange rate system was introduced in the
context of the structural Adjustment Programme (SAP), there has been a controversy
as regards output of goods and services under the flexible exchange rate system
and under the fixed exchange rate system. Right from time immemorial, a country’s
exchange rate and balance of payment is usually regarded as the sum of indices
by which a nation’s strength can be measured especially its economic strength.
Paul (2012) defined balance of payments as an accounting record to all monetary
transactions between a country and the rest of the world.
These transactions include
payments for the country’s exports and imports of goods, services and financial
capital, as well as financial transfer. It summarizes the international
transaction for a specific period usually one year and is prepared in single
currency for the country concerned. Nzotta (2014) defined foreign exchange as
the value of foreign nation’s currency in terms of the home nation currency. In
finance, the exchange rates (as also known as the foreign exchange rate or
forex rate) between two currencies specify how much one currency is worth in
terms of the other.
Devaluation is fall in
fixed exchange rate, which reduces the value of a currency in terms of other
currencies. So what we are trying to do in this study is to determine how the
reduction value of a currency with respect to the currency
of another country affect the record of all monetary transactions
between a country and another, whether visible or invisible in a period of time. This is very important
because no nation can exist on its own no matter how independent or
self-sufficient it can be, it is important to have a relationship with other
nations which can be
characterized by goods and
services going one way and foreign exchange
going the other way. When accessing the nation involved, a record of
gains and losses may have been kept. As such a nation’s foreign exchange and
balance of payments can help slowdown, accelerate or decelerate growth progress
and development. This will also have a positive or negative effect on the
citizens since it deals mainly with economic relations.
Our nation Nigeria is
currently facing serious problems regarding its foreign exchange rating (which
is very low in comparison to other countries) and it’s balance of payment which
is clearly in disequilibrium and in a deficit. As a result of this the
government is retrogressing and the citizens clearly suffering. It is in a bid to discover why this is so and
how this can be solved that this study is pertinent.
Statement of the Problem
Foreign exchange and
balance of payment are the key factors of a nation’s life. They are also
factors to look into when comparing a country’s relationship with other
nations. These factors directly or indirectly affect a host of other factors which are of severe
importance in any nation. Consequently these factors can be seen as essential
to the growth and development of the nation. Currently these two factors can be
said to have crippled the Nigeria
economy and made life uncomfortable for it’s citizens. These factors have
brought the country to a level where growth and development appear to be an
nation’s exchange rate has fallen so low due to unfavorable nature of the
competing power of the nation’s currency with foreign currencies of the world.
Our economy has been trying to resolve the problem of external and internal balance,
which has manifested in the disequilibrium in our balance of payment and
causing us a balance of payment deficit. Much controversy had also been degenerated by the
devaluation of our Naira (the national currency). Relevant literature and
opinion on this issue are of the view that exchange rate policy plays an
important role in maintenance of internal and external balance. On the other
hands, other researchers argue that devaluation is not the best policy for the
less developed country because of many diverse results.
When Nigeria started
recording huge balance of payments deficits and very low level of foreign
reserve in the 1980s, it was felt that a depreciation of the naira would
relieve pressures on the balance of payments. Consequently, the naira was
devalued. The irony of this policy instrument is that our foreign trade
structure did not satisfy the Marshall-Lerner
condition for a favourable balance of payment adjustment (Umoru and Eboreime,
2013). The Nigerian foreign structure is characterized by export of crude
petroleum whose prices are pre-determined in the world market. This is in
addition to low import and export price elasticity of
demand. Based on this, the study attempts at examining the relationship between
exchange rate and Nigeria’s
balance of payments.
This study shall seek relevant answers to the following research
1. Is there any significant long run
equilibrium relationship between exchange rate and Nigeria balance of payment?
2. To what extent has exchange rate exert influence on Nigerian
balance of payment?
3. Is there any significant causal
relationship existing between exchange rate and Nigeria balance of payment?
Objectives of the Study
The general objective of this study is to examine the impact of
exchange rate on the balance of payment
of a nation with special reference to Nigeria. The specific objectives
Investigate the extent to which
long run equilibrium relationship exists between exchange rate and Nigerian balance of payment.
Determine the extent to which
exchange rate exert influence on Nigerian balance of payment.
Ascertain if exchange rate granger causes Nigeria balance of payment.
1.5 Hypotheses of the
This research work shall be guided by the
There is no significant long
run equilibrium relationship between exchange rate and Nigerian balance of
Exchange rate does not exert influence on Nigerian balance of payment.
There is no causal relationship
existing between exchange rate and Nigeria balance of payment.
Significance of the Study
It is the significance of this study therefore; to make known the
relationship between exchange rate and balance of payments, policy implications
and recommendations which will be of immense help to policy makers and balance
of payments, and government especially as regard to the transaction of the
exchange rate and balance of payment in Nigeria.
Specifically therefore, the following individuals and groups will
find the study very useful: The government will find the study very useful as
it would guide its choice of policy formation especially as it work towards
achieving its vision of becoming one of the best twenty economies of the world
in the year 2020. The Central Bank of Nigeria whose duty among others, is to
assist government in the implementation of its monetary policy will find the
study relevant as it shall form the basis for valuable pieces of advice to
government on some of the dangers that may be identified by the study. Members
of the academia will find the study relevant as it will also form basis for
further research and a reference tool for academic works. This study shall also
be significant to the private sector especially those who may have research
interest as it shall guide their private investment decisions. Finally, the
study shall also form reasonable tool for the private sector’s contribution to
1.7 Scope and Limitations of the Study
Though the research would make reference to related studies of other
economies of the world with a view to reviewing related literature on the
subject matter, data for this work shall only be on Nigeria economy. Such variables
shall include those related in existing literature to exchange rate and it’s
impact on balance of payment with reference to the Nigeria economy. It shall be
collected between wide ranges of time spanning over a period of thirty two
years from 1982 to 2014.
Data for this study shall be secondary from government owned
institutions like the Central Bank of Nigeria and FOS sometimes.
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