ABSTRACT
This study, titled "Exchange Rate
Variation and Balance of Payments Position in the Nigerian Economy," explores
the intricate relationship between government expenditure and economic growth
in Nigeria from 1980 to 2020. Using secondary data sourced from the Central
Bank of Nigeria (CBN), the World Bank, and the National Bureau of Statistics
(NBS), the analysis focused on capital and recurrent expenditures as key
variables influencing Gross Domestic Product (GDP). Ram's model (1986), known
for its theoretical robustness, was adapted with relevant modifications to
establish the empirical relationship.
The study employed the Autoregressive Distributed
Lag (ARDL) bounds testing approach and the Error Correction Mechanism (ECM) to
examine short- and long-term dynamics. Unit root tests revealed that all
variables were non-stationary at levels but became stationary at first
difference, confirming their suitability for co-integration analysis. The
findings demonstrate a long-run relationship between government expenditure
components and economic growth.
Regression results highlight that recurrent
expenditure significantly and positively impacts economic growth, while capital
expenditure shows an insignificant contribution, contrary to theoretical
expectations. This anomaly is attributed to systemic inefficiencies such as
corruption and mismanagement of funds in public sector operations. The results
underscore the critical role of effective allocation and utilization of
recurrent expenditure in fostering economic growth while exposing the need for
improved governance in capital expenditure management.
The study concludes that government expenditure,
particularly recurrent spending, is vital for Nigeria's economic growth.
However, inefficiencies in capital expenditure management hinder its potential
contributions. Policy recommendations include enhancing oversight on capital
projects to curb corruption, increasing investments in human capital
development, and prioritizing growth-enhancing sectors such as education,
healthcare, and infrastructure. These measures are expected to optimize the
impact of public spending on sustainable economic growth.
This study provides a nuanced understanding of
the impact of government expenditure on Nigeria’s economy and offers actionable
insights to policymakers for fostering economic development through more
effective expenditure frameworks.
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
1.2 Statement
of the Research Problem
1.3 Objectives
of the Study
1.4 Research
Hypotheses
1.5 Significance
of the Study
1.6 Scope
of the study
1.7 Organization
of the study
CHAPTER
TWO
REVIEW
OF RELATED LITERATURE
2.1 Conceptual/Theoretical
Literature
2.1.1 The Role of Public Expenditure
2.2 Empirical
Literature
2.3 Theories
of Government Expenditure
CHAPTER
THREE
RESEARCH
METHOD
3.0 Introduction
3.1 Nature
and sources of Data
3.2 Model
specification
3.3 Estimation
Technique
3.3.1 Stationary
and Unit Root Test
3.4 Method
of Data Analyses
3.5 A
priori expectation
CHAPTER
FOUR
DATA
PRESENTATION, INTERPRETATION AND ANALYSIS
4.1 Data
Presentation
4.2 Interpretation
of the Regression Model
4.2.1 Unit Root Test
4.2.2 Test for Co Integration
4.2.3 Regression Result (ECM)
4.3.1 Interpretation Based on Economic Criteria
4.3.2 Interpretation Based on Statistical Criteria
4.3.2.1 The R-Squared
4.3.2.2 The T-Test
4.3.2.3 The F-test
4.3.3
Interpretation based on Econometric
Criteria
4.3.3.1
Durbin-Watson Test
4.3.3.2 Heteroskedasticity Test
4.4 Hypothesis
Testing
CHAPTER
FIVE
SUMMARY
OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1
Summary of Findings
5.2
Conclusion
5.3
Policy
Implication
5.4
Recommendations
REFERENCES
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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