Impact of Exchange Rate Fluctations on Nigrerian Balance Payments (1970-2012)

Impact of Exchange Rate Fluctations on Nigrerian Balance Payments (1970-2012).

ABSTRACT

The price of one currency (the domestic currency) in terms of another is referred to as the exchange rate (the foreign currency).

Because no nation can remain autarky due to varying factor endowment, the exchange rate plays a critical role in international economic transactions.

Exchange rate movements have repercussions on other economic variables such as interest rates, inflation rates, unemployment, money supply, and so on.

Through its effects on the volume of imports and exports, the exchange rate exerts a powerful influence on a country’s balance of payments position.

The study’s problem manifests itself in two ways. According to historical perspectives, Nigerian BOP has been cascading, which has been attributed to exchange rate fluctuations and over-dependence on oil export.

The purpose of this study is to determine how exchange rate fluctuations affect the level of Nigeria’s balance of payments during the time period under consideration.

Time series data were collated from the central bank of Nigeria statistical bulletin for the periods under study and was analyzed using Linear Regression with the application of the Ordinary Least Squares (OLS) technique and the ARCH and GARCH model as a technique to evaluate variable fluctuations.

The findings revealed that there is fluctuation in Nigeria’s exchange rate series. According to the OLS results, exchange rate fluctuations had a negative and significant impact on Nigeria’s balance of payments.

There was a negative and insignificant difference in the effect of exchange rate fluctuations on Nigeria’s balance of payments during the fixed era and a positive and insignificant difference in the effect of exchange rate fluctuations during the flexible era.

According to the findings, inflation had a positive and insignificant impact on Nigeria’s balance of payments, while interest rates had a negative and insignificant impact.

Inflation had a positive and insignificant impact on Nigeria’s balance of payments, while interest rates had a negative and insignificant impact, according to the findings.

TABLE OF CONTENTS

Title Page – – – – – – – – – – i
Certification – – – – – – – – – – ii
Approval Page- – – – – – – – – – iii
Dedication – – – – – – – – – – iv
Acknowledgements – – – –  – – – – v
Abstract – – – – – – – – – – vi
Table of contents – – – – – – – – – vii
List of Figure – – – – – – – – – – x
List of Tables – – – – – – – – – – x

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study – – – – – – – 1
1.2 Statement of the Problem – – – – – – – 3
1.3 Objectives of the Study – – – – – – – 4
1.4 Research Questions – – – – – – – – 4
1.5 Hypothesis of the Study – – – – – – – 4
1.6 Significance of the Study – – – – – – – 5
1.7 Scope of the Study – – – – – – – — 6
1.8 Operational Definition of Terms – – – – – – 6
References – – – – – – – – – 8

CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.1 Conceptual Framework – – – – – – – 9
2.1.1 The Concept of Balance of Payment – – – – – – 9
2.1.2 The Concept of Interest Rate – – – – – – – 10
2.1.3 The Concept of Exchange Rate – – — – – – – 11
2.1.4 The Concept of Inflation- – – – – – — – 11
2.2 Theoretical Review – – – – – – – – 12
2.2.1 Optimal Currency Area (OCA) Theory – – – – – 12
2.2.2 Purchasing Power Parity Theory – – – – – – 13
2.2.3 Theory of Exchange rate, Exchange rate Fluctuations and Balance of Payments 13
2.2.4 Types of Exchange Rate Regimes – – – – – – 14
2.2.5 Exchange Rate Management before the SAP (Fixed regime) – – 15
2.2.6 Exchange Rate Management since the SAP (Flexible regime) – – 16
2.2.6.1Foreign Exchange Market (FEM) – – – – – – 18
2.2.6.2 Completely Deregulated Exchange Rate System – – – – 18
2.2.6.3 Reintroduction of the Fixed Exchange Rate System – – – – 19
2.2.7 Balance of payment – – – – – – – – 27
2.2.7.1 The Elasticity Approach – – – – – – – 33
2.2.7.2 The Absorption Approach – – – – – – – 34
2.2.7.3 The Monetary Approach – – – – – – – 34
2.3 Empirical Review – – – – – – – – 36
2.3.1 Balance of Trade/payment flow and Exchange Rate Volatility in Nigeria; a Trend Analysis – 36
2.3.2 Exchange Rate Fluctuations and the Balance of Payment: Channels of Interaction in Developing and Developed Countries – – 38
2.3.3 Intertemporal Balance, Sustainability, and Efficiency of the Exchange Rate Mechanism — 41
2.3.4 The Balance of Payment Constrained Growth Model – – – 42
2.3.5 Foreign Trade Constraint and Cyclical Development – – – 44
2.3.6 Effect of Exchange Rate Reforms on the Trade Balance of Nigeria – – 44
2.3.7 Brief Overview of Exchange Rate Policy in Nigeria – – – – 49
2.3.8 Some Prior Studies – – – – – – – – 50
2.4 Review Summary – – – – – – – – 67
References – – – – – – – – – 69

CHAPTER THREE: METHODOLOGY

3.1 Research Design – – – – – – – – 82
3.2 Sources of Data – – – – – – – – 82
3.3 Model Specification – – – – – – – – 82
3.4 Description of Variables – – – – – – – 85
3.5 Technique of Analysis – – – – – – – 86
References – – – – – – – – – 89

CHAPTER FOUR

4.1 Presentation and Analysis of Data – – – – – – 90
4.1.1 Descriptive Analysis of The Variables 1970 – 2012 – – – – 90
4.1.2 Graphical Analysis of Variables – – – – – – 91
4.2 Test of Hypotheses – – – – – – – – 92
4.2.1 Test of Hypothesis One – – – – – – – 92
4.2.2 Test of Hypothesis Two – – – – – – – 94
4.2.3 Test of Hypothesis Three – – – – – – – 96
4.3 Implications of the Results – – – – – – – 99

CHAPTER FIVE: SUMMARY, CONCLUSION, AND RECOMMENDATIONS

5.1 Summary of Findings- – – – – – – – 100
5.2 Conclusion – – – – – – – – – 100
5.3 Recommendations – – – – – – – – 101
5.4 Area for further study – – – – – – – – 101
5.5 Contribution to knowledge. – – – – – – – 101
Appendices – – – – – – – – – 103
Bibliography – – – – – – – – – 110

INTRODUCTION

In layman’s terms, the exchange rate is the price of one currency (the domestic currency) in terms of another (the foreign currency).

Because no nation can remain autarky due to varying factor endowment, the exchange rate plays a critical role in international economic transactions.

Exchange rate movements have repercussions on other economic variables such as interest rates, inflation rates, unemployment, money supply, and so on.

These facts highlight the significance of the exchange rate to the economic well-being of any country that allows international trade in goods and services.

The exchange rate is significant because it connects the price systems of two different countries, allowing international trade to make direct comparisons of traded goods. In other words, it connects domestic and international prices.

The exchange rate has a significant impact on a country’s balance of payments position due to its effects on the volume of imports and exports.

As a result, nations pursuing macroeconomic goals of healthy external balances as reflected in their balance of payments (BOP) position must enunciate an exchange rate policy.

Nigeria has used both fixed and floating exchange rates. Nigeria was at the center of a civil war from 1967 to 1970.

This had a negative impact on the fixed exchange rate regime that was in place at the time.

The fixed exchange rate regime was accompanied by strict controls and regulations, which resulted in the exchange rate being overvalued.

This had a negative economic impact because it encouraged the importation of finished goods, which increased competition for domestic producers.

Furthermore, the overvalued exchange rate harmed both the country’s balance of payments position and its level of external reserves (Sanusi, 2004, Sanni, 2006).

In 1980, Nigeria was an oil-exporting country with high capital inflows, which caused the naira to appreciate.

By 1983, the oil boom had ended, and the prevailing currency appreciation had distorted economic growth.

REFERENCES

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Anderton, R. & F. Skudelny (2001). Exchange Rate Volatility and Euro Area Imports European: Central Bank (ECB) Working Paper, No. 64.

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