ABSTRACT
The study investigates empirically the impact of
Exchange Rate on Balance of Payment in Nigeria. The broad objective of this
study is; to determine the impact of exchange rate on Balance of Payment in
Nigeria within the periods of 1981 to 2015. Annual time series data on Exchange
Rate, Trade Openness, Import, Export and Balance of Payment from the Central
Bank of Nigeria covering the period 1981 – 2015 were utilized. A model was
constructed to incorporate Balance of Payment as the dependent variable, and
exchange rate, Import, Export and trade openness as the independent variables
and tested using the Ordinary least Square (OLS) Methods. The Stationarity
(Unit roots) status of the series was examined using the appropriate
statistics. Some of the assumptions of the OLS models were also tested to avoid
spurious regression. The granger causality test was also conducted to determine
the directions of causality. However, the result of this study indicates that
exchange rate and export has positive relationships with balance of payment in
Nigeria; the result also indicated that import and trade openness has negative
relationships with balance of payment in Nigeria. The study recommends that the
government should as much as possible encourage the production of most of the
imported goods in the country by the local industries as well as encourage
import substitutions.
CHAPTER ONE
INTRODUCTION
1.1
Background of the Study
Exchange rate fluctuations have been of serious concern to the monetary
authorities, policy makers and business tycoons of developing countries,
Nigeria inclusive because of the relevance of exchange rate in international
trade, investment and in determining the level of output growth of a country.
The
movement of goods and services across national frontiers in one direction
involves the movement of foreign exchange in the opposite direction. This
creates the needs for a rate of exchange between the currencies of two trading
partners to settle indebtedness arising from trade involving them (Nzotta,
2004).Exchange rate is a price at which a currency is regulated in the market,
which varies at one time or the other. In other words, it links domestic prices
with international prices. Through its effects on the volume of imports and
exports, exchange rate exerts a powerful influence on a country’s balance of
payments position. Paul (1996) defines 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.
Consequently, nations in the pursuit of the macroeconomic goals of healthy
external balances as reflected in their balance of payments (BOP) position,
find it imperative to enunciate an exchange rate policy.
Exchange rate is a key
determinant of the balance of payments (BOP) position of any country. If it is
judiciously utilized, it can serve as nominal anchor for price stability. Changes
in exchange rate have direct effect on demand and supply of goods, investment,
employment as well as distribution of income and wealth.
Exchange
rate of the naira was relatively stable between 1973 and 1979 during the oil
boom era and when agricultural products like cocoa, palm oil, groundnut, rubber
etc accounted for more than 70% of the nation’s gross domestic products (GDP).
During this period prior to 1986, Nigeria was on a fixed exchange rate
determination system. At that time, naira was very strong in reference to
dollar. The exchange rate was to one U.S dollar that is:#1 = $1. The increasing
demand for foreign exchange allocation in consonance with the goal of internal
balance made the fixed exchange rate determination system to be discarded in
September, 26 1986 while the structural Adjustment programme (SAP) came in. One
of the objectives of the various macro – economic policies adopted under the
structural adjustment programme (SAP) in July, 1986 was to establish a
realistic and sustainable exchange rate for the naira, this policy was
recommended in 1986 by the International Monetary Fund (IMF) on exchange
mechanism and was adopted in 1986 (Ewa, 2011:78).
The
key element of structural adjustment programme (SAP) was the free market
determination of the naira exchange rate through an auction system.
This
was the beginning of the unstable exchange rate; the government had to
establish the foreign exchange market (FEM) to stabilize the exchange rate
depending on the state of balance of payments, the rate of inflation, Domestic
liquidity and employment. Between 1986 and 2003, the federal Government
experimented with different exchange rate policies without allowing any of them
to make a remarkable impact in the economy before it was changed. This inconsistency
in policies and lack of continuity in exchange rate policies aggregated
unstable nature of the naira rate. (Gbosi, 1994:70).
In Nigeria, exchange
rate has changed within the time frame from regulated to deregulated regimes.
During the time of fixed exchange rate, the movement of exchange rate seemed to
be stable but the economy were getting worse every day, the alarming
deterioration of the economy and huge balance of payments deficits called for a
change, hence the switch over to flexible exchange rate. The irony of this
policy instrument is that our foreign trade structure did not satisfy the
condition for a successful balance of payment policy. The country’s foreign
structure is characterized by export of crude petroleum and agricultural produce
whose prices are predetermined in the world market and low import and export
price elasticities of demand. Hence the management of the floating exchange
rate has not proved better as the naira deteriorates everyday and many
macroeconomic variables are not stable (Anifowose, O.K.1994). .
Therefore, the effects of various macroeconomic shocks and
Balance of payment position depends on the exchange rate policy adopted by the
country, it is therefore of importance to investigate the effects of exchange rate
on the balance of payment of Nigeria and also the factors that influence
exchange rate in Nigeria.
1.2
Statement of Problem
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. 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
However, in recent times
in Nigeria, these variables have experienced staggering difficulties. This
cannot be argued considering the fact that Nigeria as a nation conduct their
foreign transactions with the use of the united states dollar (USD) which is
only gotten from the exports the country make to other nations.
Nigeria being a
mono-product export country tends to export oil as it major exports after its
discovery in 1970s while neglecting the agricultural sector which used to be
its major exports. The price and quantity of the oil products been exported by
Nigeria however is exogenously determined by the organization of petroleum
exporting countries (OPEC) this means that the quantity been sold as well as
the price are not determined by the Nigerian authorities. Moreover, the country
is an import dependent country as they import 95% of the commodities consumed
in the country. This implies that the forex generated from the export of oil
cannot equate the forex spent on the importation of foreign commodities and
this tends to move the exchange rate of the naira currency to that of other
countries in a negative direction. Which directly affect the balance of payment
of the country in negative forms.
Also, the country resorts to borrowing in order to finance
their annual budget deficit and afterwards spends a greater percentage of the
countries inflows in financing the loans incurred. This also affects the
balance of payment of the country terribly.
1.3
Research Questions
The
extent to which exchange rate affects Balance of Payment in Nigeria remains
unclear and therefore forms part of the problem which the research work intend
to study considering the following questions:
1. What
is the impact of exchange rate on the Balance of Payment of Nigeria?
2. What
is the relationship exists between exchange rate and Balance of Payment of
Nigeria?
3. What
is the causality relationship between exchange rate and balance of Payment of
Nigeria?
1.4
Objective of the Study
Owing to the above
listed research questions, the general objective of this study is to determine
the impact of exchange rate on Nigeria’s Balance of payment. The specific
objectives are to:
1. Examine
the impact of exchange rate on the Balance of Payment in Nigeria.
2. Ascertain
the relationship that exists between exchange rate and Balance of Payment in
Nigeria.
3. Obtain
the causality relationship that exists between exchange rate and balance of
Payment of Nigeria.
1.5
Hypothesis of the Study
Derived from the
objective of this study, the following hypothesis will be evaluated.
1.
H0: Exchange rate has no
significant impact on balance of payment in Nigeria.
2.
H0: Exchange rate has no
relationship with balance of payment in Nigeria.
3.
H0: Exchange rate has no
causality relationship with balance of payment in Nigeria
1.6
Significance of the Study
The result of this
study will be beneficial to a wide range of audience, such as the following:
Policy
Makers- This study will be of immense benefits to policy
makers as it would assist them in the task of policy formulation by providing
empirical evidence for their decision making concerning the roles of exchange
rate in the balance of payment of Nigeria.
Government-
The
federal government will also find this study relevant as it will assist in
making appropriate policies that will stabilize the exchange rate of the
country or reduce the fluctuation to the barest minimum.
Subsequent
Analysts- This investigation will also serve as a stepping
stone for researchers who develop interest in carrying an empirical analysis on
the impact of exchange on balance of payment.
Students-
Students
will find this piece highly relevant as it will undeniably increase their
horizon and add to their existing stock of knowledge on the concept of exchange
rate and its relationship with balance of payment.
1.7
Scope and Limitations of the Study
This study seeks to
determine the impact of exchange rate on the balance of payment in Nigeria. The
study is designed to cover a period of 36 years ranging from 1980 to 2016. The
study is made up of five chapters, the chapter one which contains the
introduction, chapter two concerned with literature reviews; chapter three
covers the methodology of the study while chapter four focuses on the results
and interpretations and chapter five on the summary and conclusion of the
research work.
In
the course of this work the researcher has been confronted with the difficulty
in generating a valid time series data. In case where data is available,
discrepancies between data on a variable from different sources still persist.
The researcher was also confronted with technical problems such as lack of
power supply to ensure a smooth running of the study.
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Item Type: Project Material | Attribute: 60 pages | Chapters: 1-5
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