Impact of Exchange Rate Fluctations on Nigrerian Balance Payments : Current School News

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

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

ABSTRACT

Exchange rate refers to the price of one currency (the domestic currency) in terms of another (the foreign currency). Exchange rate plays a key role in international economic transactions because no nation can remain in autarky due to varying factor endowment.

Movements in the exchange rate have ripple effects on other economic variables such as interest rate, inflation rate, unemployment, money supply, etc. Through its effects on the volume of imports and exports, exchange rate exerts a powerful influence on a country’s balance of payments position.

The problem of the study arises in two forms. Based on the historical perspectives we noticed that Nigerian BOP has been cascading and it was attributed to exchange rate fluctuations and over dependence on oil export.

This research is aimed at evaluating how exchange rate fluctuations affect the level of balance of payments in Nigeria for the period under study.

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

The results showed that there is the presence of fluctuation in exchange rate series in Nigeria. The OLS result showed that exchange rate fluctuation had a negative and significant impact on balance of payments in Nigeria.

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

The result reveals that Inflation had a positive and insignificant impact on balance of payments and Interest rates had negative and insignificant impact on balance of payments in Nigeria.

It is therefore the recommendation of this paper that the monetary authorities should employ every monetary tool to minimize the level of exchange rate fluctuations in the economy and the policy of exchange rate flexibility should be maintained but with government intervention guide.

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 inNigeria; 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

1.1 Background of the Study

In an ordinary parlance, Exchange rate refers to the price of one currency (the domestic currency) in terms of another (the foreign currency). Exchange rate plays a key role in international economic transactions because no nation can remain in autarky due to varying factor endowment.

Movements in the exchange rate have ripple effects on other economic variables such as interest rate, inflation rate, unemployment, money supply, etc. These facts underscore the importance of exchange rate to the economic well-being of every country that opens its doors to international trade in goods and services.

The importance of exchange rate derives from the fact that it connects the price systems of two different countries making it possible for international trade to make direct comparison of traded goods. 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. 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.

Nigeria has practiced both fixed and flexible exchange rate polices. From the period of 1967 through to 1970, Nigeria experienced a civil war. This adversely affected the fixed exchange rate regime which was in place at the time.

The fixed exchange rate regime was accompanied by strict controls and regulations which ultimately resulted in the overvaluation of the exchange rate. This had negative implications for the economy as it encouraged the importation of finished goods which created more competition for the domestic producers.

Besides, the balance of payments position and the country’s external reserves level were both compromised by the overvalued exchange rate (Sanusi, 2004, Sanni, 2006).

In 1980 Nigeria was an oil-exporting country faced with high capital inflows which resulted in the appreciation of the naira. The oil boom came to an end by 1983 and the prevailing currency appreciation distorted the growth of the economy.

REFERENCES

Adamgbe, B.T. (2003). Critical Issues in the Naira Exchange Rate, Depreciation and Capital Flight in Nigeria: Business Day Newspapers, Lagos April 26. Vol. 7, No. 560.

Aliyu S.U.R. (2007b). Import-Export Demand Functions and Balance of Payments Stability in Nigeria. A Co-Integration and Error Correction Modeling, submitted to:  Journal of Social and Management Science.

Aliyu, S.R.U (2011). Impact of oil price Shock and Exchange Rate Volatility on Economic Growth in Nigeria. An Empirical Investigation: Research Journal of International Studies, Issue 11, July.

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

Anthony J. Makin. The Balance of Payments and the Exchange Rate”. International Economics, Finance and Trade – Vol. 1. Department of Economics, the University of Queenland, Australia.

Anyanwa J.C. (1993). Monetary Economics: Theory, Policy and Institutions Onitsha: Hybrid Publishers Ltd.

Arize, A.C., T. Osang & J.D. SloHje (2000). Exchange Rate Volatility and Foreign Trade. Evidence from Thirteen LDC’s: Journal of Business and Economic Statistics 18, 10-17.

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