Exchange Rate and Balance of Payments in Nigeria

Abstract

This paper investigated the influence of exchange rate on balance of payments in Nigeria from 1981 to 2022. To achieve the above objective, the study collected data on balance of payments, exchange rate, trade openness, government capital expenditure and monetary policy rate from the statistical bulletin of the Central Bank of Nigeria and adopted Autoregressive Distributed Lag (ARDL) bounds test technique of econometrics to capture the short and long-run association between dependent and independent variables. The results revealed that in the long run, exchange rate, government capital expenditure and monetary policy rate have positive relationship with balance of payments in Nigeria. At the same time, trade openness has a negative relationship with balance of payment in Nigeria. In the short run, exchange rate and government capital expenditure have negative and significant relationship with balance of payments. Additionally, monetary policy rate and trade openness have a strong and positive correlation with balance of payments. Therefore, the study recommended that the government should adopt managed floating exchange rate policy to redress the problem of exchange rate variation in the country. Government should also increase production of a variety of good quality goods and services. This is the only way by which the country can induce foreign demand for its products, or at least reduce its demand for foreign products, either of which will have a favourable effect on the country’s currency and balance of payments.