Empirical Analysis of the Impact of Exchange Rate Fluctuation on the Nigeria Balance of Payments: 1981 – 2017

Abstract

This study examined the impact of exchange rate fluctuation on the Nigeria balance of payment for the period of 1981– 2017. The study employed ARDL bound testing approach to cointegration to test the long run relationship among the variables after the unit root test was conducted, which revealed that some variables were stationary at first difference while one was stationary at level. The empirical results from the ARDL bounds testing procedure revealed that a long-run relationship exists between exchange rate and balance of payments in Nigeria. The elasticity of the exchange rate coefficient in the balance of payments model was negative and statistically insignificant at 5 percent level, thus balance of payment position in Nigeria responded negatively to exchange rate policies in Nigeria. Both in the long-run and short-run the estimated coefficient of exchange rate variable was not statistically significant. This implied that change in exchange rate do not influence the balance of payments position in Nigeria. Therefore, it was recommended that, Nigeria government should implement economic policies that could enhance the appreciation of the Naira-US$ exchange rate against the devaluation policy which most often results in high cost of importing raw materials and capital goods, raises the cost of production and reduces the profits of the importing firms as well as reduce the excessive balance of payments deficit by discouraging over-reliance on imported goods and the promotion of domestic export produce is very imperative.