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THE EFFECT OF EXCHANGE RATE FLUCTUATIONS ON THE BALANCE OF PAYMENTS IN NIGERIA (1970-2020)

FIMUSANMI Wale John, AGBOADE Jide Festus

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Abstract

This study examined the effect of exchange rate fluctuations on Nigeria's balance of payments over a 50-year period, from 1970 to 2020. Secondary data from the Central Bank of Nigeria (CBN) Statistical Bulletins and the National Bureau of Statistics were used in the study. Other variables provided as control variables include statistics on imports and exports for the same time period. Unit root test was carried out using Dickey-Fuller (DF) for data set stationarity, and cointegration test using Johansen cointegration test for long run association between variables. The Granger causality test was also performed. The data were estimated using the Vector Error Correction Mechanism (VECM). The Granger Causality test results show that the balance of payments granger caused import, however there is no causality relationship between the exchange rate and the balance of payments in Nigeria. According to the Vector Error Correction Mechanism (VECM) estimations, the exchange rate has a positive but insignificant effect on Nigeria's balance of payment. Based on this outcome, the government should direct its monetary and fiscal instruments towards increasing national productivity and supporting exports, which will go a long way towards stabilising the currency rate and maintaining a favourable balance of payments.

Keywords:  Exchange Rate, Balance of Payments, Imports, Exports, Vector-Error Correction Mechanism