This project work investigated the effect of exchange rate fluctuations on Nigeria balance of payment. Secondary data was used in this work and was sourced from the international monetary fund and World Bank and Ordinary least squares were used in estimating this work. The empirical finding of this work was that there is a significant relationship between exchange rate and balance of payment in Nigeria using the Wald test. However, the T-test shows that exchange rate was significant at levels and at 2nd lag and has a positive and negative relationship with the dependent variable (balance of payment) respectively. In conclusion, the researcher recommended that the monetary authority (CBN) should formulate policies that will regulate the fluctuations in foreign exchange market in order to create surplus in Nigeria’s balance of payment.
CHAPTER ONE
1.0 Introduction
1.1 Background of study
Exchange rate can be defined as the price of a nation’s currency in terms of another currency. An exchange rate has two components, the domestic currency and a foreign currency: domestic currency is the legal tender issued by the monetary authority that is generally accepted in the home country while foreign currency is the currency of any foreign country which has authorized medium for circulation and exchange rates can be floating or fixed. Floating exchange rates are determined by the interaction of demand and supply (market forces) in the money market, while fixed exchange rate are determined by the government, it can also be called pegged exchange rate. Exchange rates can also be categorized as the spot rate – which is the current rate – or a forward rate, which is the spot rate adjusted for interest rate differentials.
According to Oladipupo and Ogheneovo (2011), Exchange rate is among the most important prices in an open economy. It influences the flow of goods, services, and capital in a country, and exerts strong pressure on the balance of payments, inflation and other macroeconomic variables.
The balance of payments (BOP) also known as balance of international payments of a country is the record of all economic transactions between the residents of the country and the rest of the world in a particular period . All trades conducted by both the private and public sectors are accounted for in the BOP in order to determine how much money is going in and out of a country. 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 very important to pronounce 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 by employing favorable exchange rate policies that will boost export, it can serve as nominal anchor for price stability. Oladipupo and Ogheneovo (2011) found out that When Nigeria started recording huge balance of payments deficits and very low level of foreign reserve in the 1980’s it was felt that a depreciation of the naira would relieve pressures on the balance of payments. Consequently, the naira was devalued;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 elasticity of demand.
1.2 Statement of research problem
According to Anoka and Takon (2014),Nigeria, like other developing countries has been experiencing some form of balance of payment disequilibrium, evidenced by persistent inflation, high rate of unemployment, increase in imports and a fall in export commodities also a general decline in the gross domestic product (GDP).As postulated by Aricca (1999), flexible exchange rates fluctuations have negative effects on trade and investment. Exchange rate fluctuations affect balance of payment positively or negatively. However, if the value of a home currency appreciates, it will encourage higher import than export thereby causing unfavorable balance of payment while when exchange rate depreciates; it will discourage import and encourage export causing favorable balance of payment.
Macroeconomic problems and financial management in Nigeria is complicated by balance of payments instability attributable mostly to its oil dominated export earnings. Over the last three decades, there has been growing trend in the fluctuations of the Nigeria’s balance of payments. Balance of payments crisis distorts the working of the entire system because it creates disequilibrium between the supply and demand for money (Nwani, 2003)
Most of the shortcomings in the Nigerian macroeconomic performance are as a result of neo-colonization, backward technology, reduction in exports, demographic and social conditions, ethnic and tribal divisions, inadequate infrastructure, lack of financial prudence and dependence on primary commodities for export (Collier and Gunnings, 1999; Iyoha, 2000; Sach and Warner, 1995).
This study intends to analyses the effect of exchange rate and other macro economic variables on the balances of payment position in Nigeria.
1.3 Research question
What is the effect of exchange rate fluctuationson Nigerian balance of payment?
1.4 Objective of the study
The main objective of this research work is to investigate and determine the impact of exchange rate variation on Nigerian’s internal balance position and to also determine the relationship between the exchange rate and the Nigerian balance of payment. More specifically the study intends to achieve the following.
To determine the effect of exchange rate fluctuations on the Nigerian BOP
1.5 Statement of hypothesis
The hypothesis tested in this research includes:
H0: There is no significant relationship between exchange rate andNigeria’s balance of payments(BOP).
1.6 Scope of the study
This study is limited to the analysis of exchange rate, and its effect on the Nigeria’s balance of payments, with reference to the Nigeria economy. Data will be extracted from the Central Bank Statistical bulletin, international monetary fund, the internet and other necessary sources. This study will be estimated over the period of 35year (1981-2015)
1.7 Significance of the study
The significant of this study is that the result would help policy makers to adopt exchange rate policies that would not be detrimental to the balance of the payment position, which is one of the macroeconomic goals. It lies in the fact that if the cause of the unstable exchange rate of the naira is identified and corrected, the economy will rapidly grow and develop into an advanced one. This implies that, if the unstable exchange rate of naira is proved to be affecting balance of payment, attempts will be made to stabilize it.
This study will also assist future researchers who intend to indulge in this same topic or other related ones like Academicians, students and lecturers will find the information provided in this work useful.
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