ABSTRACT
This work sets out to examine the relationship between balance of payment and
exchange rate. The work is divided into five chapters; chapter 1 gives a general
introduction to the subject matter, chapter two gives the general review of literature
in the subject matter, chapter 3 gives or states the methodology and specifies the
model used for testing. Chapter four runs the required test and provides the result
as well as the interpretation and chapter five concludes the findings and
recommends policy for the government based on the findings in the test.The
ordinary least square regression (ols) method is used to test for R-squared test
(explanatory power of the variables), T-test for the reliability, F-test for the overall
significance of the exponentials and D.W test which is the econometric criterion
for testing for presence of auto regressive scheme. The result shows a negative
relationship between balance of payment and trade openness, also there exists a
positive relationship between exchange rate and foreign direct investment. Since
trade openness has a negative impact on the balance of payment it is recommended
that the government should not consider it a policy for economic development.
TABLE OF CONTENT
Title page ————————————————————- ——- i
Certification ——————————————————— ——- ii
Dedication ——————————————— ————– ——- iii
Declaration ———————————————————– ——- iv
Acknowledgement ————————————————– ——– v
Abstract ————————————————————- ——– vi
Table of content ———————————————————— vii
CHAPTER ONE
INTRODUCTION
1.1 Background of Study ——————————————— 1
1.2 Statement of research problem ————————————— 2
1.3 Objective of the study ——————————————— 3
1.4 Research Hypothesis ———————————————— 4
1.5 Scope of study ———————————————– ——– 4
1.6 Significance of study —————————————- ——- 4
CHAPTER TWO
REVIEW OF LITERATURE AND THEORETICAL FRAME WORK
2.1 Introduction————————————————————- 7
2.2 Theoretical Concept in exchange rate———————— ——— 7
2.3 Literature Review ———————————————- ——— 8
2.3.1 Exchange system and monetary standards in Nigeria————— 10
2.3.2 Types of Exchange rate————————————— ——– 23
2.3.3 Factors affecting rate of exchange ————————– ——- 26
2.3.4 Instruments of foreign payment ——————————- ——- 31
2.3.5 Foreign Exchange market————————————- ——- 31
2.3.6 Theories of Rate of Exchange——————————– ——- 33
2.3.7 Exchange rate policy in Nigeria—————————— ——- 36
2.4 Summary of Literature review——————————– ——– 38
2.5 Theoretical Framework ————————————– ——– 39
2.5.1 Balance of payment or modern theory———————– ——— 39
2.5.2 Features of Balance of payment——————————- ——– 41
2.5.3 Distinguishing between balance of payment and balance of trade– 43
2.5.4 Components of balance of payment——————————— 45
2.5.5 Disequilibrium in balance of payment —————————— 46
2.5.6 Methods of correcting or adjusting disequilibrium—————- 53
2.5.7 The effect of exchange rate devaluation on the balance of payment– 55
CHAPTER THREE
METHODOLOGY AND MODEL SPECIFICATION
3.0 Methodology———————————————————- 58
3.1 Model specification————————————————- 58
3.2 Estimation techniques and method of data analysis—————- 59
3.2.1 Statistical test———————————————————- 59
3.2.2 Economic A priori test———————————————– 61
3.2.3 Econometric Test—————————————————— 61
3.3 Source of Data required and data required———————— 62
CHAPTER FOUR
4.1 Presentation of Analysis———————————————- 64
4.1.1 Presentation of Result———————————————— 64
4.1.2 Interpretation of Result———————————————- 64
4.2 Evaluation Based of Statistical test———————————- 65
4.2.1 Coefficient of Determinant—————————————– 65
4.2.2 The T-test————————————————————– 65
4.2.3 The F test————————————————————– 66
4.3 Economics criterion————————————————– 66
4.4 Econometric test—————————————————— 67
CHAPTER FIVE
5.1 Summary of Findings———————————————— 69
5.2 Conclusion————————————————————- 69
5.3 Recommendation—————————————————– 70
Bibliography ——————————————————— 72
Appendix ————————————————————- 74
CHAPTER ONE
GENERAL INTRODUCTION
1.1 BACK GROUND OF STUDY
Right from time immemorial, a country’s exchange rate and balance of
payment is usually regarded as the sum of indices by which a nation’s strength can
be measured especially its economic strength. Paul (1996) defines balance of
payments as an accounting record to all monetary transactions between a country
and the rest of the world.
These transactions include payments for the country’s exports and imports of
goods, services and financial capital, as well as financial transfer. It summarizes
the international transaction for a specific period usually one year and is prepared
in single currency for the country concerned. Nzotta (2004) defines foreign
exchange as the value of foreign nation’s currency in terms of the home nation
currency. In finance, the exchange rates (as also known as the foreign exchange
rate or forex rate) between two currencies specify how much one currency is worth
in terms of the other.
Devaluation is tall in a fixed exchange rate, which reduces the value of a
currency in terms of other currencies. So what we are trying to do in this study is to
determine how the reduction value of a currency with respect to the currency of
another country affect the record of all monetary transactions between a country
and another, whether visible or invisible in a period of time. This is very important
because no nation can exist on its own no matter how independent or self-sufficient
it can be, it is important to have a relationship with other nations which can be
characterized by goods and services going one way and foreign exchange going
the other way. When accessing the nation involved, a record of gains and losses
may have been kept. As such a nation’s foreign exchange and balance of payments
can help slowdown, accelerate or decelerate walking growth progress and
development. This will also have a positive or negative effect on the citizens since
it deals mainly with economic relations.
Our nation Nigeria is currently facing serious problems regarding its foreign
exchange rating (which is very low in comparison to other countries) and it’s
Balance of payment which is clearly in disequilibrium and in a deficit. As a result
of this the government is retrogressing and the citizens clearly suffering.
It is in a bid to discover why this is so and how this can be solved that this
study as pertinent.
1.2 STATEMENT OF THE RESEARCH PROBLEM
Foreign exchange and balance of payment are the key factors of a nation’s
life. They are also factors to look into when comparing a country’s relationship
with other nations. These factors directly or indirectly affect a host of other factors
which are of severe importance in any nation. Consequently these factors can be
seen as essential to the growth and development of the nation.
Currently these two factors can be said to have crippled the Nigeria
economy and made life uncomfortable and unbearable for it citizens. These factors
have brought the country to a level where growth and development appear to be an
illusion.
Currently the nation’s exchange rate has fallen so low due to unfavorable
nature of the competing power of the nation’s currency with foreign currencies of
the world. Our economy has been trying to resolve the problem of external and
internal balance, which has manifested in disequilibrium in our balance of payment
and causing us a balance of payment deficit.
Much controversy had also been degenerated by the devaluation of our Naira
(the national currency). Relevant literature and opinion on this issue are of the
view that exchange rate policy plays an important role in maintenance of internal
and external balance, on the other hands, other writers argued that devaluation is
not the best policy for the less developed country because of many diverse results.
1.3 RESEACH QUESTION
This work is guided by the following research questions:
1. How does exchange rate affect the Nigerian Balance of payment?
2. How can the Nigerian Balance of payment position be improved?
1.4 OBJECTIVES OF THE STUDY
The general objective of this study is to examine the effect of exchange rate
on the balance of payment of a nation with special reference to Nigeria. The
specific objectives are to:
1. Evaluate the impact exchange rate on the Nigeria balance of payment.
2. Recommend ways of improving Nigerian Balance of payment positions.
1.5 RESEARCH HYPOTHESIS
Hypothesis will be tested in other to allow success of this work. The hypothesis
includes;
1. There is no significant relationship between exchange rate and balance of
payment (BOP) in Nigeria.
1.6 SCOPE OF STUDY
This study is limited to exchange rate and its effect on balance of payment
with reference to the Nigeria economy. It covers a period of 40 years i.e from 1970
to 2010.
1.7 SIGNIFICANCE OF STUDY
The exchange rate and balance of payments of any nation are the heart and
foundation of any governments’ development. These are very controversial factors
that are not doing well in Nigeria. Naturally, since our economy is importdependent and as such dependent on other nations, this affects us greatly especially
since foreign involvement and foreign exchange is involved in every sector of the
economy. It is the significance of this study therefore; to make known the
relationship between exchange rate and balance of payments, policy implications
and recommendations which will be of immense help to policy makers and balance
of payments, and government especially as regard to the transaction of the
exchange rate and balance of payment in Nigeria. It is also of importance to
students and lecturers and the entire public who is interested in the subject matter
and its utilization in whichever way.
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