Exchange Rate and Balance of Payments in Nigeria
Keywords:ARDL; Balance of Payments; Devaluation; Exchange Rate
Exchange rate policy is a fundamental economic policy that affects other macroeconomic variables and balance of payments. Nigeria is currently experiencing unstable balance of payments with exchange rate policy being one of the leading policies to solve this problem. In line with this, the study explored the policy effect and implication of exchange rate on balance of payments in Nigeria. Secondary data which covered the period of 1986 to 2018 were obtained from Central Bank of Nigeria Statistical Bulletin. Augmented Dickey – Fuller (ADF) and Bound Test were conducted to test for stationarity and long run relationship among exchange rate, money supply, trade openness, inflation and balance of payments. Pairwise casualty test was also conducted to ascertain the direction of causality between exchange rate and balance of payments. In line with the unit root result, Autoregressive Distributed Lag (ARDL) was employed for analysis. The ARDL result revealed that exchange rate and trade openness stimulate overall balance payments performance in Nigeria while the causality result showed independent relationship between exchange rate and balance of payments in Nigeria. The implication of these findings is that exchange rate stability is germane for enhancing balance of payments performance through the promotion of trade activities. Thus, it was recommended that exchange rate stability should be pursued vigorously because internal and external performance of the nation hovers around exchange rate stability.
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