On balance of payments and the volatility of exchange rate in Nigeria
Kenneth U Onye, Ukere Idongesit Justin, Ofem O Akpama
This paper investigates the effect of exchange rate volatility on balance of payments (BOPs) in Nigeria, using annual time series data from 1980 to 2018. The study employs the Autoregressive Distributed Lag (ARDL) co-integration testing technique and the ARDL error correction representation to assess the long-run and short-run dynamic relationship between nominal exchange rate volatility and Nigeria’s balance of payments. The regressors included in the ARDL model are: real interest rate, real GDP growth rate, terms of trade, and volatility of nominal effective exchange rate while balance of payments (BOPs) served as the dependent variable. The key results are as follows: (i) GDP growth rate, exchange rate volatility, terms of trade and real interest rate were found to be key determinants of Nigeria’s balance of payments position; (ii) volatility of nominal effective exchnage rate is found to exert a second order negative effect on Nigeria’s Balance of payments postion-suggesting that uncertainty in the Nigerian exchnage rate market has long memory; and (iii) although improvement in terms of trade is found to exert a postive nock-on effect on the balance of payments, the potential adverse consequence of a negative terms of trade does not quickly die away. Iin view of the potential negative effect of adverse terms-of-trade, a policy of economic diversification that is annexed with an incentive-based export programme is recommended as a core way of improving Nigeria’s balance of payments position.