EXCHANGE RATE AND NIGERIA BALANCE OF PAYMENT (1982 – 2014).
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EXCHANGE RATE AND NIGERIA BALANCE OF PAYMENT (1982 – 2014).
Chapter one
INTRODUCTION
1.1 Background of the Study
Any country with its own currency must choose which form of exchange rate system to keep. Exchange rate arrangements are usually grouped into three types: fixed or pegged arrangements, flexible arrangements, and in-between arrangements with “limited flexibility”.
Each type or alternative has distinct ramifications that influence the extent to which countries participate in foreign exchange markets. When a monetary authority decides to fix exchange rates against other currencies, it commits to intervening in the market by purchasing and selling its currency as needed to keep the exchange rate stable.
When, on the other hand, the monetary authority fully avoids engaging in the exchange rate market, it chooses to allow its exchange rates to float freely.
In practice, by manipulating the size and conditions under which they intervene in currency markets, Peter (1997) asserts that governments can attempt to manage their exchange rates with virtually any degree of flexibility they choose.
Exchange rate policies strive to develop a Real Exchange Rate (RER) that ensures internal and external balance in any economy. Internal balance is defined as the degree of economic activity that ensures appropriate inflation control and full resource utilisation.
External balance, on the other hand, is defined as a balance of payments equilibrium or a long-term current account deficit covered by expected capital inflows (Pondexter, 1981; Dernbourg, 1980).
Improvements in the economy’s international competitiveness affect real exchange rates. The implication is clear: any distortions in the real exchange rate will almost certainly cause distortions in both internal and external balances.
One of the primary purposes of macroeconomic policy is to promote rapid growth. According to Zuvekas (1979), economic growth is measured by the rise in output of products and services over time, while Akpan (2008) states that economic growth occurs when a country’s productive capacity increases.
The production of goods and services involves exports and imports, which include foreign exchange transactions, and exchange rates have been volatile, raising concerns about their impact on economic growth.
Given that Nigeria’s exchange rate policy has primarily oscillated between the fixed exchange rate system since the immediate post-independence era in 1960, and then from 1986, when a market-based exchange rate system was introduced as part of the structural Adjustment Programme (SAP), there has been some debate about the output of goods and services under the flexible exchange rate system and the fixed exchange rate system.
Since time immemorial, a country’s exchange rate and balance of payments have been viewed as a collection of metrics that can be used to assess a nation’s strength, particularly its economic strength. Paul (2012) defined the balance of payments as an accounting record of all monetary transactions between a country and the rest of the globe.
These transactions encompass payments for the country’s exports and imports of products, services, and financial capital, as well as financial transfers. It summarises foreign transactions during a specified time period, often one year, and is prepared in a single currency for the country concerned.
Nzotta (2014) defined foreign exchange as the value of a foreign country’s currency in relation to the home country’s currency. In finance, exchange rates (also known as foreign exchange rates or forex rates) between two currencies determine how much one currency is worth in relation to the other.
Devaluation is a decrease in the fixed exchange rate that reduces the value of a currency in terms of other currencies. So, the goal of this study is to assess how a currency’s loss in value relative to another country’s currency affects the record of all monetary transactions between countries, whether visible or invisible, over time.
This is highly vital since no nation can exist on its own, no matter how autonomous or self-sufficient it can be. It is important to establish a relationship with other nations that can
characterised by commodities and services moving one way and foreign exchange moving the other way. When entering the country, a record of gains and losses may have been kept.
As such, a country’s foreign exchange and balance of payments can contribute to stall, accelerate, or decelerate growth and development. This will also have an impact on citizens, both positively and negatively, because it primarily concerns economic interactions.
Nigeria is currently experiencing major challenges with its foreign exchange rating (which is quite poor in contrast to other countries) and its balance of payments, which is plainly in disequilibrium and deficit.
As a result, the government is regressing while the population visibly suffer. This work is important in determining why this is the case and how to address it.
1.2 Statement of the Problem
Foreign exchange and balance of payments are critical components of a nation’s life. They are also aspects to consider while assessing a country’s relationship with other countries.
These factors have an impact on a variety of other factors that are critical to any nation, either directly or indirectly. As a result, these factors can be considered critical to the nation’s growth and development.
Currently, these two causes are considered to have crippled the Nigerian economy and made life difficult for its residents. These causes have pushed the country to the point where progress and development appear to be a mirage.
Currently, the nation’s exchange rate has fallen so low due to the unfavourable nature of the competing power of the nation’s currency with international currencies throughout the world.
Our economy has been attempting to resolve the problem of external and internal balance, which has resulted in a balance of payment deficit. The depreciation of our Naira (the national currency) had also caused a great deal of debate.
The relevant research and opinion on this issue agree that exchange rate regulation is critical to maintaining internal and external balances. Other scholars, however, think that devaluation is not the optimal policy for developing countries due to the wide range of outcomes.
When Nigeria began to record massive balance of payments deficits and a very low level of foreign reserves in the 1980s, it was believed that a naira depreciation would alleviate balance-of-payments pressures.
As a result, the naira was devalued. The irony of this policy instrument is that our international trade structure does not meet the Marshall-Lerner requirement for a positive balance of payment adjustment (Umoru and Eboreime, 2013).
Nigeria’s foreign structure is defined by the export of crude petroleum, whose prices are predetermined in the global market. This is in addition to the low elasticity of demand for imports and exports. Based on this, the study looks at the relationship between the exchange rate and Nigeria’s balance of payments.
1.3 RESEARCH QUESTIONS
This study shall seek relevant answers to the following research questions:
1. Is there any substantial long run equilibrium relationship between exchange rate and Nigeria balance of payment?
2. To what extent has the exchange rate influenced Nigeria’s balance of payments?
3. Is there a significant causal relationship between the exchange rate and Nigeria’s balance of payments?
1.4 Objectives of the Study
The basic purpose of this study is to analyse the impact of exchange rate on the balance of payment of a nation with special reference to Nigeria. Specific aims are to:
1. Investigate the extent to which long run equilibrium relationship exists between exchange rate and Nigerian balance of payment.
2. Determine the extent to which exchange rate exert influence on Nigerian balance of payment.
3. Ascertain if exchange rate granger causes Nigeria balance of payment.
1.5 Hypothesis of the Study
This research will be led by the following hypotheses:
1. There is no significant long run equilibrium relationship between exchange rate and Nigerian balance of payment.
2. The exchange rate has no impact on Nigeria’s balance of payments.
3. There is no direct relationship between the exchange rate and Nigeria’s balance of payments.
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