THE EFFECT OF EXCHANGE RATE ON BALANCE OF PAYMENT IN NIGERIA

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Author

Presented To

Department of Economics

Abstract

This project examines the effect of exchange rate on balance of payment in Nigeria. The broad objective of the study is to ascertain the extent to which exchange rate determines the balance of payment and also to determine the relationship between national income and balance of payment. The problem of foreign exchange inadequacy, dependence on the oil sector for exchange earning, continuous depreciation of the naira exchange rate coupled with the inability to determine precisely the level of exchange rate of the naira that would ensure the internal and external balance simultaneously. The secondary source of data collection was used as data was collected from CBN publications and the Federal Office of Statistics. The ordinary least square regression was used to analyze the data and the findings revealed that the national income has a positive correlation with balance of payment and that the relative price of agricultural products has a positive correlation with balance of payment. It was concluded that the disparity in the size of oil export and non oil export in terms of relative comparism, the unfavourable domestic and international economic development has constrained the achievement of balance and sustained economic growth that could foster balance of payment viability. It was recommended amongst others that there should be increase in non oil exports commodities.

INTRODUCTION

1.1      Background to the 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. Balance of payments is an accounting record to all monetary transactions between a country and the rest of the world.

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 Problem

Prior to the adoption of structural adjustment programme (SAP) IN 1986, Nigeria had no well spelt out trade policies. the practice was the formulation of trade policies, meant to protect the local industries, thus the policies consist of  qualitative import control administered through import licensing system relatively high tariffs and imposition of quantity restrictions on imports by way of quotas and the outright ban on certain goods and services and hence exchange of currencies between Nigeria and other countries as a result, the exchange rate of the naira has been greatly affected by this economic controls. Typical of these economic controls was the exchange control system based largely on the exchange control act of 1962, which was applied vigorously during the civil war and up to 1971, during which the Nigeria currency became increasingly unconvertible.

However the problem of foreign exchange inadequacy, dependence on the oil sector for exchange earning, continuous depreciation of the naira exchange rate coupled with the inability to determine precisely the level of exchange rate of the naira that would ensure the internal and external balance simultaneously. The existence of black market where the naira is exchange with other currencies illegally has also affected  the exchanged rate in the sense that the black market violate all policies and regulatory measures used by the government to control the exchange rate of the naira and as such the existence of these black market has to a Large extent distorted the effective measure of exchange of Nigeria currency (naira) with those of other currencies and as the records (data) of exchange does not reflect the actual exchange due to the existence of the black market has to a large extent distorted the effective measure of exchange of Nigeria currency (naira) with those of other currencies and as the record (data) of exchange does not reflect the actual exchange due to the existence of the black market.

1.3   Research Questions

This research work will be relevant to readers because it will treat or provide answers to the following questions:

i.      To what extent does exchange rate determine balance of payment?

ii.     What relationship does national income have with balance of payment?

iii.    What relationship does the relative price of agricultural products have with balance of payment?

1.4   Objectives of the Study

        The objectives of this study are listed below in the following:

i.      To ascertain the extent to which exchange rate determines the balance of payment.

ii.     To determine the relationship between national income and balance of payment.

iii.    To ascertain how relative prices of agricultural products affect balance of payment.

1.5   Statement of Hypothesis

Hypothesis One

Exchange rate does not significantly affect balance of payment.

Hypothesis Two

The national income has a negative correlation with balance of payment.

Hypothesis Three

The relative prices of agricultural products have a negative correlation with balance of payment.

1.6   Significance of the Study

Stakeholders: The stakeholders will generally benefit from this study since it will make known the relationship between exchange rate and balance of payment policy implications and recommendations which will be of immense help to policy makers and balance of payment,

Government: This study will also benefit the government especially as regard to the transaction of the exchange and balance of payment in Nigeria.

Researchers: It is also of importance to researchers, be it student or lecturers and the entire public who is interested in the subject matter and its utilization in whichever way.

1.7   Scope of the Study

Balance of payment deficit and unstable exchange rate are global phenomena and have not been smooth in their movements in Nigeria. This study examines the relationship between balance of payment and exchange rate using 2010 " 2015 as a reference period.

1.8   Limitations of the Study

The study is faced with some constraints which may likely affect the generalization of findings; the constraints include the following below:

·                    Geographical Coverage: Factor that may likely affect the work is the issue of investigating all accounting firms in the country. Due to the spread of accounting firms all over major cities in the country, the researcher could not be able to cover the whole areas.

·                    Problem of sourcing for material: The research was faced with problems of getting current materials, textbooks, journals, seminar papers in relation with this research topic. In the final analysis most interviewed and investigated could not give some vital information that would have acted as ingredients in the work.

·                    Only selected firms were used as case study hence if the result is generalized, it may not reflect the true position of other firms due to environmental difference.