Asymmetric Impact of Exchange Rate on Balance of Payment in Nigeria

Abstract

Maintaining a stable exchange rate is key to attaining macroeconomic objectives for any emerging economy like Nigeria. Thus, an unstable exchange rate may lead to economic instability and uncertainty in the investment climate of an economy like Nigeria. Over time Nigeria has been faced with unstable exchange rates. persistent economic challenges and an unfavourable balance of payments. In the pursuit of these macroeconomic goals, Nigeria has implemented various exchange rate regimes, including fixed, floating, and a unified exchange rate system. However, these goals remain a challenge to the economy. It is against this backdrop that this study employed the Nonlinear Autoregressive Distributed Lag estimation technique to analyze the asymmetric impact of exchange rate fluctuations on Nigeria’s balance of payments. Additionally, it considers the impact of control variables such as real interest rates, gross fixed capital formation, trade openness, trade policies, financial deepening, natural resources, and trade balance. Findings from this study revealed that the exchange rate has an asymmetric impact on the balance of payments in Nigeria. Other control variables were statistically insignificant but contributed positively to the balance of payment in Nigeria. Therefore, the research suggested that to improve the balance of payments of the country, Nigeria’s monetary authorities; the Central Bank of Nigeria (CBN), should implement exchange rate policies that will promote domestic investment and encourage export activities. Interest rate policies that would encourage domestic investments are necessary. This can be achieved through reducing the monetary policy rate which is a driver of banks’ interest rate. This will further encourage loanable funds for investment, hence a favourable balance of payment in Nigeria. Furthermore, the Federal Government through the Ministry of Petroleum and Natural Resources should leverage international oil prices to enhance export activities and strengthen the balance of payments.