Analysis of Trade Effects of Parallel Exchange Rate in Nigeria

Abstract

Aims: The study examines the potency of parallel exchange rates in the movement of international trade in Nigeria. The monetary authorities have embarked on various exchange rate regimes basically because the supply of foreign exchange is not enough to meet the demand. Consequently, a parallel market for exchange rates exists and has become a strong and functional market in the country. But the reason for managing foreign exchange and by extension, introducing various exchange rate regimes was to correct the balance of trade disequilibrium. Yet the balance of trade deteriorates, particularly that of non-oil trade balance. Does the parallel exchange rate contribute to this or does it ameliorate it? Study Design: Descriptive, Correlation, and Regression analysis on time series data. Place and Duration of Study: Sample: Monthly data from January 2007 to December 2022 (2007:1-2022:12) were extracted from the online data repository of the Central Bank of Nigeria. Methodology: The autoregressive distributed lag technique was employed on monthly data between January 2007 and December 2022 (2007:1-2022:12). Results: The result indicates that the short-run dynamics of total exports (total imports) are negatively (positively) and significantly affected by parallel exchange rate. Generally, depreciation of the parallel exchange rate is detrimental to export particularly non-oil exports. Further, depreciation of parallel exchange rate encourages imports and highly persistent in influencing non-oil imports. The J-curve phenomenon breaks down for total balance of trade. However, the J-curve phenomenon cannot be confirmed in the case of oil trade balance because there is no information about the long run effect of parallel exchange rate on oil export due to the non-integration of the model. In the case of non-oil trade balance, the short-run outcome confirms the existence of the J-curve prediction. Conclusion: Following these results, it is recommended among others that government should activate a single market (window) for foreign exchange. Also, the authorities should ensure that importation of non-oil products such as exotic cars by government officials be stemmed.