BALANCE OF TRADE, EXCHANGE RATE AND ECONOMIC GROWTH IN NIGERIA

Abstract

This study delved into the relationship between the balance of trade, exchange rates, and economic growth in Nigeria. Utilizing annual time series data spanning from 1981 to 2021 sourced from the Central Bank of Nigeria (CBN) statistical bulletin and the National Bureau of Statistics (NBS), the investigation employed a Heteroskedasticity Model. Within this framework, GARCH, an expanded version of ARCH, and the Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGACH) were applied. The findings revealed that both trade balance and exchange rates exhibited heightened sensitivity to adverse news, indicating that uncertainties surrounding exchange rates significantly contributed to fluctuations. Moreover, the ARCH effects initially observed in the balance of trade and exchange rates were completely mitigated by the considered heteroskedastic models. Furthermore, the study identified a negative and statistically significant impact of the balance of trade on economic growth. Similarly, exchange rates were found to exert an undesirable significant influence on economic growth in Nigeria. This suggests that unfavorable changes in the Nigerian naira tend to exacerbate its volatility. Notably, while the relationship between trade balance and economic growth was positive, it did not reach statistical significance. In conclusion, the study underscores the critical role of external demand in driving economic growth in Nigeria, particularly highlighting the stimulative effect of a strong depreciation of the domestic currency. As a recommendation, the government is urged to adopt export-driven policies aimed at bolstering trade balance, fostering export, particularly of primary products, to attract foreign exchange inflows and foreign investment, thereby spurring economic growth in Nigeria.