Determinants of Exchange Rate Crisis in the Nigeria Economy

Abstract

The study examined the causes of exchange rate crises in Nigeria between 1986 and 2021. In particular, we investigate how the trade balance (LNBOP), oil price (COP), external debt (LNEXDS), and private sector credit (LNPSC) influence Nigeria’s exchange rate (EXR). The statistical bulletin of the Central Bank of Nigeria and the Nigeria Bureau of Statistics provided the study’s data. At the 5% level, descriptive statistics, the stationarity test, Johansen cointegration, VAR, and VAR Block Granger Causality were utilised. The variables were integrated at first difference for the stationarity test, yielding the Johansen cointegration test, which indicates a co-integrating relationship. LNEXDS and LNPSC are negative and significant in relation to EXR, whereas LNBOP and COP are negative but not significant. Only LNPSC and LNEXDS support REER for the VAR Block Granger Causality test, but all variables support EXR collectively. External debt and private sector credit are the primary determinants of the naira exchange crisis in Nigeria. The federal government of Nigeria should utilise less external debt since it weakens the country’s exchange rate position. In addition, the federal government of Nigeria should collaborate with producers to develop and integrate local content into their production processes in order to reduce the burden on EXR.