Naira to Dollar Exchange Rate Fluctuations and Nigeria’s Balance of Payment

Abstract

The authors analyze how changes in the value of the naira affect the country’s overall trade surplus or deficit. The 2020 edition of the Central Bank of Nigeria Statistical Bulletin was consulted for data on the country’s balance of payments, exchange rate, trade openness, and inflation rates. Exchange rate, exchange rate fluctuation, trade openness, and inflation rate are the independent variables, and the balance of payments (BOPs) is the dependent variable. The model’s variables’ stationary was determined using the ADF unit root test method. The results of the tests show that after the first difference, the balance of payment and the inflation rate stabilized, while the actual exchange rate, exchange rate fluctuation, and the degree of trade openness all remained stable at their respective levels. The study’s dependent and independent variables” long-term relationship was estimated using an autoregressive distributed lag bounds test. There is a long run link between the study’s dependent and independent variables, as evidenced by the estimates’ F-statistics value of 4.85, which is larger than the lower and upper critical bounds of 3.23 and 4.35. Estimates also reveal that in the long run, the balance of payment in Nigeria is positively impacted by exchange rate fluctuations and the real exchange rate, while it is negatively impacted by inflation and trade openness. As a result, the study suggests that government should subsidize farmers who produce export goods in order to reduce the volatility of naira to dollar exchange rate. The national government should put aside more funds to increase the nation’s foreign reserve in order to reduce the volatility of the currency exchange rate. Rigid taxes on imported goods are one way to prevent heavy reliance on them.