Remittances, Exchange Rate and Exports in Nigeria: Investigating the Foreign Exchange Channel for Future Optimization

Abstract

The study investigated the nexus among diaspora remittance inflows, foreign exchange, exchange rate and exports in Nigeria. The objective of this study therefore, was to examine the pass-through effect of remittance inflows to exports via the exchange rate in Nigeria, focusing on the foreign exchange channel. The study utilised the Structural Vector Autoregressive (SVAR) model which uses the contemporaneous effects, impulse response and the forecast variance error decomposition to measure the pass-through effects among macroeconomic variables. Annual time series data on remittance inflows to Nigeria, the supply of foreign exchange, exchange rate and the monetary value of exports of goods and services in Nigeria from 1986 to 2020 were used for the investigation. Findings revealed that diaspora remittance inflows have the potential effect of increasing foreign exchange, which in turn appreciates the exchange rate. Also, the study revealed that the exchange rate appreciation potentially erodes the competitiveness of the exports-oriented sectors in Nigeria. The paper explored policy prescriptions that may offset the negative effects of large inflows of remittance in the country for future optimisation. The innovation of this study stems from the use of the SVAR to systematically examined the pass-through effects of the diaspora remittance inflows to exports via exchange rate in Nigeria. Its uniqueness and novelty is the focus on the foreign exchange channel for future optimisation of remittances in the country.