Impact of Exchange Rate on Balance of Payment in Nigeria

Abstract

This paper empirically investigates the impact of exchange rate on theNigeria External sector (the balance of payments position) using theOrdinary Least Square (OLS) method of estimation for data covering theperiod between 1970 and 2008. We found that exchange rate has asignificant impact on the balance of payments position. The exchange rate depreciation can actually lead to improved balance of payments position if fiscal discipline is imposed. We also found out that improper allocation and misuse of domestic credit, fiscal indiscipline, and lack of appropriate expenditure control policies due to centralization of power in government are some of the causes of persistent balance of payments deficits in Nigeria. We recommend that appropriate monitoring machineries be set up to ensure judicious use of credit and available foreign exchange. Exchange rate policies have to be used along with the fiscal and monetary instruments to get meaningful results. This implies that our balance of payments problems can be solved simultaneously from two angles, namely, boosting supply and managing demand. Export diversification and promotion, import substitution and frivolous import restriction cannot be over emphasized.