Impact of Real Effective Exchange Rates on Balance of Payments: Empirical Evidence from Nigeria

Abstract

This paper examined the impact of the real effective exchange rate variations on the overall balance of payments in Nigeria between 1986-2019. The autoregressive distributed lag (ARDL) bounds co-integration technique was used to analyse the data based on the outcome of the stationarity test. The bounds test indicated  a long-run relationship among the macroeconomic variables in the balance of payments function. Empirical evidences indicated that real exchange rate had insignificant negative effect on the balance of payments in the long-run, but exerted significant positive effect in the short-run with a lag. Private sector credit impacted negatively in the long-run, while real output significantly improved balance of payments both in the long-run and in the short-run with a lag. Lagged real interest rate and oil prices had significant positive short-run impacts, while the latter impacted negatively in the long-run. Overall, the result implied that real exchange rate depreciation may not be used to improve Nigeria’s balance of payments position. The study, therefore, recommended that the monetary authority should  adopt  proactive export promotion policies that will strengthen and stabilise the real exchange rate of the naira. It is also important to  ensure  productive utilization of the private sector credits, and diversify the country away from the oil sector in view of the current global dwindling oil prices.