Trade Liberalization and Real Exchange Rate Nexus in Nigeria

Abstract

Over the years, the perturbation of the RER has been grossly attributed to the liberalization of trade between Nigeria  and the rest of the World. Nigeria exports are mainly unprocessed products dominated by crude oil, while the country  imports finished products with very high foreign exchange. This has deprived the country of the supposed benefits that  come with the depreciation of a national currency like naira. The main objective has been to examine the nexus between  the RER and trade liberalization in Nigeria between 1996 to 2021. Cointegration and ECM framework were used. The unit root test by both the ADF and PP revealed that the variables are I(1). The Johansen cointegration test  suggests a long run equilibrium relationship among the variables. The parsimonious ECM results revealed that trade  liberalization has a positive and significant impact on the RER. This provides an indication that the incremental trade  liberalization policies has been a major factor that led to the depreciation of the RER. The low production base of the  Nigerian economy has been responsible for little benefits from trade liberalization. The TOT has positive and significant  impact on the RER. The GEX has a positive and significant impact on the RER. The statistical significance of the ECM  which has a negative sign indicates that about 13 percent of the errors are corrected at each period. To stabilize the RER,  exports of processed commodities to boost exports earnings is recommended amongst others.