Terms of trade instability and balance of payments adjustment in Nigeria: A simultaneous equation modelling

Abstract

This paper employs simultaneous equation modeling to test the  hypothesis that impact of terms of trade instability has no significant  impact on Nigeria.s balance of payments position. Empirical evidence  reveals that BOP has negative relationship with terms of trade. This implies that for any 1percent instability (shock) in terms of trade, balance of  payment will be adversely affected by about 1.8 percent. Hence it becomes pertinent for policy makers to pursue policies that will stabilize terms of  trade. The study also invalidates the Marshal-learner condition. Hence,  caution should not be thrown to the wind in adopting the policy of  deliberately depreciating the naira especially because of the peculiarity of the country.s exports and imports. Indeed, evidence thus abound that it is not enough to increase exports rather the export basket should be  diversified. The negative association between inflation and BOP should be a source of worry to policy makers. It is therefore imperative for economy to address exchange control problems to the effect that the naira does not depreciate beneath a managed floor value.

Key Words: Terms of trade instability, Balance of payments adjustment, Nigeria