Exchange rate and income distribution in Nigeria

Abstract

This work examined the correlation between exchange rate and income distribution in Nigeria between 1990 and 2021, applying Autoregressive Distributed Lag (ARDL) Bound testing technique. In specific terms, the objective of the study is to examine the impact of devaluation or depreciation of the naira on income inequality in Nigeria. The results from the empirical analysis show that devaluation or depreciation of the naira deteriorates income distribution and by extension amplifies income inequality. Evidence from the data analysis also indicates that, in the long-run, increases in per capita income reduced the spread and magnitude of income inequality. However, the short-run outcome is different, because the result shows that for exchange rate depreciation to exacerbate income inequality, it must persist in the long- run, while short-term devaluation or depreciation does not worsen income inequality. In addition, increases in domestic investments, educational attainment and trade openness (globalisation) reduce income inequality in the long run. The recommendation occasioned from the outcome of the work is that the Federal Government of Nigeria should be circumspect with devaluation or depreciation of the naira, because of the adverse impact such policies has on income distribution and the country’s Gini coefficient. In addition, the government should pursue sustainable economic growth policies because of the positive effects of such policies on income inequality.