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Macroeconomic Variables And The Balance Of Payment Position In Nigeria

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ABSTRACT

This study examined the effect of the selected macroeconomic variables on balance of payment in Nigeria. Three research objectives were formulated for the study. This study made use of the ex-post facto design and used secondary data collected from National Bureau of Statistics and the Central Bank of Nigeria. Monthly data was used in the computations. The study covered the period of  22years (1995-2017), OLS technique via multiple linear regression was used to model the relationship between the independent variables, and a dependent variable was used by fitting a linear equation to observed data. The Data analysis was done using SPSS data analysis tool and the presentations made using tables and figures. The model specification employed a multiple linear model BOP = f(FER, MOS, GEX). The findings established that there was a direct relationship between macroeconomic variables and balance of payments position in Nigeria. The findings also show that there is positive relationship between Foreign Exchange Rate (FER) and Balance of Payments (BOP) position in Nigeria and an insignificant relationship between government expenditure (GEX) and Balance of Payments (BOP) in Nigeria. The study recommends amongst others that Nigerian economy needs to be diversified to enhance exchange rate stability which will create a favorable balance of payments in Nigeria.

 

 

CHAPTER ONE

INTRODUCTION

1.1     Background of the Study

Macroeconomic variables as those that are pertinent to a whole economy either at the national or regional level and affect a large population rather than a few selected individuals. Macroeconomic variables are indicators that guide investors on the best way to strike a balance between their trading partners (Odili, 2007). The balance of payment on the other hand is a country’s state of affairs in international trade (Beatrice, 2001). A relationship therefore exists between macroeconomic variables and balance of payment since there cannot be international trade is a country’s currency is not priced in another country so as to allow trade across borders.

Consequently, nations in the pursuit of macroeconomic goals of healthy external balances as reflected in their balance of payment (BOP) positions find it impressive to enunciate on exchange rate pricing (Oladipupo & Onotainyohuro,  2011). The objectives of macroeconomic policies were tailored towards the achievement of the overall macro-economic goal of internal and external balance in the medium and long term. External balance refers to the level of economic activity consistent with the satisfactory control of inflation, while external balance means balance of payments equilibrium or sustainable account deficit  financed in a lasting basis by expected capital inflow (Ogbonna,2011).

Before, the oil boom of the early 1970s, Nigeria was predominantly an agrarian country being sustained the agricultural sector. Nigeria was less dependent on importation of finished goods since domestically produced substitutes were available at a  reasonable price. The real exchange rate of the naira to a dollar was 0.52798 (CBN, 2005), and the naira experienced favorable balance of payment.

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Following the fluctuation of the naira in 1986, a policy induced by the structural adjustment programme (SAP), the subject of exchange rate fluctuations has become a  typical issues in Nigeria. This is because the goal of every economy is to have a stable rate of exchange with its trading partners. In Nigeria this goal was not realized in spite of the fact that the country embarked on programmes capable of promoting export and stabilizing the rate of exchange. The failure to realize this goal subjected the Nigerian balance of payment position to the challenge of a constant fluctuation exchange rate.

The foreign exchange is derived from the observed macro-economic objectives to be attained and the likely trend of growth in the balance of payment positions, although these acknowledge objectives of foreign exchange policy remains the attainment of a favorable balance of payment positions as well as the achievement of a realistic exchange rate on the Nigerian economy.

The foreign exchange market in Nigeria is very wide on the  demand side and very narrow on the supply side. The market is extremely demand driven and is  characterized by the non-adherence to laws, rules and regulations guiding the market by participants in the market. Due to this reason, it encounters the problems of exchange rates misalignment, prevalence of arbitrage between the official and unofficial rates, increasing interest and inflation rates, exchange rate mismanagement and reduction the nations’ foreign exchange reserves (Odusola, 2006). These alterations have negatively affected the exchange rate of the country’s currency in relation to other currencies of the world as the balance of payment position in Nigeria (Aniekan, 2013).

Following the end of the oil boom period, when the Nigerian economy benefited from a steady balance of payments surplus, her balance of payments has  been fluctuating between positions of surplus and deficit (Ogbonna, 2011). The balance of payment problems has become federal government of Nigeria macro-economic objective. Since the 1980s, the nation’s balance of payment position has been under constant pressure and this has been part of the major macro-economic problem the nation has been dealing with. According to Gbosi (2002), these reasons are as a result of fluctuations in prices of crude oil, poor performance of the non-oil export, high taste for foreign goods and services, continuous fall in the country’s foreign exchange and ineffective manufacturing sector.

Exchange rate fluctuations influence balance of payments through their effects in aggregate supply and demand. In general, when a currency depreciates, it will result in higher import prices, if the country is an international price taker, while lower import prices result to depreciation.

Where there are fluctuations in foreign exchange rates, various economic activities are usually affected such as the purchasing power, balance of payment, prices of goods and services, export earnings, government revenue, external reserve, among others.

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Foreign exchange rate is a key determinant of the balance of payments position in any country. If it is judiciously utilized, it can serve as nominal anchor for price stability. This prevailing instability in exchange rates and balance of payment positions in various economic variables will be of paramount importance in this study.

1.2     Statement of the Problem

The foreign exchange and balance of payment are some of the key factors of a nations’ life. They are factors that look into comparing a country’s relationship with other nations.

The exchange rate of the naira was relatively stable between 1973 and 1979 during the oil boom period. This was also the situation prior to 1990 when agricultural products accounted for more than 70% of the nation’s gross domestic product Ewa, 2011). However, because of the development in the petroleum sector, in 1970s, the share of agriculture total export declined significantly while that of oil increased. Nevertheless, from 1981, the world oil market started to deteriorate and with this, economic crises emerged in Nigeria because of the country’s dependence in oil sales for her export earnings. Consequently, the naira was devalued and the irony of this policy instrument is that Nigeria’s foreign trade structure did not satisfy the conditions for a successful balance of payment position. It was felt that a depreciation of naira would relieve pressure on the balance of payment.

The country’s foreign structure is characterized by export of crude petroleum and agricultural product, whose prices are determined in the market with low imports and exports price elasticity in demand.

Currently, the nations’ foreign exchange rate has fallen and has been fluctuating. This so far has been due to the unfavorable nature of the competing powers of the nation’s currency to other currencies of the world. This has manifested in the disequillibrum in her balance of payment while causing a balance of payment deficit.

The major problem however, which this study is designed to solve is whether foreign exchange rate fluctuations has any significant impact (effect) on Nigeria’s balance of payment position.

1.3     Objectives of the Study

The major objective of the study is to examine the effect of macroeconomic variables on the Balance of Payments position in Nigeria.

Specific objectives include to;

  1. Investigate the effect of foreign exchange rate (FER) on the balance of payments (BOP) position in Nigeria.
  2. Examine the effect of money supply (MOS) in the balance of payments (BOP) in Nigeria
  • Examine the effect of Government expenditure (GEX) on the balance of payments (BOP) positions in Nigeria.

1.4     Research Questions

In line with the objectives of this study, this research project is guided by the following research questions;

  1. What is the effect of macroeconomic variables on the balance of payments position in Nigeria?
  2. How has balance of trade affected the balance of payments position in Nigeria?
  • To what extent does money supply affect the balance of payment position in Nigeria?
  1. What is the effect of government expenditure on the balance of payments position in Nigeria?
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1.5               Research Hypothesis

Ho1: Macroeconomic variables have no significant effect on balance of payments position in Nigeria.

Ho2: There is no significant relationship between supply and balance of payments position in Nigeria.

Ho3: There is no significant relationship between expenditure and balance of payments position in Nigeria.

1.6     Scope of the Study

This study is limited to the analysis of macroeconomic variables and their effects on the Nigeria’s balance of payments position with reference to the Nigerian economy. Variables examined include; foreign exchange rate (FER), Money supply (MOS) and Government expenditure (GEX), explanatory variables. On the other hand, the study uses balance of payment (BOP) as the dependent variable. This study covers the period of 1995-2017.

1.7     Significance of the Study

The significance of this study cannot be overemphasized as it will make known the wide relationship that exist between foreign exchange rate and balance of payments positions in every sector of the economy.

The study will bring to limelight, its implication on policies and make proper recommendations which will be of immense help to the banking sector.

Students will find the information provided in this work very useful. It will serve as an  enrichment or addition to the knowledge base of their studies.

To policy makers, the study will serve as a  guide towards policy initiations of the various mechanisms on the exchange rate fluctuations and balance of payment. Also, to make recommendations that will be of immense help to policy makers.

To government, the study will make known the relationship between foreign exchange rate and balance of payment, especially as regards to the various transactions involved in the exchange rate and balance of payments position in Nigeria.

Importantly, the Central Bank of Nigeria will find this study helpful.. it will be useful in identifying the strengths and weaknesses of each  foreign exchange system and hence, adopt policies that will suit the economy best. In addition, this study will assist future researchers who intend to indulge in the  same topic or related issues.

1.8     Definition of Terms

Foreign Exchange: This is the exchange of one currency for another or the conversion of one currency into another currency.

Balance of Payment: This is the record of all economic transactions between the residents of the country and the rest of the world in a  particular period of time.

Government Expenditure: This refers to the funds and resources allocated by the government to social goods and services such as health care, education and infrastructure.

Money Supply: This is the total value of money (naira) available in an economy at a point of time.


Pages:  71

Category: Project

Format:  Word & PDF        

Chapters: 1-5                                 

Material contains Table of Content, Abstract and References.

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