EXCHANGE RATE FLUCTUATIONS AND NIGERIA’S BALANCE OF PAYMENTS

ABSTRACT

This research delves into the multifaceted impact of exchange rate fluctuations on the Balance of Payment (BOP) in Nigeria. The primary objective is to scrutinize the relationship between exchange rate movements and the country’s BOP over the period spanning from 1990 to 2020. Descriptive statistics serve as the primary methodology, offering a comprehensive analysis of the interrelations between exchange rate fluctuations and BOP dynamics using an Error Correction Model (ECM) as a robust analytical framework. The research unveils a range of critical findings. It illuminates a positive and statistically significant connection between past BOP values and the current BOP, thus affirming the existence of an error correction mechanism. Furthermore, a substantial and statistically significant negative relationship emerges between exchange rate fluctuations and BOP, implying that exchange rate volatility plays a pivotal role in shaping the stability of Nigeria’s BOP. The analysis also underscores the positive and statistically significant impact of the trade balance on BOP, suggesting that trade policies aimed at fostering exports and diminishing imports can bolster BOP. However, the study does not identify statistically significant relationships between BOP and foreign direct investment (FDI), inflation rate, and interest rates. These non-significant relationships underscore the need for further research and scrutiny in these dimensions. Based on the findings, several policy recommendations are put forth, including exchange rate stability, trade balance improvement, promoting FDI, controlling inflation, and prudent interest rate management. These findings provide a robust foundation for policymakers to craft well-informed decisions and effective policies, ensuring economic growth and stability in the face of these dynamic forces