ABSTRACT

The paper investigates exchange rate policy and the Nigerian balance of payment in Nigeria. The main objective of this study is to empirically examine the effect of exchange rate volatility on the balance of payment in Nigeria during the period under study. The study utilized aggregate annual data from 1980 to 2019. The data was analyzed with the co-integration/VECM method. The major findings are: the test for stationary using Augmented Dickey Fuller (ADF) showed that all the variables were not stationary in levels but were stationary in first difference. The Johansen-Juselius co-integration techniques were employed in testing for long run equilibrium relationship among the variables and the results indicated that co-integrating relationship was found among the variables. The coefficient of determination reveals  that about 84% systematic variation in the dependent variable that is the balance of payment (BOP) were explained by the six independent variables which are nominal exchange rate, money supply(broad money), oil price, real interest rate, consumer price index and budget deficit. Also, the vector error correction model (VECM) shows that about 8% of the discrepancy between the actual and the long run equilibrium value in the BOP is corrected or eliminated each year. Furthermore, the result revealed that exchange rate, money supply has a negative and significant effect on the BOP, oil price has a positive and significant effect on the BOP, interest rate has a positive and insignificant effect on BOP while consumer price index and budget deficit has both negative and insignificant effect on BOP based on the magnitude and the level of significance of the coefficient and their respective p-values. The paper concluded that, there is need to discourage over-dependence on foreign goods and the promotion of domestic production is very imperative. This can only be achieved if the Nigerian economy is diversified; entrepreneurial development is promoted in the country with continuous funding of institutions for research and development to bring about innovations and new technologies that will spur indigenous growth and development and by extension improve the BOP.