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PROJECT TOPIC: IMPACT OF EXCHANGE RATE FLUCTATIONS ON NIGRERIAN BALANCE PAYMENTS (1970-2012)

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ABSTRACT

 

Exchange rate refers to the price of one currency (the domestic currency) in terms of another (the foreign currency). Exchange rate plays a key role in international economic transactions because no nation can remain in autarky due to varying factor endowment. Movements in the exchange rate have ripple effects on other economic variables such as interest rate, inflation rate, unemployment, money supply, etc. Through its effects on the volume of imports and exports, exchange rate exerts a powerful influence on a country’s balance of payments position.The problem of the study arises in two forms. Based on the historical perspectives we noticed that Nigerian BOP has been cascading and it was attributed to exchange rate fluctuations and over dependence on oil export.This research is aimed at evaluating how exchange rate fluctuations affect the level of balance of payments in Nigeria for the period under study. Time series data was collated from central bank of Nigeria statistical bulletin for the periods under study and was analyzed using the Linear Regression with the application of Ordinary Least Squares (OLS) technique and the ARCH and GARCH model as a technique to evaluate variable fluctuations. The results showed that there is the presence of fluctuation in exchange rate series in Nigeria. The OLS result showed that exchange rate fluctuation had a negative and significant impact on balance of payments in Nigeria.There was negative and insignificant difference in the effect of exchange rate fluctuations in the fixed era and there was positive and insignificant difference in effect of exchange rate during flexible era on balance of payments in Nigeria. The result reveals that Inflation had a positive and insignificant impact on balance of payments and Interest rates had negative and insignificant impact on balance of payments in Nigeria. It is therefore the recommendation of this paper that the monetary authorities should employ every monetary tool to minimize the level of exchange rate fluctuations in the economy and the policy of exchange rate flexibility should be maintained but with government intervention guide.

CHAPTER ONE

 

2.0              INTRODUCTION

 

2.1              BACKGROUND OF THE STUDY

 

In an ordinary parlance, Exchange rate refers to the price of one currency (the domestic currency) in terms of another (the foreign currency). Exchange rate plays a key role in international economic transactions because no nation can remain in autarky due to varying factor endowment. Movements in the exchange rate have ripple effects on other economic variables such as interest rate, inflation rate, unemployment, money supply, etc. These facts underscore the importance of exchange rate to the economic well-being of every country that opens its doors to international trade in goods and services. The importance of exchange rate derives from the fact that it connects the price systems of two different countries making it possible for international trade to make direct comparison of traded goods. In other words, it links domestic prices with international prices. Through its effects on the volume of imports and exports, exchange rate exerts a powerful influence on a country’s balance of payments position. Consequently, nations in the pursuit of the macroeconomic goals of healthy external balances as reflected in their balance of payments (BOP) position, find it imperative to enunciate an exchange rate policy.

 

Nigeria has practiced both fixed and flexible exchange rate polices. From the period of 1967 through to 1970, Nigeria experienced a civil war. This adversely affected the fixed exchange rate regime which was in place at the time. The fixed exchange rate regime was accompanied by strict controls and regulations which ultimately resulted in the overvaluation of the exchange rate. This had negative implications for the economy as it encouraged the importation of finished goods which created more competition for the domestic


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