IMPACT OF EXCHANGE RATE FLUCTUATIONS ON NIGERIAN BALANCE PAYMENTS (1970-2012)
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.