TABLE OF CONTENTS
Title Page – – – – – – – – – i
Certification – – – – – – – – – ii
Dedication – – – – — – – – – iii
Acknowledgements – – – – – – – – iv
Table of Content – – – – – – – – vi
Abstract – – – – – – – – – – ix
CHAPTER ONE
- Background of the study – – – – – – – 1
- Statement of the Problem – – – – – – – 3
- Research Questions – – – – – – – – 4
- Objectives of the Study – – – – – – – 4
- Hypothesis of the Study – – – – – – – 5
- Significance of the Study – – – – – – – 5
- Scope of the Study – – – – – – – – 6
CHAPTER TWO: LITERATURE REVIEW
2.0 Introduction – – – – – – – – – 7
2.1 Conceptual Framework – – – – – – – 7
2.1.1 Exchange Rate Management in Nigeria – – – – 9
2.1.2 Balance of Payment in Nigeria – – – – – – 12
2.2 Theoretical Framework – – – – – – – 14
2.2.1Theories of Exchange Rate – – – – – – – 15
2.2.2 Theories of Balance of Payment – – – – – – 17
2.3 Empirical Literature – – – – – – – – 20
2.4 Limitation of Previous Studies – – – – – – 23
CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY
3.1 Theoretical Framework – – – – – – – 24
3.2 Methodology- – – – – – – – – – 24
3.3 Model Specification – – – – – – – – 24
3.4 Method of Evaluation – – – – – – – – 26
3.4.1 Preliminary Tests – – – – – – – – 26
3.4.2 Stationarity (Unit Root) Test – – – – – – 26
3.4.3 Co-integration Test – – – – – – – – 26
3.4.4 Error Correction Mechanism – – – – – – 27
3.4.5 Economic Test of Significance (A Priori Test) – – – 27
3.4.6 Statistical Test of Significance (First Order Test) – – – 28
3.4.7Test for Goodness of Fit – – – – – – – 28
3.4.8 t-Test of Significance – – – – – – – 28
3.4.9 f-Test of Significance – – – – – – – 29
3.4.10 Econometric Test of Significance (Second Order Test) – – 29
3.4.11 Autocorrelation Test: Autocorrelation Test – – – – 29
3.4.12 Normality test – – – – – – – – 30
3.4.13 Granger Causality Test – – – – – – – 30
3.5 Data Required and Sources – – – – – – – 31
3.6 Economic Package Used – – – – – – – 32
CHAPTER FOUR: PRESENTATION AND ANALYSES OF RESULT
4.1 The Empirical Results – – – – – – – 33
4.1.1 Unit Root Test Results – – – – – – – 33
4.1.2 Co-integration Test Result – – – – – – 34
4.1.3 Error Correction Mechanism Result – – – – – 35
4.2 Regression Result – – – – – – – – 36
4.3 Evaluation of Regression Results – – – – – – 37
4.3.1 Evaluation Based on Economic Criterion – – – – 37
4.3.2 Evaluation Based On Statistical Criterion – – – – 38
4.3.2.1 R2 –Result and Interpretation – – – – – – 38
4.3.2.2 t–Test Result and Interpretation – – – – – 38
4.3.2.3 Result of f–Test of Significance – – – – – 39
4.3.3 Evaluation Based on Econometric Criterion – – – – 39
4.3.3.1 Result and Interpretation of Autocorrelation Test     –  –       39
4.3.3.2 Result and Interpretation of Normality Test – – – – 40
4.3.3.3 Granger Causality Test: Result and Interpretation – – – 41
4.4 Evaluation of Research Hypotheses – – – – – 42
4.4.1 Hypotheses one – – – – – – – – – 42
4.4.2 Hypothesis two – – – – – – – – 42
4.4.3 Hypotheses three – – – – – – – – – 42
4.5 Implication of the Results – – – – – – – 42
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION
5.1 Summary of Findings- – – – – – – – 44
5.2 Conclusion – – – – – – – – – 44
5.3 Recommendations – – – – – – – – 44
References – – – – – – – – – – 46
Appendix I — – – – – – – – – – 49
Appendix II – – – – – – – – – – 51
Appendix III – – – – – – – – – 52
Appendix IV – – – – – – – – – 53
Appendix V – – – – – – – – – – 54
Appendix VI- – – – – – – – – – 55
Appendix VII – – – – – – – – – 56
Appendix VIII – – – – – – – – – 57
Appendix IX – – – – – – – – – 58
Appendix X – – – – – – – – – – 59
Appendix Xi – – – – – – – – – 60
ABSTRACT
The study investigates empirically the impact of Exchange Rate on Balance of Payment in Nigeria. The broad objective of this study is; to determine the impact of exchange rate on Balance of Payment in Nigeria within the periods of 1981 to 2015. Annual time series data on Exchange Rate, Trade Openness, Import, Export and Balance of Payment from the Central Bank of Nigeria covering the period 1981 – 2015 were utilized. A model was constructed to incorporate Balance of Payment as the dependent variable, and exchange rate, Import, Export and trade openness as the independent variables and tested using the Ordinary least Square (OLS) Methods. The Stationarity (Unit roots) status of the series was examined using the appropriate statistics. Some of the assumptions of the OLS models were also tested to avoid spurious regression. The granger causality test was also conducted to determine the directions of causality. However, the result of this study indicates that exchange rate and export has positive relationships with balance of payment in Nigeria; the result also indicated that import and trade openness has negative relationships with balance of payment in Nigeria. The study recommends that the government should as much as possible encourage the production of most of the imported goods in the country by the local industries as well as encourage import substitutions.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Exchange rate fluctuations have been of serious concern to the monetary authorities, policy makers and business tycoons of developing countries, Nigeria inclusive because of the relevance of exchange rate in international trade, investment and in determining the level of output growth of a country. The movement of goods and services across national frontiers in one direction involves the movement of foreign exchange in the opposite direction. This creates the needs for a rate of exchange between the currencies of two trading partners to settle indebtedness arising from trade involving them (Nzotta, 2004).Exchange rate is a price at which a currency is regulated in the market, which varies at one time or the other. 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. Paul (1996) defines balance of payments as an accounting record to all monetary transactions between a country and the rest of the world. These transactions include payments for the country’s exports and imports of goods, services and financial capital, as well as financial transfer. It summarizes the international transaction for a specific period usually one year and is prepared in single currency for the country concerned. 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.
Exchange rate is a key determinant of the balance of payments (BOP) position of any country. If it is judiciously utilized, it can serve as nominal anchor for price stability. Changes in exchange rate have direct effect on demand and supply of goods, investment, employment as well as distribution of income and wealth.
Exchange rate of the naira was relatively stable between 1973 and 1979 during the oil boom era and when agricultural products like cocoa, palm oil, groundnut, rubber etc accounted for more than 70% of the nation’s gross domestic products (GDP). During this period prior to 1986, Nigeria was on a fixed exchange rate determination system. At that time, naira was very strong in reference to dollar. The exchange rate was to one U.S dollar that is:#1 = $1. The increasing demand for foreign exchange allocation in consonance with the goal of internal balance made the fixed exchange rate determination system to be discarded in September, 26 1986 while the structural Adjustment programme (SAP) came in. One of the objectives of the various macro – economic policies adopted under the structural adjustment programme (SAP) in July, 1986 was to establish a realistic and sustainable exchange rate for the naira, this policy was recommended in 1986 by the International Monetary Fund (IMF) on exchange mechanism and was adopted in 1986 (Ewa, 2011:78).
The key element of structural adjustment programme (SAP) was the free market determination of the naira exchange rate through an auction system.
This was the beginning of the unstable exchange rate; the government had to establish the foreign exchange market (FEM) to stabilize the exchange rate depending on the state of balance of payments, the rate of inflation, Domestic liquidity and employment. Between 1986 and 2003, the federal Government experimented with different exchange rate policies without allowing any of them to make a remarkable impact in the economy before it was changed. This inconsistency in policies and lack of continuity in exchange rate policies aggregated unstable nature of the naira rate. (Gbosi, 1994:70).
In Nigeria, exchange rate has changed within the time frame from regulated to deregulated regimes. During the time of fixed exchange rate, the movement of exchange rate seemed to be stable but the economy were getting worse every day, the alarming deterioration of the economy and huge balance of payments deficits called for a change, hence the switch over to flexible exchange rate. The irony of this policy instrument is that our foreign trade structure did not satisfy the condition for a successful balance of payment policy. The country’s foreign structure is characterized by export of crude petroleum and agricultural produce whose prices are predetermined in the world market and low import and export price elasticities of demand. Hence the management of the floating exchange rate has not proved better as the naira deteriorates everyday and many macroeconomic variables are not stable (Anifowose, O.K.1994). .
Therefore, the effects of various macroeconomic shocks and Balance of payment position depends on the exchange rate policy adopted by the country, it is therefore of importance to investigate the effects of exchange rate on the balance of payment of Nigeria and also the factors that influence exchange rate in Nigeria.
1.2 Statement of Problem
Right from time immemorial, a country’s exchange rate and balance of payment is usually regarded as the sum of indices by which a nation’s strength can be measured especially its economic strength. They are also factors to look into when comparing a country’s relationship with other nations. These factors directly or indirectly affect a host of other factors
However, in recent times in Nigeria, these variables have experienced staggering difficulties. This cannot be argued considering the fact that Nigeria as a nation conduct their foreign transactions with the use of the united states dollar (USD) which is only gotten from the exports the country make to other nations.
Nigeria being a mono-product export country tends to export oil as it major exports after its discovery in 1970s while neglecting the agricultural sector which used to be its major exports. The price and quantity of the oil products been exported by Nigeria however is exogenously determined by the organization of petroleum exporting countries (OPEC) this means that the quantity been sold as well as the price are not determined by the Nigerian authorities. Moreover, the country is an import dependent country as they import 95% of the commodities consumed in the country. This implies that the forex generated from the export of oil cannot equate the forex spent on the importation of foreign commodities and this tends to move the exchange rate of the naira currency to that of other countries in a negative direction. Which directly affect the balance of payment of the country in negative forms.
Also, the country resorts to borrowing in order to finance their annual budget deficit and afterwards spends a greater percentage of the countries inflows in financing the loans incurred. This also affects the balance of payment of the country terribly.
