Exchange Rate Dynamics and Balance of Payments Repositioning in Nigeria

Abstract

The study examines foreign exchange dynamics in the Nigerian economy in relation to balance of payments, using time series drawn from the publications of the Central bank of Nigeria (CBN), Debt Management Office (DMO) and National Bureau of Statistics (NBS). The regression method was adopted in data analysis, facilitated by software package for social sciences (SPSS). The statistical results justified the alternate hypotheses, thus affirming that the foreign exchange proxies specified in this study are significant predictors of variations in balance of payments. In explaining the variations in the current and capital accounts of balance of payments, the predictor coefficients are positive for exchange rate and external reserves but negative for external debt. This analytical manifest is traditional as a favorable exchange rate (positively) stimulates trade and capital flows. Also, an increase in external reserves (positively) boosts the confidence of foreign investors and this fundamentally mirrors the strength and depth of liquidity in the global economy. It is a critical factor of foreign investment interest in the economy. Furthermore, a nation’s external indebtedness apparently (negatively) conveys a profile of macroeconomic weakness and flakiness. It is, therefore, vitally imperative for more auspicious management systems to be institutionalized for the close monitoring stabilization of favorable profiles of exchange rate, external reserves and external debt. This will advance and sustain a more attractive, competitive and productive Nigerian economy.

Keywords: Foreign exchange, International investment, Nigerian economy