Exchange Rate Reform Policies and Trade Balances in Nigeria

Abstract

Exchange rate arrangement in Nigeria has undergone significant changes over the past four decades; it shifted from a fixed exchange regime in the 1960s to a pegged arrangement between 1970s and mid 1980s. Nigeria finally adopted exchange rate reform policy under Structural Adjustment Programme (SAP) which applied floating regime since 1986.

Before this reform, the fixed exchange regime in operation was believed to have induced an overvaluation of the naira; this engendered significant distortions in the economy and gave vent to massive importation of finished goods with adverse consequences for domestic production, balance of payments position and the nation’s external reserves level. The SAP which encompasses exchange rate liberalization has since mainly began to depreciate the value of naira. For instance, the rate which was $1.8 to the N1 sometimes before SAP was downgraded by fiat from N2 to N60 to the Dollar in one swoop after SAP. This had gone as much as N150 to the Dollar in 2009 and N160 in 2012. This has in no small measure contributed to the instability of other macroeconomic variables such as inflation, interest rate, money supply etc. This effect of exchange on various macro economic variables in the recent past has been one of the major discussions in macroeconomic debate. A most prominent issue in economic literature is the degree of exchange rate flexibility that should be permitted by any country.