Balance of Payments Adjustment and Productivity Growth in Nigeria: A Small Macroeconometric Analysis

Abstract

This study using aggregate data from 1970 to 2012, investigates balance of payments adjustment and productivity growth in Nigeria by specifying a small macro- econometric model to analyze the various channels through which the economy’s Bop position could be enhanced. The empirical model identifies real exchange rate, government expenditure/revenue, real trade, and foreign direct investment as the various channels that drive productivity growth of the Nigerian economy. The simultaneous equation model was analyzed using the ECM – error correction model approach rather than the conventional Ordinary Least Square (OLS) to overcome simultaneity bias while the unit roots and co-integration tests was carried out using ADF and Johansen/Juselius techniques. The stability test of the parameters of the model was also carried out using the cumulative sum of squares residuals (CUSUM). The result shows that the elasticity of oil revenue, real trade balance, and credit to the private sector, foreign direct investment, government expenditure and degree of openness have positive and significant effect on real GDP while the CUSUM test falls within the 5% critical bound showing the stability of   the simultaneous equation models and thus validating the model. Among the findings of the study is that there is a relationship between changes in real exchange rate misalignment and changes in actual exchange rate. This, therefore suggest that the monetary authorities can use exchange rate alignments to develop the external sector of the Nigerian economy, via the non-oil export thereby solving the BoP disequilibrium Problem.

(JEL Codes): F4,F32, C5

Keywords: Balance of Payments mechanism, adjustment policies, macro- econometric model, ECM, CUSUM Test.