Testing for the Sustainability of Current Account Deficit in Nigeria

Abstract

This paper investigates the sustainability of current account deficit in Nigeria for the period, 1970Q1 to 2015Q4, using the Autoregressive Distributed Lag (ARDL) Bounds testing procedure.  Evidence from the Bounds testing cointegration approach revealed the existence of long-run relationship between Nigeria’s exports and imports. The sign and significance of the error correction estimate further reinforces the evidence of cointegration, thus confirming the first and necessary condition required for sustainability, and indicating that the trade imbalance is short-term. Results from the ARDL regression indicate that the Log of Export (LXP) is positive and statistically significant at one percent level. Also, the estimate of β (the coefficient of LXP) in the long run results is 0.92% which is closer to unity and indicating that a one per cent increase in exports is associated with a 0.92% increase in imports, resulting in sustainable current account position during the sample period. In other words, imports in Nigeria are fully covered by export earnings during the sample period.  It therefore follows that estimates of long run coefficients based on ARDL shows that Nigeria satisfies the sufficient condition for sustainability of her current account over the long run. It is therefore recommended that policies be put in place that would encourage the expansion of the country’s export base so that the growth momentum can be maintained.

Keywords: Sustainability, Current account deficit, Imports, Exports, ARDL