The Effect Of Exchange Rate Devaluation On The Nigerian Balance Of Payments
ABSTRACT
This work sets out to examine the relationship between balance of payment and exchange rate. The work is divided into five chapters; chapter 1 gives a general introduction to the subject matter, chapter two gives the general review of literature in the subject matter, chapter 3 gives or states the methodology and specifies the model used for testing. Chapter four runs the required test and provides the result as well as the interpretation and chapter five concludes the findings and recommends policy for the government based on the findings in the test.
The ordinary least square regression (ols) method is used to test for R-squared test (explanatory power of the variables), T-test for the reliability, F-test for the overall significance of the exponentials and D.W test which is the econometric criterion for testing for presence of auto regressive scheme.
From the result gotten, a 3013% change in balance of payment is caused by a unit change in exchange rate, a 120% change in balance of payment is caused by a unit change in foreign direct investment, and 865821% change in balance of payment is caused by a unit change in trade openness.
The result shows a negative relationship between balance of payment and the explanatory variables (exchange rate, foreign direct investment, and trade openness). Since exchange rate devaluation has a negative impact on the balance of payment it is recommended that the government should not consider it a policy for economic development.
CHAPTER ONE
GENERAL INTRODUCTION
1.1 BACK GROUND OF STUDY
Right from the immemorial that would be called a country’s exchange rate and balance of payment as usually regarded as the sum of indices by which a nation’s strength can be measured especially economic strength. Although the economic power of a nation is not a criterion for measuring the strength of the nation on its own, it is also seen that economic strength can clearly be seen as a measure of the rate of growth and development of a nation and the well being of its citizens. 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, service and financial capital, as well as financial transfer. It summarizes the international transaction for a specific period usually one year is prepared in single currency for the country concerned. Nzotta (2004) defines foreign exchange as the value of foreign nation’s currency interims of the home nation currency. In finance the exchange rates (as also known as the foreign exchange rate or forex rate) between two currencies specify how much one currency is worth in terms of the other.
Devaluation is a tall in a fixed exchange rate, which reduces the value of a currency in terms of other currencies. So what we are trying to do in this study is to determine how the reduction the value of a currency with respect to the currency of another country affect the record of all monetary transactions between a country and another, whether visible or invisible in a period of time. This is very important because no nation ca exist on its own no mater how independent on self-sufficient it must necessary have relation with other nations which can be characterized by goods and services going one way and foreign exchange going the other way access the boundary of the nation concerned and naturally a record of that was gained or what was lost will be kept by both. As such a nation’s foreign exchange and balance of payments can either help slowdown. Accelerate or decelerate walking growth progress and development this will also naturally have a positive or negative effect on the citizens since it deals mainly will economic relations which in one way or the other the citizens will benefits from.
Our nation Nigeria is currently facing serious problems regards its foreign exchange rating (which is very low in comparison to other countries) and its balance are payment which is clearly in disequilibrium and in a deficit. As a result of this the government is retrogressing and the citizens clearly sufficing.
It has also been discovered and it is clearly seen that as a result of these factors other factors are also yielding negative dividends and also affecting the nations and citizen adversely. It is in a bid to discover why this is so and how this can be solved that this study as pertinent.
1.2 STATEMENT OF THE RESEARCH PROBLEM
Foreign exchange and balance of payment are the key factor of a nations live. 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 which are of severe nation importance in any nation. Consequently these factors can be seen as essential to the growth and development of the nation.
Currently these two factors can be said to have crippled the Nigeria economy and made live uncomfortable and unbearable for it citizens. These factors have brought the country to a level were growth and development appear to be an illusion.
Currently the nation’s exchange rate has fallen so low due to unfavorable nature of the competing power of the nation’s currency with foreign currencies of the world. Our economy has been trying to resolve the problem of external and internal balance, which has manifested in disequilibrium in our balance of payment and causing us a balance of payment deficit.
Much controversy had also been degenerated by the devaluation of our Naira (the national currency). Relevant literature and opinion on this issue are of the view that exchange rate policy plays an important role in including maintenance of internal and external balance, on the other hands, other writers argued that devaluation is not the best policy for the less developed country because of many diverse results it is capable of including these arguments with the deteriorating nature of the economy have made the study of this nation imperative.
1.3 OBJECTIVES OF THE STUDY
The general objective of this study is to examine the effect of exchange rate devaluation on the balance of payment of a nation with special reference to Nigeria. The specific objective are
1. Give a through insight of exchange rate and its devaluation
2. Give a through insight of balance of payment.
3. Identify the effect of devaluation and other factors on the nation’s external account.
4. Evaluate the impact exchange rat variation has on the Nigeria balance of payment.
5. Identify all problems affecting the Nigeria balance of payment and its exchange rating.
6. suggest ways of resolving this problem
7. Proffer some policy prescriptions correct the in balance in the internal and external sectors of the Nigeria economy that will pave the way for the resumption of sustainable grown.
8. Give an insight into exchange rate and balance of payment and their effect on the nations economy, its and development and its citizens.
9. Give an insight into how the exchange rate and balance of payment of the nation affect its relations other nations.
10. To determine and explore any existing relationship between exchange rate and balance of payments.
1.4 RESEARCH HYPOTHESES
Hypotheseswill be tested in other to allow success of this work some of them include;
1. There is no significant relationship between exchange rate and balance of payment (Bop) in Nigeria.
2. There is no significant relationship between open economy(X-m) and balance of payments in Nigeria
3. There is no significant relationship between foreign direct investment (FDI) and balance payment (Bop) in Nigeria.
1.5 SCOPE OF STUDY
This study is limited to exchange rate and its devaluation effect on balance of payment with reference to the Nigeria economy. Since the subject matter is very wide, any attempt to go future than this will involve going into limitless research with a limitless scope.
Therefore it is necessary to limit our study to the exchange rate and its devaluation and its effect on the balance of payment of Nigeria economy.
1.6 SIGNIFICANCE OF STUDY
The exchange rate and balance of payments of any nation are the heart and foundation of any governments’ development. Currently these are very controversial factors that are not doing well on Nigeria. Naturally, since our economy is import dependent and as such dependent on other nations this affects us greatly especially since foreign involvement and foreign exchange is involved in every sector of the economy. It is the significance of this study therefore; to create awareness on the relationship between exchange rate, its devaluation and balance of payments, policy implications and recommendations which will be of immerse help of policy makers and balance of payments, and government especially as it regards the transaction of the exchange rate and balance of payment in Nigeria and other less developed countries. It is also of importance to students and lectures and the entire public who is interested in the subject matter and its utilization in which ever way.
1.7 ORGANIZATION OF STUDY
This study is organized in five chapters, chapter one, deals with the introduction consisting of background of the study statement of the problem, objectives of the study, significance of study, scope of study, research hypothesis, and the organization of study. Chapter two gives the theoretical frame work and literature review. Chapter three consist the methodology model specification, associated data source and the technique for analysis of data source. Chapter four contains the empirical results and analysis. Chapter five finally, concludes the study with the summary of the result, recommendations and fins conclusion.
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