Statistical Analysis of Development in Nigerian Balance of Payment

Objectives of study

With due reference to the questions raised on the proceeding section, this researchers intends to collect, collate and analyze data on Nigerian balance of payment position for the period covering 1986 – 2015 all inclusive.
It is also the intention of this researcher to critically examine the statement with a view to determining what recent developments have taken place in Nigerians foreign trade and other transactions with the rest of the world.
In particular, this researcher will try to ascertain whether Nigeria has been paying her wages internationally.

Not only that, the question as to whether the various policy packages have been effective or not will be thoroughly investigated.

CHAPTER TWO

LITERATURE REVIEW

An overview of the Nigerian economy

The Nigerian economy is fundamentally rich, self-sufficient in energy, a semi-literate population and adequate level of wealth among less developed countries (LDCs), Anya (1995). But the country have suffered from considerable mismanagement leading to erratic economic growth, slow GDP growth rate, high inflation, high unemployment rate, balance of payments crisis and reduced economic activity. Other vulnerabilities are reliance on a single export commodity, a weak political structure, regional and religious tension.

Until the time of this study, the economy is a typical low-income developing country with an abundance of unskilled and underemployed labour and inadequate industrial capital stock. The economy was stagnant and its structure has a strong agrarian base, savings and investments are at low level and the growth rate of the economy is at an abysmal rate lower than the population growth rate. This macro-economic policy structure is as confusing and inimical as that of many African countries and non-oil exports was still negligible. The result is that development dynamics are conspicuously missing. In terms of per capital income, Nigeria is at the button of poverty league.

The monetary policy in the country is targeted, at least theoretically, at a set of macroeconomic objectives aimed at influencing the aggregate level performance of the economy. The broad first rank objectives included price stability, full employment, balance of payments equilibrium and growth in the real sector. A new economic scheme, the Structural Adjustment Programme (SAP) was introduced by the militancy government in July, 1986. The monetary and financial policy structure was reoriented with an objective to support high diversification of production base of the economy, commercialization and revitalization of state-owned enterprises. Arising from the deregulation of various economic variables, for example, interest rates, there was an increase in financing assets, that is time and savings deposit.

Contractionary monetary policies were followed whenever inflationary forces seemed to get out of hand, Afolabi (1999). Fiscal policies and budget deficits have a significant bearing on the aggregate demand, inflation level, composition of economic activity and the external economic balance, Agiobenebo and Onuchuku (2000). The lack of a credible fiscal policy can trigger capital flight, leading external balance to plunge into the red. The entire major external policy instrument like tariffs subsides and flexible exchange rates have important fiscal policy implications. Gbosi (1993) posits that budget deficits have been a recurrent fiscal feature of the economy arising directly or through off-budget activities. According to Akpakpan (1999), he asserted that the financial sector comprises of monetary institutions, specialized financial institutions and non-bank financial intermediaries. The Central bank of Nigeria, which is the apex regulator of the financial sector, was established in 1961, and has virtually not been independent. Financial repressions, direct controls and monetary policies have been sources of distortion to the banking system, Anyanwu (1993). The interest rate policies swept away the intermediation functions of rate of interest. They did not reflect the market-clearing rate. Monetary policies neglected the profitability of banks by minimizing the spread between lending and deposit rates. Commercial loans were not based on feasibility and credit worthiness of the project.

The government is preparing Nigeria’s Vision 2020 which focuses on diversification of the economy away from oil. Vision 2020 will articulate the government’s goal of placing Nigeria among the top 20 economies in the world. At present the country’s economic structure reflects an undiversified economy that is highly dependent on a capital – intensive oil sector, with a traditional agricultural sector accounting for the bulk of employment. Agriculture was the leading contributor to GDP in 2009, helped by a good harvest.

Overview Of exchange Rate Regimes in Nigeria

In Nigeria, foreign exchange management policies have traversed the extremes of fixed and flexible regimes with a view to achieve the following major objectives.

Preserve the value of the domestic currency, the naira, maintain a favourable external reserves position; and ensure price stability. The immediate post-independence era witnessed a regime of fixed exchange rate in Nigeria. Up till 1967, the naira was at parity with the British pound until when the latter was devalued by Britain. From 1967 to 1974, naira was fixed to the US dollar, and thereafter the naira was fixed using import weighted baskets of currencies of Nigeria‟s seven trading countries (US dollar, British pound, German Mark, French Franc). However, all the various exchange rate policies could not lead to the realization of the stated objectives. As a result, a flexible exchange rate policy was adopted in 1986, following the introduction of the structural Adjustment Programme (SAP).

Following the failure of previous macroeconomic policies to turn round the economy, Nigeria adopted SAP in September 1986. The major element of which was the pursuant of a realistic exchange rate. With the introduction of SAP, the second-tier Foreign Exchange Market (SFEM) was established. SFEM was expected to produce a market determined exchange rate that would remove the over-valuation of the naira which persisted in the pre-SAP era. Since 1986, various exchange rate policies, ranging from dual exchange to unified exchange rate system in 1987 were adopted.

In 1994, regulation of the „Forex‟ market was re-introduced with rate fixed at N22.00 per US dollar. However, because of inherent abuses and bureaucratic bottlenecks associated with regulation, the Autonomous Foreign exchange Market (AFEM) was introduced following the promulgation of Foreign exchange (Monitoring and Miscellaneous Provisions) Decree 17 of 1995 and the abolition of Exchange Control Act of 1962. Under AFEM, CBN was to intervene in the market at short notice.

The failure of AFEM led to the introduction of inter-bank Forex Market (IFEM), a pre-cursor to the Dutch Auction System (DAS) in October 25, 1999. IFEM was aimed at, among other things, deepening interbank Forex market as well as having a stable naira exchange rate. The IFEM therefore was intended to diversify the supply of foreign exchange in the economy by encouraging the funding of the inter–bank operations from privately-earned foreign exchange rate. Development in IFEM namely, persistent high demand for Forex, continued depreciation of the naira with the premium between official rate and those in parallel market widening from N7.0470 per US dollar in 1999 to N16.3808 per US dollar in 2002, and continued depletion of reserves position led to its abandonment and the re-introduction of DAS in July 22, 2002.

DAS, as a means of exchange rate management was not new in Nigeria as it was practiced in 1987 and 1990-91. It was re-introduced to address the failure of IFEM. Specifically, it was aimed at achieving the following objectives:

Determination of exchange rate of the naira.
Conserve external reserve position;
Reduce the premium between official rate and that of the parallel market and; 4)Ensure stability of the naira exchange rate.

CHAPTER THREE

RESEARCH METHODOLOGY

Model Data

This study seeks to establish the statistical analysis of development in Nigerian balance of payment using yearly time series data ranging from 1986 to 2015. The core variables are exchange rate and inflation whereas interest rate, domestic credit, FDI, money supply, RGDP and trade openness are included as control variables. Data for RGDP, domestic credit, money supply and balance of payment were obtained from the Central Bank of Nigeria (CBN) statistical bulletin (CBN, 2016) while data for other variables incorporated were drawn from World Bank (2016).

Research Methodology/Model

To capture the objective of this study (i.e. to ascertain the relationship between exchange rate, inflation and balance of payment in Nigeria), the mathematical relationship between the explained and explanatory variables is expressed as follows:

Where:

𝐵o𝑝 = ƒ(𝐸𝑥𝑟, 𝐼𝑛ƒ𝑟, 𝐼𝑛𝑡𝑟, 𝐷o𝑚𝐶𝑟e𝑑, 𝐹𝑑i, 𝑀₂, 𝑅𝑔𝑑𝑝, 𝑇o𝑝) 1

Bop is Balance of Payment Exr is Exchange Rate

Infr is Inflation Rate DomCred is Domestic Credit

Fdi is Foreign Direct Investment M₂ is Money Supply

Rgdp is a Real Gross Domestic Product (a proxy for real output)

Top is Trade Openness (measure as import plus export divided by RGDP) The econometric form of Equation 1 is specified as follows:

CHAPTER FOUR

Results and Interpretation

Stationarity Test

As a pre-condition for the avoidance of spurious regression, stationarity test was conducted for all the variables listed in the model. This test is expected to help determine whether or not the mean value as well as variance of these variables do not vary over time. The popular Augmented Dickey-Fuller (ADF) test was employed in this study. The null hypothesis is stated as follows:

𝐻₀: ð = 0 o𝑟 𝜌 = 1 (i.e. the variables are non-stationary)

CHAPTER FIVE

Summary of Findings, Conclusion and Recommendation

Summary of Findings

This study seeks to investigate the statistical analysis of development in Nigerian balance of payment between 1986 and 2015 incorporating exchange rate and inflation rate as core variables while interest rate, domestic credit, FDI, money supply, real output (using RGDP as a proxy) and trade openness are listed as control variables. In addition, this study also seeks to establish the possible ways of improving the Nigerian Balance of payment position

The researchers found that the core variables (exchange rate and inflation rate) were statistically significant and have an inverse relationship with the dependent variable (LgBop) of this study. Therefore, it suits to say that exchange rate and inflation rate are strong drivers of LgBop in Nigeria albeit negative drivers. These negative signs carried by the core variables are in agreement with theoretical expectations since exchange rate appreciation and rising inflation rate will drastically fall in export and overall output respectively and in turn balance of payment. Note that three of the control variables (domestic credit, money supply and real output) modelled were also found to be statistically significant; while domestic credit and real output were observed to be positively related to balance of payment, money supply was negatively associated to it.

Out of interest rate, FDI and trade openness (other control variables) that were observed to be statistically insignificant in the model; the coefficients of interest rate and FDI carried negative and positive signs respectively (in accordance with a priori expectation) while trade openness came out with negative sign contrary to theoretical expectation. Although this variable is not significant (considering the t-statistics and P-value), carrying a negative sign can be best explained to mean that the Nigerian economy is not reaping desirably from openness of her economy to foreign investors. Finally, since exchange rate, inflation rate, domestic credit, money supply and real output are drivers of LgBop, the researchers are optimist these variables can be manipulated and control to promote and expand productive activities in Nigeria so as to put the balance of payment in desirable position.

Conclusion

Following the failure of previous attempts by the Nigerian government to checkmate the rapidly growing inflation rate and unstable exchange rate as well as its associated socio-economic predicaments in the country; in this study, the researchers made an attempt to establish the relationship between exchange rate, inflation rate and balance of payment in Nigeria. Among what can be deduced from these findings are: that the current exchange rate policy is not desirable for expansion of productivity and boosting of exports; that the Nigerian inflation rate is too high and it is discouraging both domestic and foreign investors; that the Nigerian monetary policies are not yet in the right position since funds injected seem not to be used for investment and that there is need to make more economically affordable loans and credits available for potential local investors.

From the findings, it suffices to conclude that the Nigerian government should take urgent steps to attend to the issues raised so as to boost productivity and enhance or promote more exports of goods and services. Although the attention of the researcher focused principally on the behaviour of the afore-mentioned core variables of the study, the researcher cannot keep mum as to the surprise sign (negative) with which trade openness appeared in the model. The only feasible explanation that can be adduced to this rarely behaviour is that the Nigerian economy is not yet reaping any economic advantage of opening up her economy. As such efforts should be put in place to also address this problem so that the total output and overall performance of Nigerian economy can be bettered.

Recommendation

Sequel to the findings of this study, the following recommendations are made:

TheNigerian government should embark on policies capable of checking the rising rate of inflation in the
Policiescapable of directly controlling and proper management of supply/injection of funds into the economy should be All funds injected should be tailored towards expansion of output.
Thegovernment should also consider exchange rate depreciation policy since it is expected to assist in expanding output and boosting more exports of goods and services.
TheNigerian government as well as private sector should thrive harder to invest in education and skill acquisition This will improve the quality of labour which will in turn positively exert productivity.
TheNigerian government should also invest more in the area of infrastructural facilities as this will create the much needed enabling environment for various economic activities.

Finally, it is crystal clear that the Nigerian government still needs to spend more to ensure more credit facilities are made available at low interest for potential domestic investors

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