The Impact of Exchange Rate, Variation on Balance of Payment
CHAPTER ONE
OBJECTIVE OF THE STUDY
The main objective of this research work is to investigate and determine the impact of exchange rate variation on Nigerian’s internal balance position and to also determine the relationship between the exchange rate and the Nigeria. More specifically the study intends to achieve the following.
- To determine the effect of foreign exchange rate changes on the BOP
- To determine the impact of exchanges rate on foreign reserves in Nigeria.
- To determine the impact of foreign reserves on economic growth in Nigeria.
CHAPTER TWO
REVIEWED OF RELATED LITETATURE
Certain studies have been carried out by economists on the impact of exchange rate devaluation and the performance of the external sector. Gafar (1980) using Jamaica as a case study tested for the effect of devaluation on the balance of payments adjustment. Using the elasticity approach based on the Marshall-Lerner’s condition for exchange rate stability, he tested if devaluation is an appropriate policy tool for balance of payments adjustment. He estimated the price and income elasticity for import and exports of Jamaica including tourism. It was found that Marshall-Learners condition was satisfied in two condition estimated; first when tourism was excluded from the model and the other when tourism was included. He therefore concluded that while devaluation is a useful policy device to correct balance of payment deficits, it could possibly produce contra dictionary effects of used in isolation of other monetary and fiscal measures. It is worthy of note that foreign exchange reserve is not inclusive in any of the two models estimated as it leads to high degree of correlation with the income variable. Ajakaiye (1985) also using the elasticity approach analyzed the impact of alternative combinations of import structures and rise short runs after analyzing different bounds of import structures under alternative sets of price elasticity of demand for exports and imports in Nigeria, he concluded that devaluation might not work if the elasticity are such that relevant import structure does not hold. Devaluation should be accompanied by a certain form of import restructuring. But in a case were actual import structure fails within the bounds where the sum of price elasticity of demand for exports and competitive imports plus the difference between the price elasticity of demand for non-competitive imports weighted by the share of non-competitive imports in the total, exceed one; the devaluation could work but structure of import must be monitored on a continuous basis to ensure that it does not get out of hand; especially if elasticity are unstable. In a situation where the actual import structure outside the range where both export and non-competitive imports are completely insensitive to changes in their prices; where both exports and competitive imports are insensitive to price changes; where price elasticity of demand for import is zero; where the competitive imports have zero price elasticity of demand then devaluation accompanied by trade liberalization policies should be pursued to ensure that the eventual structure of imports falls within the desirable range. Oluremi, (1985) in his paper titled “Devaluation and the Nigerian Economy: some observations” analyzed the likely effects of devaluation basing his model also on Marshall-Learner’s condition. He concluded that the current structure of Nigeria does not support devaluation of the naira. He argued that as a policy measure to correct trade deficit, devaluation is useful only when considered strictly on the merit of the purpose and as a last resort when all other measures have failed. Olutim et al (1986) adopted both theoretical and empirical approach to the issue of devaluation. On the theoretical grounds, they argued that be it from the perspective of relative prices (elasticity) approach, or the absorption approach, or even the monetary approach, neither offered a definitive guide as to when devaluation might be beneficial to a developing deficit country with internal adjustment problems
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
In this chapter, we described the research procedure for this study. A research methodology is a research process adopted or employed to systematically and scientifically present the results of a study to the research audience viz. a vis, the study beneficiaries.
RESEARCH DESIGN
Research designs are perceived to be an overall strategy adopted by the researcher whereby different components of the study are integrated in a logical manner to effectively address a research problem. In this study, the researcher employed the survey research design. This is due to the nature of the study whereby the opinion and views of people are sampled. According to Singleton & Straits, (2009), Survey research can use quantitative research strategies (e.g., using questionnaires with numerically rated items), qualitative research strategies (e.g., using open-ended questions), or both strategies (i.e., mixed methods). As it is often used to describe and explore human behaviour, surveys are therefore frequently used in social and psychological research.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
INTRODUCTION
This chapter presents the analysis of data derived through the questionnaire and key informant interview administered on the respondents in the study area. The analysis and interpretation were derived from the findings of the study. The data analysis depicts the simple frequency and percentage of the respondents as well as interpretation of the information gathered. A total of eighty (80) questionnaires were administered to respondents of which only seventy-seven (77) were returned and validated. This was due to irregular, incomplete and inappropriate responses to some questionnaire. For this study a total of 77 was validated for the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Introduction
It is important to ascertain that the objective of this study was to ascertain the Impact Of Exchange Rate, Variation On Balance Of Payment. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of the Impact Of Exchange Rate, Variation On Balance Of Payment
Summary
This study was on the Impact Of Exchange Rate, Variation On Balance Of Payment. Three objectives were raised which included: To determine the effect of foreign exchange rate changes on the BOP, to determine the impact of exchanges rate on foreign reserves in Nigeria and to determine the impact of foreign reserves on economic growth in Nigeria. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from CBN. Hypothesis was tested using Chi-Square statistical tool (SPSS).
Conclusion
Having seen that exchange rate is statistically insignificant but has a positive effect on balance of payments, we therefore accept the hypothesis that there is no significant relationship between exchange rate and balance of payments (BOP) in Nigeria.
Recommendation
Nigeria should have a restriction on openness because it affects the Bop negatively. They should not be too open to import especially to advanced countries. The restriction can be done by import tariffs, quotas, etc. One of the factors that attract Foreign Direct Investment is stable economy. If the economy is not stable, investors will be scared of investing. So the government should make sure that the economy is politically and socially stable. It creates a positive environment for investment to thrive and this improves balance of payment
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