ABSTRACT
The relationship between balance of
payment and exchange rate have been modeled by various researchers using single
equation models in which, either balance of payment or exchange rate was each
considered as dependent variable. In other words, the cause-and-effect
relationship between balance of payment and exchange rate was assumed to be
one-way or unidirectional. However, in many practical situations, such
unidirectional or one-way cause-and-effect relationship is not meaningful. This
is because economic theory has suggested that balance of payment could be
determined by exchange rate and exchange rate is, in turn determined by balance
of payment, thereby requiring the use of a simultaneous equation model. This thesis discussed the Balance of Payment
and Exchange rates in Nigeria so as to account for the two-way
cause-and-effect relationship between balance of payment and exchange rate in
Nigeria. The relevance of this lies in
the fact that it could help to monitor the Balance of Payments and Exchange
rates and throw early warning signal about any economic crisis. Monthly data on Nigeria exchange rate,
interest rate, inflation and balance of payment for the period January 2000 to
December, 2016 were derived from the 2018 CBN Statistical Bulletin. The data
were analyzed using indirect least squares estimation method of the
simultaneous equation model. Results of the analyses showed that (i) the data
satisfied the exogeineity and simultaneity assumptions of the specified model
(ii) relationships existed between exchange rate and BOP. As shown in
the result there was balance of payment deficit due to the negative impact of
exchange rate on it. To forestall this problem, we recommended that there
should be a reduction in government spending; higher interest rates and higher
taxes as these could all have the effect of dampening consumer demand reducing the
demand for imports. Furthermore, the government should make policies to raise
productivity measures to bring about more innovation and incentives to increase
investment in industries with export potential so as to boost exports
performance and compete more effectively with imports. Moreover, the government
may invest in education and health to boost human capital and increase
competitiveness in fast-growing and high value industries such as
bio-technology, engineering, finance and medicine. Meanwhile, we recommended
that Nigeria should begin to produce agro-products such as live-stock
production, rice, pulses, millets, and so on, that will have better quality
than those imported from other countries and ensure that these locally
manufactured goods are relatively cheaper than those imported. Once this is achieved, the balance of payment
deficit will gradually disappear. We also recommended currency devaluation
because making Nigeria’s currency less valuable will reduce its consumption,
shifting some demand to local manufacturers, whose price will not increase as a
result of currency devaluation. For instance, suppose one Naira equals one U.S.
dollar, and therefore a product cost N10
in Nigeria also cost $10 in the U.S., then Nigerians will prefer to buy from
local manufacturers.
UKO, U (2024). Simultaneous equation modeling of balance of payment and exchange rate in Nigeria. (A Case Study of Central Bank of Nigeria, Owerri):- Uko Onwukwe U. Repository.mouau.edu.ng: Retrieved Nov 10, 2024, from https://repository.mouau.edu.ng/work/view/simultaneous-equation-modeling-of-balance-of-payment-and-exchange-rate-in-nigeria-a-case-study-of-central-bank-of-nigeria-owerri-uko-onwukwe-u-7-2
UKO, UKO. "Simultaneous equation modeling of balance of payment and exchange rate in Nigeria. (A Case Study of Central Bank of Nigeria, Owerri):- Uko Onwukwe U" Repository.mouau.edu.ng. Repository.mouau.edu.ng, 17 Jul. 2024, https://repository.mouau.edu.ng/work/view/simultaneous-equation-modeling-of-balance-of-payment-and-exchange-rate-in-nigeria-a-case-study-of-central-bank-of-nigeria-owerri-uko-onwukwe-u-7-2. Accessed 10 Nov. 2024.
UKO, UKO. "Simultaneous equation modeling of balance of payment and exchange rate in Nigeria. (A Case Study of Central Bank of Nigeria, Owerri):- Uko Onwukwe U". Repository.mouau.edu.ng, Repository.mouau.edu.ng, 17 Jul. 2024. Web. 10 Nov. 2024. < https://repository.mouau.edu.ng/work/view/simultaneous-equation-modeling-of-balance-of-payment-and-exchange-rate-in-nigeria-a-case-study-of-central-bank-of-nigeria-owerri-uko-onwukwe-u-7-2 >.
UKO, UKO. "Simultaneous equation modeling of balance of payment and exchange rate in Nigeria. (A Case Study of Central Bank of Nigeria, Owerri):- Uko Onwukwe U" Repository.mouau.edu.ng (2024). Accessed 10 Nov. 2024. https://repository.mouau.edu.ng/work/view/simultaneous-equation-modeling-of-balance-of-payment-and-exchange-rate-in-nigeria-a-case-study-of-central-bank-of-nigeria-owerri-uko-onwukwe-u-7-2