JORIND 13(2) December, 2015. ISSN 1596-8303. www.transcampus.org/journal; www.ajol.

info/journals/jorind

EXCHANGE RATE AND BALANCE OF PAYMENTS POSITION IN NIGERIA

Anthony Ilegbinosa Imoisi

College of Social & Management Sciences, McPherson University, Seriki Sotayo, P.M.B. 2094,
Abeokuta, Ogun State
E-mail: mcanthonyby@yahoo.co.uk +2348034525743
Abstract
The study examines exchange rate variations and balance of payments position in Nigeria under
regulated and deregulated periods. Over the years, attaining a realistic exchange rate and improving the
balance of payments position in Nigeria are among the macroeconomic objectives of the Federal
Government. The nation’s balance of payments position has been under constant pressure since the
1980s as a result of several factors such as fluctuations in the prices of crude oil, poor performance of
non-oil exports, high taste for foreign goods and services, etc. The main objective of this study is to
analyse policies initiated by the Federal Government of Nigeria in attaining a realistic exchange rate and
improving the balance of payments position. To achieve this objective, the econometric techniques of
ordinary least squares, co-integration and error correction mechanism were used to analyze the sourced
data. The results showed that exchange rate had more impact on the balance of payments position during
the deregulated period than the regulated period in Nigeria. Based on the results, the study recommends
that to improve the balance of payments position in the country, governments should increase their
capital expenditure; exports should be stimulated and diversified in the non-oil sector such as agriculture
and manufacturing sector; a contractionary monetary policy should be implemented to discourage
importation of luxurious goods and the Naira should be devalued to make exports cheaper in the
international market.

Keywords: Exchange rate, balance of payments, devaluation, regulated and deregulated periods

Introduction world as well as the balance of payments position

A nation’s policy on foreign exchange is derived
from the observed macroeconomic objectives to be
attained and the likely trend of growth in the
economy. Although the acknowledged objectives
of foreign exchange policy remains the attainment
of a favourable balance of payments position as
well as the achievement of a realistic exchange
rate; on the other hand, monetary policy
concentrates on ensuring price stability whereas
fiscal policy highlights a non-inflationary tax base
that would generate sufficient revenue for the
government and ensure fiscal discipline.
The foreign exchange market in Nigeria is very
wide on the demand side and very narrow on the
supply side. The market is extremely demand
driven and is characterized by the non-adherence
to laws, rules and regulations guiding the market
by participants in the market. Due to this, it
encounters the problem of exchange rates
misalignment, prevalence of arbitrage between the
official and unofficial rates, increasing interest and
inflation rates, exchange rate mismanagement and
reduction in the nation’s foreign exchange reserves
(Odusola, 2006). These alterations have negatively
affected the exchange rate of the country’s
currency in relation to other currencies of the
of the Nigerian economy (Aniekan, 2013).
Following the end of the oil boom period when the
Nigerian economy benefited from a steady balance
of payments surplus, her balance of payments has
been fluctuating between positions of surplus and
deficit. Nigeria has recorded well over fifteen
deficits in her balance of payments account. These
deficits were recorded in 1962, 1963, 1964, 1965,
1966, 1976, 1977, 1981, 1982, 1983, 1986, 1988,
1992, 1994, 1995, 1996, 1998, 1999, 2002, and
2003 (CBN 2010; 2011). The balance of payments
problem has become a binding constraint in the
realization of the federal government of Nigeria
macroeconomic objectives. Since the 80s, the
nation’s balance of payments position has been
under constant pressure and this has been part of
the major macroeconomic problem the nation has
been dealing with.So many reasons have being
suggested for this excessive pressure on the
balance of payments position in the economy.
According to Gbosi (2002), these reasons are as a
result of fluctuations in the prices of crude oil, poor
performance of the non-oil export, high taste for
foreign goods and services, continuous fall in the
country’s foreign exchange and ineffective
manufacturing sector.
JORIND 13(2) December, 2015. ISSN 1596-8303. www.transcampus.org/journal; www.ajol.info/journals/jorind
Theoretical literature
In an open economy, the national income
accounting framework shows income (Y) as the
sum of consumption (C), investment (I),
Government Expenditure (G) and Exports less
Imports (X - M).
Y = C + I + G +(X-M)
(1)
Where C + I + G are often referred to as absorption
and are represented as domestic absorption. At this
point, it is denoted as A, while X - M is identified
as balance of trade. Therefore, equation (1) is
restated as follows
Y = A + (X - M)
(2)
Y – A = (X - M)
(3)
Equation (3) implies that each time domestic
absorption A is greater than the domestic output
(Y), imports will be greater than exports.
It is either A > Y or M > X
Consequently, whenever there is an imbalance in a
nation’s internal and external sectors, two types of
polices are set up. The first is to increase the total
production level until it is equal to total absorption.
The first policy is attained by means of changing
the structure of relative prices such that the prices
of imports become more expensive while the
prices of the domestic goods become less
expensive. This alteration in the structure of
relative prices has the effect of reducing imports
while it increases the demand for home goods used
in domestic production. This is usually called the
expenditure - switching policies (Jhigan, 2006).
Conversely, to make sure there is a cut in
absorption, two things ought to be done; first, is to
increase the relative price of imports to that of
domestic goods as well as ensuring a contraction in
the monetary and fiscal policies. This will
guarantee a fall in demand generally. Thus, under a
regime of fixed exchange rate, the change in the
make-up of the relative prices is attained due to
devaluation of nominal exchange rate. Therefore, if
the government wants to protect the par value, she
cuts down the level of the nation’s external reserve
to pay for the trade-off. The cutting down of the
external reserve reduces the domestic monetary
base and consequently brings about a fall in the
money supply and hence, reduces the total
demand.
On the other hand, under the flexible exchange
rate, the exchange automatically happens by means
of exchange rate depreciation. This is because the
demand for imports rises given the stock of foreign
exchange reserves, the price of foreign exchange
increases, hence the exchange rate depreciates.
Devaluation of the exchange rate will succeed if
and only if the addition of export and import
elasticity of demand is greater than unity,
Marshall-Lerner condition (Speller, 2006).
Thus, under a flexible exchange rate the following
outcomes are realized. Where the increase in
absorption is as a result of increase in supply of
foreign exchange, it will result in the fall of the
price of foreign exchange so that the nominal
exchange rate depreciates automatically.
According to Imoisi (2012), the depreciation in
exchange rate will alter the framework of the
relative prices in favour of domestic goods and
services but against the fall in import and rise in
exports; that is, the terms of the trade worsen and
the gain from trade reduces.
Nevertheless the increase for domestic goods and
services raises the gross domestic product and
hence domestic income. As income rises, demand
for money also rises therefore, increasing the rate
of interest. The increase in the rate of interest
reduces domestic investment expenditure and
creates an initial outflow of capital, which leads to
an appreciation of the domestic currency and
consequently corrects the decline in the terms of
trade that would have risen from the initial
exchange rate depreciation (Obadan, 2006).
Therefore, under the regime of flexible exchange
rates, equilibrium in the balance of payments is
restored through the exchange rate, the demand for
money and the interest rate. While under the
regime of fixed exchange rate, the federal
government is compelled to rely on the par value
of the exchange rate and therefore, pay for the
deficits by reducing the external reserves. This
leads to a decrease in the monetary base of the
economy and consequently, a reduction in the
money supply. As the money supply reduces, the
interest rate increases which forces down both the
rate of investment and expenditure on
consumption. As a result of this, the level of
absorption and imports will fall.
Empirical literature review
Over the years, several researches have been
carried out on the management of exchange rate on
balance of payments position. These researches
can be split into two separate philosophies:
JORIND 13(2) December, 2015. ISSN 1596-8303. www.transcampus.org/journal; www.ajol.info/journals/jorind
a. The researches that favour exchange rate
overvaluation on Balance of Payments position;
and
b. The researches that favour exchange rate
devaluation on Balance of Payments position.
Researches that uphold overvaluation of exchange
rate on balance of payments position include:
Agene (1991), Chowdhury (1999), Beatrice
(2001), Dubas (2009), etc. For instance, Agene
(1991) findings back the overvaluation of the rate
of exchange in improving economic growth. In
Papua Guinea, Chowdhury (1999) found out that
overvaluation of the country’s rate of exchange
enhances her balance of payments position. Also,
Beatrice (2001) supported an overvaluation of the
rate of exchange as a way of realizing a favourable
balance of payments position in Zambia. In
addition, Dubas (2009) results showed that
overvaluation of the rate of exchange will enhance
the current account of the balance of payments
position without major freedom in imports.
Researches that supported devaluation of the rate
of exchange as a universal remedy to a favourable
balance of payments position include: Anifowose
(1994), Cooper (1978), Dufrenot and Yehoue
(2005), Khan and Lizonda (1987), Onoh (1982),
Patel & Srivastava (1997), etc. For instance,
Anifowose’s (1994) findings encouraged the
devaluation of the rate of exchange of the Naira as
an important solution to the deficits in Nigeria’s
balance of payments position. Also, Onoh (1982)
empirical findings maintain that devaluation of the
exchange rate of the Naira is a suitable tool for
fixing disequilibrium in Nigeria’s balance of
payments position and promoting the activities of
the export sector of the economy. Patel &
Srivastava (1997) were of the opinion that
devaluation of the rate of exchange of the Indian
currency (rupee) is an important factor that
determines favourable balance of payments
position in India. Furthermore, Khan and Lizonda
(1987) discovered that less developed nations with
deficits in their balance of payments position ought
to devaluate their currencies to bring about
changes in their balance of paments position.
Dufrenot and Yehoue (2005) in their research
discovered that devaluation of exchange rate have
an important impact on the balance of payments
position because it improves the external reserves
of the countries carrying out the devaluation of
their currencies. In addition, Cooper (1978)
discovered that devaluation of a country’s currency
increases exports and reduces imports, which
enhances the balance of payments position of the
country.
Method of study
This section is concerned with the method by
which this study is carried out. To this end the
research design, sources of data, method of data
collection and model specification were discussed.
Research design
The research adopted a quasi experimental design.
The reason is that it analyses the impact of two or
more independent variables simultaneously on the
dependent variable and strengthens the validity of
this study. The research is an empirical analysis on
the impact of exchange rate variations on balance
of payments position in Nigeria, using annual time
series from secondary sources for the period 1960
– 2013. The research carried out a comparative
analysis between two policy periods (the period of
fixed exchange rate regime and the period of
flexible exchange rate regime). In order to do this,
it employed the Ordinary Least Square (OLS, the
Johansen’s Co-integration test and the Error
Correction Model (ECM) in estimating the
relationship between the dependent variable
(Balance of payments) and the independent
variables (exchange rate, balance of trade, money
supply and government expenditure). Also, the
study employed the Chow test in testing for the
stability of the coefficients to know the point of
structural break; hence, it tells us if the two time
periods regression are different or not.
Model specification
The fundamental relationships between the
dependent variable and independent variables are
specified as follows:
Balance of payments function
BOP = f (ER, BOT, M1, GEX)
(4)
Where: BOP = Balance of Payments
ER = Exchange Rate
BOT = Balance of Trade
M1 = Money Supply
GEX = Government Expenditure
The functional relationship between the dependent
variable (BOP) and independent variables (ER,
BOT, M1, and GEX) is specified in linear and log
linear form. The choice of a version is based on the
goodness of fit of the regression result, precision of
the multiple regression coefficients and a tolerable
level of multicollinearity. Thus, the linear and log
JORIND 13(2) December, 2015. ISSN 1596-8303. www.transcampus.org/journal; www.ajol.info/journals/jorind

linear specification of our model in equation 3.1

above is stated as follows:
Linear Specification of the Model
BOP = a0 + a1ER + a2BOT + a3M1 + a4GEX + U
(5)
Log Linear Specification of the Model
Log BOP = Loga0 + a1LogER + a2LogBOT +
a3LogM1 + a4LogGEX + U
(6)
Where BOP, ER, BOT, M1 and GEX are as
defined for equations 3.1 above, a0 = the constant
term, U = Random/Error Term, a1, a2, a3, and a4 are
parameter estimates. The apriori expectation of
these estimates is as follows: a1 < 0, a2 < 0, a3 > 0,
a4 < 0.
Analysis of regression results
This study analyzed data collected on two models
(one during regulation and one during
deregulation). From our analysis, the log linear
regression result of the Balance of Payments model
for the regulated period (1960 -1985) and the
deregulated period (1986 – 2013) gave a better
result than the linear regression result based on the
goodness of fit, precision of the multiple regression
coefficients, degree of autocorrelation and a
tolerable level of multicollinearity. Thus, it was
adopted for our analysis. The log linear results are
shown below:

Table 1: Log Linear Regression Result of the BOP Model for the Regulated Period (1960 – 1985)
Variable Coefficient T-statistic Probability
C 13.33515 20.66314 0.0000
Log (ER) -0.017529 -0.017509 0.9862
Log (BOT) -0.089790 -0.616610 0.5441
Log (M1) -0.196215 -0.641898 0.5279
Log (GEX) 0.266336 0.808061 0.4281
R2 = 0.036; Adjusted R2 = -0.015; F-Statistics = 0.199; D.W = 1.164

Source: Computed Result – E-views 7.1

Table 2: Log Linear Regression Result of the BOP Model for the Deregulated Period (1986 – 2013)
Variable Coefficient T-statistic Probability
C -0.107665 -0.012113 0.9904
Log (ER) -2.934250 -1.302689 0.0009
Log (BOT) 1.922867 0.848837 0.0311
Log (M1) -0.971586 -0.460707 0.6495
Log (GEX) 0.987755 0.369855 0.7150
R2 = 0.252; Adjusted R2 = 0.235; F-Statistics = 2.992; D.W = 1.231

Source: Computed Result – E-views 7.1

From the results above, the R2 for the regulated
period was 0.036, while that of the deregulated
period was 0.252. The F statistic for the regulated
period was 0.199, while that of the deregulated
period was 2.992. Also from the results, all the
variables under consideration for both the
regulated and deregulated periods are insignificant
at 5% level. This may be informed by the
characteristics of time series data which are usually
non-stationary and spurious. Thus, there is the
need for a stationary test to eliminate the unit-root
problems associated with time series data.

Table 3: Unit Root Test Results of the BOP Model for the Regulated Period (1960 – 1985)
Variables ADF Test 1% Critical 5% Critical 10% Critical Order of
Statistic level level level Integration
D(Log(BOP),2) -4.864209 -4.063465 -3.500495 -3.853617 1
D(Log(ER),2) -4.427279 -2.743584 -2.790692 -1.146578 1
D(Log(BOT),2) -3.842559 -3.009734 -3.257330 -3.259826 1
D(Log(M1),2) -4.853908 -3.831465 -3.300495 -3.046617 1
D(Log(GEX),2) -4.446514 -4.852584 -3.952692 -3.051578 1
Source: Computed Result - E-views 7.1
JORIND 13(2) December, 2015. ISSN 1596-8303. www.transcampus.org/journal; www.ajol.info/journals/jorind

The unit root test reported in table 3 above shows
that all the variables in the Balance of Payments
model for the regulated period could not attain
stationarity at ordinary level. However, due to
further differencing they attained stability at first
difference. The long-run relationships among the
variables were examined after the stationarity test
using Johansen (1997) co-integration framework.
The results of the Johansen co-integration test are
reported as follows:

Table 4: Johansen Co-integration Test Result of the BOP model for the Regulated Period (1960 – 1985)
Series D(Log(BOP),2) D(Log(ER),2) D(Log(BOT),2) D(Log(M1),2) D(Log(GEX),2) Lags interval (in
first differences): 1 to 1
Hypothesized Eigenvalue Max-Eigen 0.05 Critical Prob**
No of CE(s) Statistic Value
None* 0.922744 55.05143 33.87687 0.0000
At most 1* 0.762653 39.74214 27.58434 0.0019
At most 2* 0.565619 27.66801 21.13162 0.0372
Source: Computed Result - E-views 7.1
The result above indicates that there exist three (3) (ECM). Table 5 below shows the result of ECM
co-integrating equations which satisfy the model for the Balance of Payments position in
condition for fitting in the error correction model Nigeria during the regulated period (1960 -1985)

Table 5: The Error Correction Model of the BOP model for the Regulated Period (1960-1985)
Variable Coefficient T-statistic Probability
C 0.089768 0.496573 0.6272
D(LOG(BOP(-1))) 0.220510 0.592576 0.5629
D(LOG(BOP(-2))) -0.571094 -1.839538 0.0717
D(LOG(ER)) 4.400580 11.29158 0.0004
D(LOG(ER(-1))) 0.563040 16.78325 0.0001
D(LOG(BOT(-2))) -0.426585 -17.17511 0.0001
D(LOG(M1(-1))) 0.757559 9.962614 0.3521
D(LOG(M1(-2))) 1.590614 -4.826000 0.0892
D(LOG(GEX(-2))) -0.616686 0.830328 0.0732
ECM(-1) -0.638883 -3.114648 0.0395
R2 = 0.69; Adjusted R2 = 0.51; F – statistic = 38.38; Durbin Watson = 2.38
Source: Computed Result - E-views 7.1

The long run result of the balance of payments
model for the regulated period (1960 – 1985) in
table 5 shows that Exchange Rate deviated from
our apriori expectation with a positive sign.
However it is statistically significant at 5% level.
This implies that a fall in the Exchange Rate of the
Naira in relation to the U.S dollars (Appreciation)
significantly reduced Balance of Payments deficits
during the period of this study. It should be noted
that this direct relationship between Exchange Rate
and Balance of Payments might not be
unconnected with the increase in the demand for
Nigeria’s crude oil in the 1970s in the international
market as a result of the oil crisis of 1973-1974
(Arab embargo). This increase in the demand for
Nigeria’s crude oil raised the quantity of crude oil
exported and its price. For example, in 1970, the
total exports of crude oil was 383,455 thousand
barrels at U.S$2.4 per barrel; it latter increased to
627,639 thousand barrels exported in 1973 at
U.S$4.0 and latter crude oil export rose to 656,261
at U.S$11.3 in 1975 (NNPC, Nigerian Oil Industry
Statistical Bulletin 1983).
Balance of trade complied to our apriori
expectation with a negative sign. It is also
statistically significant at 5% level. This implies
that a rise in the Balance of Trade position reduced
Balance of Payments deficits while a fall in the
Balance of Trade position increased the Balance of
Payments deficits during the period of this study.
The increase in the demand for Nigeria’s crude oil
in the 1970s as a result of the oil crisis during 1973
– 1974 (Arab Embargo), may have accounted for
the rise of Exports over Imports during this period.
Increased Exports of crude oil generated more
revenue for the country, increased government
expenditure, and stimulated investment which are
important for reducing Balance of Payments
deficits.
JORIND 13(2) December, 2015. ISSN 1596-8303. www.transcampus.org/journal; www.ajol.info/journals/jorind

Money Supply complied with our apriori
expectation with a positive sign. It is also
significant at 5% level. Increase in Money Supply,
reduces interest rates, stimulates investments, put
more money in the hands of people, increases the
demand for imports and thus, increases the Balance
of Payments deficits during the period of this
study. The compliance of this variable with our
apriori expectation may be attributed to the high
export earnings of crude oil in the 1970s.
From our result, Government Expenditure
complied with our apriori expectation by bearing a
negative sign. It is also not significant at 5% level.
This implies that increase in Government
Expenditure reduced Balance of Payments deficits
while a fall in Government Expenditure increased
Balance of Payments deficits during the period of
this study. Increased Government Expenditure on
capital projects and social over heads stimulates
investment, production and economic growth
which are key ingredients for reduction of Balance
of Payments deficits. The rise in Government
Expenditure due to the increase in the demand,
exports and prices of Nigeria’s crude oil in the
1970s may have accounted for this result.
The coefficient of determination (R2) of 0.69
indicated that 69% of the total variation in the
Balance of Payments model is explained by
Exchange Rate, Balance of Trade, Money Supply
and Government Expenditure during the period of
this study. This implies that Exchange Rate,
Balance of Trade, Money Supply and Government
Expenditure had serious implication for the
Balance of Payments position in Nigeria during the
period of this study. Also, the Durbin Watson
statistic of 2.38 shows that serial correlation is
minimal, while the F statistic of 38.38 indicates
that the overall Balance of Payments model is
statistically significant. Finally, the correctness of
the sign of the Error Correction Model and its
significance at 5% level reveals that the Balance of
Payments model adjusts speedily to long run
dynamics

Table 6: Unit Root Test Results of the BOP Model for the Deregulated Period (1986 – 2013)
Variables ADF Test 1% Critical 5% Critical 10% Critical Order of
Statistic level level level Integration
D(Log(BOP),2) -3.427209 -4.063465 -3.500495 -3.853617 1
D(Log(ER),2) -3.577279 -2.743584 -3.498692 -1.146578 1
D(Log(BOT),2) -4.027559 -3.009734 -3.257330 -3.181826 1
D(Log(M1),2) -5.014908 -4.148465 -3.300495 -3.046617 1
D(Log(GEX),2) -4.335514 -4.852584 -3.952692 -3.051578 1
Source: Computed Result - E – views 7.1

The unit root test reported in table 6 above shows

that all the variables in the Balance of Payments
model for the deregulated period could not attain
stationarity at ordinary level. However, subjecting
the variables to further differencing made them to
attain stability at first difference.
The long-run relationships among the variables
were examined after the stationarity test using
Johansen (1997) co-integration framework. The
results of the Johansen co-integration test are
reported as follows:

Table 7: Johansen Co-integration Test Result of the BOP model for the Deregulated Period (1986 – 2013)
Series D(Log(BOP),2) D(Log(ER),2) D(Log(BOT),2) D(Log(M1),2) D(Log(GEX),2) Lags interval (in
first differences): 1 to 1
Hypothesized Eigenvalue Max-Eigen 0.05 Critical Prob**
No of CE(s) Statistic Value
None* 0.700299 59.04351 33.87687 0.0000
At most 1* 0.538726 37.91442 27.58434 0.0017
At most 2* 0.375898 23.10066 21.13162 0.0261
Source: Computed Result – E – views 7.1

The result above indicates that there exist three (3) (ECM). Table 8 below shows the result of ECM
co-integrating equations which satisfy the model for the Balance of Payments position in
condition for fitting in the error correction model Nigeria during the deregulated period (1986 -2013)
JORIND 13(2) December, 2015. ISSN 1596-8303. www.transcampus.org/journal; www.ajol.info/journals/jorind
Table 8: The Error Correction Model of the BOP model for the Deregulated Period (1960-1985)
Variable Coefficient
C -0.275236
D(LOG(ER)) -4.652654
D(LOG(ER(-2))) -1.189405
D(LOG(BOT)) -1.663298
D(LOG(BOT(-2))) -1.115866
D(LOG(M1(-2))) 4.497284
D(LOG(GEX(-2))) -9.405742
ECM(-1) -0.816869
R = 0.87; Adjusted R = 0.82; F – statistic = 39.80; Durbin Watson = 2.09
2 2
Source: Computed Result - E-views 7.1
The Error Correction Model of the Balance of
Payments model reported in table 8 above for the
deregulated period shows that Exchange Rate
complied with our apriori expectation by bearing
the negative sign. It is also significant at 5% level.
This implies that a rise in the Exchange Rate of the
Naira in relation to the U.S. dollars (Depreciation)
reduced the Balance of Payments deficits, while a
fall in the Exchange Rate of the Naira in relation to
the U.S. dollars (Appreciation) increases the
Balance of Payments deficits. The compliance of
this variable to our apriori expectation may be
attributed to the demand elasticity of our exports,
which are mostly primary products. This view is
supported by Jhigan (2006), who opined that for
Balance of Payments deficits to be reduced in most
third world countries, their currencies should be
depreciated because most of their exports are
primary product which have elastic demand in the
international market.
Balance of Trade complied to our apriori
expectation with a negative sign. It is also
statistically significant at 5% level. This implies
that an increase in the Balance of Trade reduced
Balance of Payments deficits while a fall in the
Balance of Trade increased the Balance of
Payments deficits during the period of this study.
The increase in the demand for Nigeria’s Exports
as a result of the depreciation of the Naira in
relation to the U.S dollars may have accounted for
the rise of Exports over Imports during this period.
Increased Exports of goods produced in Nigeria
generated more revenue for the country, increased
government expenditure, and stimulated
investment which are important for reducing
Balance of Payments deficits.
Money Supply complied with our apriori
expectation with a positive sign. It is also
significant at 5% level. Decreases in Money
T-statistic Probability
-0.377919 0.7097
-3.307868 0.0037
-5.268222 0.2200
3.576266 0.0020
-4.495850 0.0219
-3.871148 0.0768
5.054573 0.0001
-5.508165 0.0000
Supply, reduces interest rates, reduces investments,
reduces the amount of money in the hands of
people, decreases the demand for imports and thus,
decreases the Balance of Payments deficits during
the period of this study. The compliance of this
variable with our apriori expectation may be
attributed to the tight or contractionary monetary
and credit policy measures by the Central Bank of
Nigeria in order to ensure Exchange Rate stability.
This view is supported by Anyanwu (1997), who
opined that the CBN adopted a tight monetary and
credit policy measures in 1995 to complement a
disciplined fiscal policy in order to reduce
inflationary pressures, Balance of Payments
deficits and ensure exchange rate stability.
From our result, Government Expenditure
complied with our apriori expection by bearing a
negative sign. It is also significant at 5% level.
This implies that increase in Government
Expenditure reduced Balance of Payments deficits
while a fall in Government Expenditure increased
Balance of Payments deficits during the period of
this study. Increased Government Expenditure on
capital projects and social over heads stimulates
investment, production and economic growth
which are key ingredients for reduction of Balance
of Payments deficits. The rise in Government
Expenditure due to the increase in the demand for
our exports as a result of the depreciation of the
Naira in relation to the U.S dollars may have
accounted for this result.
The coefficient of determination (R2) of 0.87
indicated that 87% of the total variation in the
Balance of Payments model is explained by
Exchange Rate, Balance of Trade, Money Supply
and Government Expenditure during the period of
this study. This implies that Exchange Rate,
Balance of Trade, Money Supply and Government
Expenditure had high implication for the Balance
JORIND 13(2) December, 2015. ISSN 1596-8303. www.transcampus.org/journal; www.ajol.info/journals/jorind

of Payments position in Nigeria during the period
of this study. This is confirmed by the significance
of all the independent variables such as Exchange
Rate, Balance of Trade, Money Supply and
Government Expenditure. Also, the Durbin
Watson statistic of 2.09 shows that serial
correlation is minimal, while the F statistic of
39.80 indicates that the overall Balance of
Payments model is statistically significant. Finally,
the correctness of the sign of the Error Correction
Model and its significance at 5 percent level
reveals that the Balance of Payments model adjusts
speedily to long run dynamics.

Table 9: Structural or Parameter Stability Test – BOP Model

Chow Breakpoint Test: 1986
Null Hypothesis: No breaks at specified breakpoints
Varying regressors: All equation variables
Equation Sample: 1960 2013
F-statistic 25.611514 Prob. F(5,43) 0.0378
Log likelihood ratio 14.05449 Prob. Chi-Square(5) 0.0153
Wald Statistic 13.05757 Prob. Chi-Square(5) 0.0228
Source: Computed Result – E – views 7.1
JORIND 13(2) December, 2015. ISSN 1596-8303. www.transcampus.org/journal; www.ajol.info/journals/jorind
Table 9 above indicates that the regressions in the
two time periods are different given the
significance of the F-statistics. This implies that
the relationship between Balance of Payments and
Exchange Rate has undergone a structural change
in Nigeria over the period 1960 – 2013.
Findings
 The Balance of Payments (BOP) model
for the regulated period indicated that only
government expenditure was not
significant at 5% level while for the
deregulated period all the explanatory
variables were significant at 5% level
 The results also revealed that 87% of the
total variation in the Balance of Payments
model was explained by Exchange Rate,
Balance of Trade, Money Supply and
Government Expenditure during the
deregulated period, while for the regulated
period about 69% of the total variation in
the Balance of Payments model was
explained by Exchange Rate, Balance of
Trade, Money Supply and Government
Expenditure (Independent variables)
 Also, the result revealed a high Adjusted
R2 of 0.82 or 82 percent during the
deregulated period while that of the
regulated period was 0.51 or 51 percent.
These findings also show that Exchange
Rate variations had serious implication on
Balance of Payments position during the
deregulated period than the regulated
period.
 All the explanatory variables (Exchange
Rate, Balance of Trade, Money Supply
and Government Expenditure) in the
Balance of Payments model appeared with
their appropriate signs during the
deregulated period, while for the regulated
period, while for the regulated period,
apart from Exchange Rate, the other
explanatory variables appeared with their
appropriate sign in the Balance of
Payments model.
 The relationship between Balance of
Payments and Exchange Rate variations
over the two time periods (Regulated and
Deregulated) is different (there is a
structural break)
Conclusion
The study examined the impact of Exchange Rate
variations on Balance of Payments position in
Nigeria during alternative economic regimes.
From the results and findings, it was discovered
that Exchange Rate had serious implication on
Balance of Payments position during the
deregulated than regulated period. This is shown
by the higher value of the coefficient of
determination of the Balance of Payments model
in the deregulated period. Also, Exchange Rate,
Balance of Trade, Money Supply and Government
Expenditure all appeared with the appropriate sign
and were statistically significant during the
deregulated period than the regulated period.
Recommendations
Based on these results and findings, the study
recommends that government expenditure should
be increased on capital project such as roads,
power etc, the Naira should be devalued with
respect to other currencies of the world especially
the U.S. dollars, exports should be stimulated and
direct controls should be implemented by the
Federal Government on unnecessary imports as
possible ways of improving the Balance of
Payments position in the Nigerian economy.
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