Effect of Exchange Rate Depreciation on Trade Balance in Nigeria

Anoke, Charity Ifeyinwa and Odo, Stephen Idenyi and Ogbonna, BigBen Chukwuma (2016) Effect of Exchange Rate Depreciation on Trade Balance in Nigeria. IOSR Journal Of Humanities And Social Science (IOSR-JHSS), 21 (3). pp. 72-81. ISSN 2279-0845

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This study examined the effect of exchange rate depreciation on trade balance in Nigeria (1986-2014). The econometric analytic tools used are: Co integration Test, vector error correction model, Wald test, Granger Causality Test with the following results (i) the trace statistics of the Johansen co integrating equation shows that there exist a long run equilibrium relationship between exchange rate depreciation and trade balance in Nigeria. (ii) the vector error correction term met the required conditions, however exchange rate depreciation has no significant effect on trade balance in Nigeria, (iii) the causal relationship between BOT and EXR indicated that exchange rate granger cause balance of trade. The study concludes that depreciation cannot improve the trade balance in the Nigerian economy in the short run as depreciation can only benefit countries that are originally export based before the depreciation of a currency. Economies that are import dependent like Nigeria can hardly benefit from the depreciation of its currency. Based on the findings, the study makes the following recommendations; to retain the continuous long run relationship among BOT and other explanatory variables (EXR, FDI), effort should be made through the use of appropriate policy instruments to diversify sources of foreign exchange in the country to sustain such positive relationship in the long run. Since, it was seen that any increase in the depreciation of Naira with respect to dollar will bring about a fall in the balance of trade; Government should discourage further depreciation of the naira as this is unfavorable to the economy. Result from this study shows that a rise in foreign direct investment (FDI) will promote trade in the economy, hence Government should encourage foreign direct investment by improving on local security, revitalizing our power sector and other social services that can attract foreign investment.

Item Type: Article
Subjects: H Social Sciences > HJ Public Finance
Divisions: Faculty of Management and Social Sciences
Depositing User: mrs chioma hannah
Date Deposited: 27 May 2019 10:55
Last Modified: 27 May 2019 10:55
URI: http://eprints.gouni.edu.ng/id/eprint/1571

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