This work sets out to examine the relationship between the balance of payment and the exchange rate. The work is divided into five chapters; chapter 1 gives a general introduction to the subject matter, chapter two gives a general review of the literature on the subject matter, and chapter 3 gives or states the methodology and specifies the model used for testing. Chapter four runs the required test and provides the result and interpretation, and chapter five concludes the findings and recommends government policy based on the test findings. The ordinary least square regression (OLS) method is used to test for the R-squared test (explanatory power of the variables), T-test for the reliability, F-test for the overall significance of the exponentials and D.W test, which is the econometric criterion for testing for the presence of autoregressive scheme. The result shows a negative relationship between the balance of payment and trade openness. Also, a positive relationship exists between the exchange rate and foreign direct investment. Since trade openness has a negative impact on the balance of payment, it is recommended that the government should not consider it a policy for economic development.
1.1 BACKGROUND OF STUDY
From time immemorial, a country’s exchange rate and balance of payment are usually regarded as the sum of indices by which a nation’s strength can be measured, especially its economic strength. Paul (1996) defines the balance of payments as an accounting record of all monetary transactions between a country and the rest of the world.
These transactions include payments for the country’s exports and imports of goods, services, financial capital, and financial transfer. It summarizes the international transaction for a specific period, usually one year, and is prepared in a single currency for the country concerned. Nzotta (2004) defines foreign exchange as the value of a foreign nation’s currency in terms of the home nation’s currency. In finance, the exchange rates (also known as the foreign exchange rate or forex rate) between two currencies specify how much one currency is worth in terms of the other.
Devaluation is tall in a fixed exchange rate, which reduces the value of a currency in terms of other currencies. So what we are trying to do in this study is to determine how the reduction value of a currency with respect to the currency of another country affects the record of all monetary transactions between a country and another, whether visible or invisible, in a period of time. This is very important because no nation can exist on its own, no matter how independent or self-sufficient it can be; it is important to have a relationship with other nations characterized by goods and services going one way and foreign exchange going the other way. A record of gains and losses may have been kept when accessing the nation involved. As such, a nation’s foreign exchange and balance of payments can help slow down, accelerate or decelerate walking growth, progress and development. This will also positively or negatively affect the citizens since it deals mainly with economic relations.
Our nation Nigeria is facing serious problems regarding its foreign exchange rating (which is very low compared to other countries) and its Balance of payment, which is clearly in disequilibrium and a deficit. As a result, the government is retrogressing, and the citizens clearly suffering.
It is in a bid to discover why this is so and how this can be solved that this study is pertinent.
1.2 STATEMENT OF THE RESEARCH PROBLEM
Foreign exchange and balance of payment are the key factors in a nation’s life. They are also factors to look into when comparing a country’s relationship with other nations. These factors directly or indirectly affect a host of other factors of severe importance in any nation. Consequently, these factors can be seen as essential to the growth and development of the nation.
These two factors can be said to have crippled the Nigerian economy and made life uncomfortable and unbearable for its citizens. These factors have brought the country to a level where growth and development appear to be an illusion.
Currently, the nation’s exchange rate has fallen so low due to unfavorable nature of the competing power of the nation’s currency with foreign currencies of the world. Our economy has been trying to resolve the problem of external and internal balance, which has manifested in disequilibrium in our balance of payment and caused us a balance of payment deficit.
Much controversy had also been degenerated by the devaluation of our Naira (the national currency). Relevant literature and opinion on this issue believe that exchange rate policy plays an important role in maintaining internal and external balance; on the other hand, other writers argued that devaluation is not the best policy for the less developed country because of many diverse results.
1.3 RESEARCH QUESTIONS
The following research questions guide this work:
1. How does the exchange rate affect the Nigerian Balance of payment?
2. How can the Nigerian Balance of payment position be improved?
1.4 OBJECTIVES OF THE STUDY
The general objective of this study is to examine the effect of the exchange rate on the balance of payment of a nation with special reference to Nigeria. The specific objectives are to:
1. Evaluate the impact exchange rate on the Nigeria balance of payment.
2. Recommend ways of improving Nigerian Balance of payment positions.
1.5 RESEARCH HYPOTHESIS
The hypothesis will be tested in other to allow the success of this work. The hypothesis includes;
1. There is no significant relationship between the exchange rate and the balance of
payment (BOP) in Nigeria.
1.6 SCOPE OF STUDY
This study is limited to the exchange rate and its effect on the balance of payment with reference to the Nigerian economy. It covers a period of 40 years, i.e. from 1970 to 2010.
1.7 SIGNIFICANCE OF THE STUDY
Any nation’s exchange rate and balance of payments are the heart and foundation of any government’s development. These are very controversial factors that are not doing well in Nigeria. Naturally, since our economy is import-dependent and dependent on other nations, this affects us greatly, especially since foreign involvement and foreign exchange are involved in every sector of the economy. It is the significance of this study, therefore, to make known the relationship between exchange rate and balance of payments, policy implications and recommendations which will be of immense help to policymakers and balance of payments, and government, especially as regards the transaction of the exchange rate and balance of payment in Nigeria. It is also important to students, lecturers, and the entire public interested in the subject matter and its utilization in whichever way.
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