The effect of exchange rate on the nigerian balance of payments (1970-2010)

Thesis Overview

<p> GENERAL INTRODUCTION<br>1.1 BACK GROUND OF STUDY<br>Right from time immemorial, a country’s exchange rate and balance of<br>payment is usually regarded as the sum of indices by which a nation’s strength can<br>be measured especially its economic strength. Paul (1996) defines balance of<br>payments as an accounting record to all monetary transactions between a country<br>and the rest of the world.<br>These transactions include payments for the country’s exports and imports of<br>goods, services and financial capital, as well as financial transfer. It summarizes<br>the international transaction for a specific period usually one year and is prepared<br>in single currency for the country concerned. Nzotta (2004) defines foreign<br>exchange as the value of foreign nation’s currency in terms of the home nation<br>currency. In finance, the exchange rates (as also known as the foreign exchange<br>rate or forex rate) between two currencies specify how much one currency is worth<br>in terms of the other.<br>Devaluation is tall in a fixed exchange rate, which reduces the value of a<br>currency in terms of other currencies. So what we are trying to do in this study is to<br>determine how the reduction value of a currency with respect to the currency of<br>another country affect the record of all monetary transactions between a country<br>and another, whether visible or invisible in a period of time. This is very important<br>because no nation can exist on its own no matter how independent or self-sufficient<br>it can be, it is important to have a relationship with other nations which can be<br>characterized by goods and services going one way and foreign exchange going<br>the other way. When accessing the nation involved, a record of gains and losses<br>may have been kept. As such a nation’s foreign exchange and balance of payments<br>can help slowdown, accelerate or decelerate walking growth progress and<br>development. This will also have a positive or negative effect on the citizens since<br>it deals mainly with economic relations.<br>Our nation Nigeria is currently facing serious problems regarding its foreign<br>exchange rating (which is very low in comparison to other countries) and it’s<br>Balance of payment which is clearly in disequilibrium and in a deficit. As a result<br>of this the government is retrogressing and the citizens clearly suffering.<br>It is in a bid to discover why this is so and how this can be solved that this<br>study as pertinent.<br>1.2 STATEMENT OF THE RESEARCH PROBLEM<br>Foreign exchange and balance of payment are the key factors of a nation’s<br>life. They are also factors to look into when comparing a country’s relationship<br>with other nations. These factors directly or indirectly affect a host of other factors<br>which are of severe importance in any nation. Consequently these factors can be<br>seen as essential to the growth and development of the nation.<br>Currently these two factors can be said to have crippled the Nigeria<br>economy and made life uncomfortable and unbearable for it citizens. These factors<br>have brought the country to a level where growth and development appear to be an<br>illusion.<br>Currently the nation’s exchange rate has fallen so low due to unfavorable<br>nature of the competing power of the nation’s currency with foreign currencies of<br>the world. Our economy has been trying to resolve the problem of external and<br>internal balance, which has manifested in disequilibrium in our balance of payment<br>and causing us a balance of payment deficit.<br>Much controversy had also been degenerated by the devaluation of our Naira<br>(the national currency). Relevant literature and opinion on this issue are of the<br>view that exchange rate policy plays an important role in maintenance of internal<br>and external balance, on the other hands, other writers argued that devaluation is<br>not the best policy for the less developed country because of many diverse results.<br>1.3 RESEACH QUESTION<br>This work is guided by the following research questions:<br>1. How does exchange rate affect the Nigerian Balance of payment?<br>2. How can the Nigerian Balance of payment position be improved?<br>1.4 OBJECTIVES OF THE STUDY<br>The general objective of this study is to examine the effect of exchange rate<br>on the balance of payment of a nation with special reference to Nigeria. The<br>specific objectives are to:<br>1. Evaluate the impact exchange rate on the Nigeria balance of payment.<br>2. Recommend ways of improving Nigerian Balance of payment positions.<br>1.5 RESEARCH HYPOTHESIS<br>Hypothesis will be tested in other to allow success of this work. The hypothesis<br>includes;<br>1. There is no significant relationship between exchange rate and balance of<br>payment (BOP) in Nigeria.<br>1.6 SCOPE OF STUDY<br>This study is limited to exchange rate and its effect on balance of payment<br>with reference to the Nigeria economy. It covers a period of 40 years i.e from 1970<br>to 2010. <br></p>