Determinants Of Balance Of Payments Disequilibrium In Nigeria

Abstract

This study investigates the macroeconomic determinants of Balance of Payments dynamics in Nigeria between 1970-2011, using econometric method of cointegration and Error correction mechanism. It found that Balance of Payments cointegrated with all the identified explanatory variables, suggesting that Balance of Payments disequilibrium in Nigeria could be caused by naira/dollar nominal exchange rate, interest rate differential, external debt growth and Government spending. Again the dummy variable approach to chow test was conducted to check whether there is a structural break between the pre-SAP and post-SAP periods in the naira/dollar exchange rate. The test reveals that there is evidence of structural instability during the period under consideration. The result equally reveals that the coefficients of most of the variables under consideration confirms to the aprori expectation of economic theory. The researcher therefore concludes that a reduction in government spending, increased domestic production through private investment, effective capital movement, effective expenditure switching policy and an implementation of fixed naira/dollar nominal exchange rate system are the solution to the negative stance of the Nigerian Balance of Payments.