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Real Exchange Rate Distortions and External Balance Position of Nigeria: Issues and Policy Options

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  • Chukwuma Agu

    (African Institute For Applied Economics)

Abstract

This research paper examines the position of the observed real exchange rate (RER) in relation to its unobservable equilibrium position, estimating the time path of the latter using the single equation procedure. It found out that over the sample period, real exchange rate misalignment (measured as the deviation of the actual from the estimated equilibrium path) was irregular but persistent. Misalignment was also found to be higher during the period of deregulation than during that of regulation. After generating the misalignment and volatility of the RER, this work proceeded to ascertain the influence of these distortions on the balance of payment - a gauge of the external balance position of the country. It was then observed that real exchange rate distortions (misalignment and volatility) hurt both the trade balance and the capital account. However, while RER misalignment is critical to the two external sector variables, volatility matters more to the flow of capital. The paper therefore recommends a more realistic management of investment environment (with an eye on stability), public sector expenditure and other fundamentals as a necessary complement to nominal devaluations in the search for stronger external positioning.

Suggested Citation

  • Chukwuma Agu, 2002. "Real Exchange Rate Distortions and External Balance Position of Nigeria: Issues and Policy Options," Journal of African Development, African Finance and Economic Association (AFEA), vol. 5(2), pages 20-47.
    • Handle: RePEc:afe:journl:v:5:y:2002:i:2:p:20-47
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    Citations

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    Cited by:

    1. Shehu Usman Rano Aliyu, 2010. "Exchange rate volatility and export trade in Nigeria: an empirical investigation," Applied Financial Economics, Taylor & Francis Journals, vol. 20(13), pages 1071-1084.
    2. Omotosho, Babatunde S., 2015. "Is Real Exchange Rate Misalignment a Leading Indicator of Currency Crises in Nigeria?," MPRA Paper 98353, University Library of Munich, Germany.
    3. Ali, Abdulkadir I. & Ajibola, Isaiah O. & Omotosho, Babatunde S. & Adetoba, Olutope O. & Adeleke, Abiola O., 2015. "Real exchange rate misalignment and economic growth in Nigeria," MPRA Paper 98526, University Library of Munich, Germany.
    4. Shehu Usman Rano, Aliyu, 2007. "Real Exchange Rate Misalignment: An Application of Behavioral Equilibrium Exchange Rate (BEER) to Nigeria," MPRA Paper 10376, University Library of Munich, Germany.
    5. Omotosho, Babatunde S. & Wambai, Murjanatu, 2012. "Is the Naira-US Dollar Real Exchange Rate Misaligned?," MPRA Paper 98354, University Library of Munich, Germany.
    6. Omotosho, Babatunde S., 2012. "Endogenous Structural Breaks and Real Exchange Rate Determination in Nigeria since Interbank Foreign Exchange Market (IFEM)," MPRA Paper 98306, University Library of Munich, Germany.
    7. Kenny S, Victoria, 2019. "Macroeconomic Performance Indicators and Exchange Rate Misalignment in Nigeria," MPRA Paper 93292, University Library of Munich, Germany.
    8. Dr. Marshal Iwedi, 2021. "Effects of Foreign Exchange Crisis on the Performance of Manufacturing Sector in Nigeria," Noble International Journal of Economics and Financial Research, Noble Academic Publsiher, vol. 6(1), pages 01-07, January.

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