INFLATION RATE, EXCHANGE RATE AND BALANCE OF PAYMENTS IN NIGERIA

Abstract This study investigates the impact of inflation and exchange rates on Nigeria's balance of payments (BOP) from 1986 to 2022, amidst persistent exchange rate volatility and inflation that have adversely affected the BOP. With significant deficits in recent years, understanding these dynamics is essential. The primary objective is to analyze the influence of inflation and exchange rates on Nigeria's BOP, focusing on specific objectives that include assessing inflation's impact. examining the relationship between exchange rates and the BOP, and determining causal relationships between both inflation and exchange rates with the BOP. Employing various theoretical frameworks, including the Inflationary Theory and Structural Theory, this study employs an ex-post facto research design using annual time-series data from secondary sources spanning 1989 to 2023. Multiple regression analysis via Ordinary Least Squares (OLS) is utilized, along with unit root tests, co-integration tests, and Granger causality tests to assess long-term relationships and causal effects among the variables. Findings reveal that inflation has a negligible short-run effect on the BOP, while a depreciating official exchange rate and increased domestic credit worsen it. Conversely, foreign direct investment and trade openness positively influence the BOP. The analysis indicates a strong long-run equilibrium relationship among the determinants, despite most variables lacking significant Granger causality. The study concludes by recommending measures to maintain exchange rate stability, manage domestic credit growth, promote foreign investment, enhance trade openness, and monitor inflation and interest rates to support long-term economic stability and resilience in Nigeria's balance of payments.