IMPACT OF EXCHANGE RATE FLUCTUATION ON TRADE BALANCE IN NIGERIA

This study investigates the effects of the exchange rate, real GDP, oil price, and lending interest rate on Nigeria's trade balance from 1990 to 2024. Using the Autoregressive Distributed Lag (ARDL) model, the study first established a long-run cointegrating relationship among the variables. Findings reveal that while the exchange rate and lending interest rate do not have a statistically significant long-run impact, both real GDP and oil price are significant long-run determinants of the trade balance. Specifically, a 1% increase in real GDP leads to a significant decrease of $76.9 billion in the trade balance, whereas a 1% increase in oil price results in a significant increase of $33.7 billion. In the short run, the model confirms a rapid adjustment to equilibrium, with over 80% of disequilibrium corrected within the current period. The short-run impacts of real GDP and oil price are significant but complex, with both immediate and lagged effects, while the exchange rate and lending interest rate have no statistically significant short-run impact. Granger Causality tests indicate a unidirectional causal relationship from real GDP to the trade balance. Based on these findings, it is concluded that policymakers should adopt a diversified, export-oriented growth strategy, focusing on the non-oil sector to reduce dependency on volatile oil prices and manage the long-run trade balance. It is also recommended that a broader policy approach, integrating fiscal and monetary measures, be employed to effectively manage the complex dynamics of Nigeria's trade balance.