ABSTRACT
This thesis investigated the
Domestic and External Sector Correlates of Balance of Payments in Nigeria. The
study which covered a period of thirty five (35) years from 1980 to 2015
proposed six (6) research objectives and Hypotheses. In order to achieve the
objectives of the study, Pearson Correlation and multiple regression analyses
were employed to test the proposed hypotheses. The findings of the study
indicate that Balance of Payment is negatively correlated with Exchange Rate,
Foreign Direct Investment, Foreign Portfolio Investment, Government
Expenditure, Private consumption Expenditure and All Share Index of the
Nigerian Stock Exchange. On the other hand, only two out of six independent
variables indicated a negative relationship with balance of payment. Thus, a
naira increase in government expenditure or private consumption is expected to
lead to a commensurate decrease in balance of payment and vice versa. A
positive relationship is indicated to exist between balance of payment and
exchange rate, foreign direct investment, foreign portfolio investment and the
all share index. This implies that a unit increase in any of the above named
variables will lead to an increase in balance of payment and vice versa.
Finally, none of the independent variables in the hypotheses formulated for the
study were found to be statistically significant, hence the decision to accept
all six null hypotheses. Based on the above findings, it was concluded that
even though all external correlates of balance of payment specified for the
study have a positive relationship with balance of payment, none can be relied
on to provide the needed stimulation to improve Nigeria’s balance of payment
position. The domestic correlates (Government expenditure, Private consumption
and All share index) do not significantly contribute to the objective of
improving Nigeria’s balance of payment position. Given the conclusions above,
we recommend that regulatory authorities should put appropriate policies in
place that will help in enhancing/improving Nigeria’s balance of payment
position. Foreign investors through the vehicle of foreign direct investment
and foreign portfolio investment should be encouraged to bring in additional
foreign investment into the country. Fluctuations in the exchange rate should
be stabilized through control of the out-flow, this will help improve balance
of payment position of the country. Finally, government expenditure especially
in the area of recurrent expenditure should be curtailed in order to reduce
drain on government earnings. Instead attention should be given to capital
expenditure that is expected to lead to increase in economic activities in the
country.
111
Pages
Project Reference Code: C048
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The external domestic sector of the Nigerian
economy has undergone profound changes in recent years. Principal among these
are the rapid depreciation of the naira, the accumulation of payments arrears,
the external debt problem which has resulted in debt restructuring, etc. These
changes, along with other aspects of international economic transaction are
captured in the balance of payments (BOP), Statistics (CBN, 1998).
The balance of
payments account is a periodic report that summarizes the flow of economic
transactions with foreigners. It provides information on the nation’s exports,
earnings of domestic assets owned by foreigners, international capital
movements (Quantney et al, 1990).
Prior to the introduction of the Structural Adjustment
Programme (SAP) in 1986, Nigeria’s Balance of Payment (BOP) had started to show
signs of disequilibrium having been managed over the years within a policy
framework of direct control. The controls were in areas of credit, interest
rate, exchange rate, and trade. Following the sudden collapse of international
oil prices in 1980’s and the consequent fall in foreign exchange receipts,
controls were tightened. However, the controls proved counter-productive as it
became clear that the economy could not be managed with a policy framework that
placed heavy reliance on direct controls (Olisadebe, 1993).
The period beginning from the later end of 1999 marked a
turning point from a hitherto culture of fiscal indiscipline characterized by
frivolous spending to a new dawn of prudent consumption and saving. This is
evidence from an unprecedented accumulation in the level of reserve from USD
4.98 billion in May 1999 to USD 59.37 billion as at March 28, 2007 (CBN, 2007).
These robust domestic economic performances according to Magnus (2007) were
occasioned by macroeconomic fundamentals like internal reforms, complemented by
favourable external conditions like the persistent and unprecedented rise in
crude oil prices joined with drastic decline on external obligations like debt
service.
The recent growth of external reserve is not a phenomenon
that has been unique to Nigeria. Most of the South East Asian as well as Latin
American economies have also been indulging in this kind of behaviour. For
instance, Adam and Leonce (2007) noted that global official foreign exchange
reserves rose from USD 1.2 trillion in January 1995 to USD 5.04 trillion in
December 2006 and the share of developing countries in world reserves increased
from 50 to 72% over the same period. These development according to Magnus
(2007) consequently underscored the critical role of foreign exchange reserve
in the balance sheet of Central Bank and monetary policy operation, generating
renewed and ranging controversies among schools and analysts in the process.
Domestic public debt is not a new phenomenon for developing
countries. Guidotti and Kumor (1991) study the case of 15 emerging market
countries and show that their domestic public debt-to-GDP ratio went from 10
per cent in 1981 to 16 per cent in 1988. They also point out that while the
ratio of domestic debt to total public debt remained more or less constant over
the period (at about 30 percent), there were important differences in the
process that led to the accumulation of domestic and external debt. The
increase in domestic debt was mainly due to new borrowing and that of external
debt was due to accumulation of arrears. This suggests that if emerging market
countries had not been shut down from the international capital market, they
would have probably accumulated more external and less domestic debt. This view
is consistent with the one put forward by Borensztein, Cowan, Eichengreen and
Panizza (2007), who find that crisis play a key role for the development of the
domestic bond market.
The determination of the level of domestic and external
sector correlates of balance of payment that is appropriate to achieve the
goals of macroeconomic policy forms the fulcrum of domestic and external sector
correlation. In particular, it is of paramount importance to the achievement of
a favourable balance of payment position. This is in view of the serious
balance of payments problems that might result from improper articulation and
implementation of domestic and external sector correlation. Thus, in order that
a country like Nigeria may optimize the advantages of international trade, it
becomes imperative for the country to institute appropriate domestic and
external sector correlation.
1.2 STATEMENT OF THE PROBLEM
The external sector of the
Nigeria economy has undergone profound changes in recent years. The most
significant among these changes are the rapid depreciation of the naira
exchange rate and the accumulation of payment arrears. At the period
corresponding to Nigeria’s independence, the Nigeria economy witnessed
tremendous growth in all macroeconomic aggregate. The economy at that time was
largely agrarian, with agriculture contributing over 60 percent to the Gross
Domestic Product and constituting over 80 percent of total export earnings. The
situation however changed with the emergency of the oil boom of the 1970s.
The oil boom of the 1970s brought with it fundamental
changes in the Nigeria economy and was orchestrated by the sharp rise in world
oil prices as a result of the Arab-Israeli war in 1973 and the oil shock of
1979 (Gbosi, 1997). These developments led to unprecedented transfer of wealth
to Nigerian specifically in the wake of the oil boom, export revenues increased
substantially, as also did foreign exchange reserves, import bills and national
income. Government expenditure rose to mop up the phenomenal inflow of wealth
and foreign exchange, real wages increased and the real exchange rate
appreciated. As a result, the economy depended heavily on crude petroleum
export as the main source of foreign exchange earnings and government revenue.
By 1980, the oil sector which accounted for 22 percent of the GDP provided 80
percent of Government revenue and over 96 percent of export earnings. Also, the
structure of sector correlation incentives and controls encouraged import
orientated production and consumption patterns with little incentives for
non-oil exports. Again, the competitiveness of the agricultural sector in the
world market was eroded by over-valued naira exchange rate, inadequate pricing
policies, rural-urban migration and neglect arising from the oil syndrome.
Thus, its share of 40 percent of GDP in the early 1970s fell to 20 percent in
1980s. In fact, low productivity in the agricultural sector, became so acute
that Nigeria became heavily dependent on imported food and agro-allied
industrial inputs. Moreover, the public sector became the prime mover of the
economy through huge investments in economic and social activities.
However, the oil boom came to an abrupt end with the
collapse of world oil prices in 1982 and a rise on real interest rates on
world-wide basis and with it at economic crisis emerged in Nigeria. The fall in
oil prices was reflected in domestic and external sector receipts and
Government revenue. Thus, foreign exchange receipts and revenues from oil
dropped proportionally to dismal levels. Consequently, the external reserves
fell sharply and foreign debts mounted in the face of rising imports,
government deficits widened and efforts at containing the adverse developments
created some other serious problems such as economic depression, rising
inflation, unemployment and persistent balance of payments (BOP) deficits.
Specifically, the external sector of the economy became characterized by
rapidly depleting external reserves, expansive and persistent balance of
payments deficits, and the emergence of the external debts crisis.
In addition to the above problems that were necessitated by
the slump in oil prices during this period, was the fact that foreign direct
investment (FDI) and foreign portfolio investment (FPI) into Nigeria all but
dried up due to the perceived high risk inherent in the Nigeria economy.
From the foregoing, it can be seen that domestic and
external factors such as foreign exchange rate, foreign direct investment,
foreign portfolio investment, government expenditure, private consumption and
the all share price index are among the first line indicators of balance of
payment problems which by extension is a economic growth problem.
Thus, finding a solution to problems involving these
domestic and external correlates represent the principal panacea to balance of
payments problems.
Generally, domestic and external sector correlation
involves choosing a foreign exchange rate management system and determining the
particular rate at which foreign transactions will take place Cobadan, (1996).
It can be used to achieve macroeconomic efficiency through the achievement of
balance of payments viability and thus domestic and external sector stability,
which ultimately results in economic growth and development.
Much emphasis has been laid by previous authors on the
different aspects of the domestic and external correlates of Balance of Payment
without seeming to realize the importance of having appreciation of the
comprehensive effects of these correlates on the balance of payment. For
example, Agene
(1991), Ogiogo (1996), Olisadebe Anietie et al. (2004), Enrique and Nagayasu
(2004), Annsofie (2005),Speller (2006), Yu (2006), Balogun (2007), Antonia et
al. (2008), Dubas (2009), etc. laid much emphasis on the the relationship
between balance of payment and exchange rate while Landua (1986), Ram (1986), Lin (1994), Deverajan et al (1993), Nitoy et
al. (2003), Josaphat et al. (2000). Junko and Vitali (IMF, 2008) investigate the
impact of foreign investment on BOP.
All the aforementioned previous empirical studies have
covered the correlates of Balance of Payment (BOP) in one form or the other but
failed to provide a comprehensive or holistic coverage of the study matter. The
present study intends to fill this gap in literature and analyses by providing
a comprehensive study that takes into consideration all the above mentioned correlates of balance of payment both
domestic and external.
1.3 PURPOSE OF THE
STUDY
1.4 RESEARCH QUESTIONS
1.5 RESEARCH
HYPOTHESIS
To address these problems
above and to have a focus, the following null hypothesis has formulated:
Ho1: There is no
significant relationship between all share price index and balance of payment.
Ho2: There is no significant
relationship between government expenditure
and balance of payment.
Ho3: There is no significant
relationship between private consumption and
balance of payment.
Ho4: There is no significant
relationship between exchange rate and balance
of payment.
Ho5: There is no
significant relationship between foreign portfolio investment and balance of payment.
Ho6: There is no significant
relationship between foreign direct investment
and balance of payment.
1.6 SIGNIFICANCE OF
THE STUDY
1.7 SCOPE AND LIMITATION
OF STUDY
1.8 DEFINITION OF
TERMS
REFERENCES
CHAPTER TWO
LITERATURE REVIEW
2.0 INTRODUCTION
In this chapter, a concerted effect will be made to review the relevant
theories and empirical literature relating to domestic and external sector
correlates and the balance of payment as propounded by various researchers.
Attention will also be focused of trends, management and current issues in the
area of the subject matter. This is to enable us build a proper foundation of
knowledge on the subject matter so as to contribute to the advancement of
knowledge, with a view to achieving the purpose and objectives of this study.
Several researches have been carried out over the years on foreign
portfolio investment policy and management, as well as the balance of
international payment. It is our intention to examine these academic exercises
and establish the relationship between domestic and external sector correlates
and balance of payments performance in Nigeria, with a view to adequately
addressing the pertinent issue of Nigeria’s domestic and external sector
correlates of balance of payment viability/ efficiency.
To this end the impact of all share price index of Nigeria’s domestic and
external sector correlates of balance of payment will be critically examined.
Also, the impact of government expenditure to balance of payment and the
effects of private consumption on balance of payment will also be examined.
Attempt will also be made to examine the exchange rate to balance of payments
stabilization, as well as review the various effect of foreign portfolio
investment to balance of payment, furthermore examine foreign direct investment
to balance of payment and their effects on balance of payments performance.
This will greatly enable us achieve the objectives of this study.
Thus, by the conclusion of this exercise, we would be in a better
position to articulate remedial and amelioratory measures towards curbing the
intractable problem of Nigeria’s domestic and external sector correlates of
balance of payment instability.
2.1 CONCEPTUAL FRAMEWORK OF BALANCE OF PAYMENT
The balance of payments is defined as a systematic record of economic
and financial transactions for a given period of time, say one year, between
residents of an economy and non residents - rest of the world. These
transactions involves the provision and receipts of real resources – goods, services
and income – and changes in claims on and liabilities to the rest of the world.
Specifically, the balance of payments records transaction in goods,
services and income, changes in ownership and other changes in an economy’s
holdings of monetary gold, Special Drawing Rights (SDRs) and claims on and
liabilities to the rest of the world. It also records unrequited or unilateral
transfers –the provision or receipts of an economic value without the
acceptance or relinquishing of something of equal value. Generally,
transactions involving payments to a country by non-resident are classified as
credit entries. Those involving payments by country to non-residents are debt
entries.
Basically, the balance of payments is divided into the current and
capital account. The capital account is made up of portfolio and direct
investment, either long or short term capital and capital transfers. While the
current account records all current transactions, which are transactions that
include either the export or import of goods and services. They include
merchandise and services. The capital account also refers to charges in
financial assets and liabilities, portfolio investment, external loan drawings
and amortization and charges in short-term capital movements.
However, it should be noted that development in the other sectors –
real, monetary and public – has implications for the balance of payments. As a
result, current account deficit may not necessarily be an inappropriate policy
to pursue especially in a country that is for example, importing to increase
domestic investment. However, in a short-term, import bills may remain unpaid
or external reserves could be drawn down. A long-term and more viable solution
lies in ensuring balance of payments viability.
A viable balance of payments position may be defined as a current
account position, which can be financed on a sustainable basis by net capital
movements on terms that are compatible with reasonable development, growth
prospects and debt servicing capacity as well as macro-economic stability. It
can be seen that the balance of payments is linked with the other accounts in a
general equilibrium framework. This implies that disequilibrium in one sector;
say external sector is transmitted to the other sectors and vice versa. Thus,
there is need to achieve both internal and external balance.
According to Marsha (1994), two types of policy measures are used in
dealing with balance of payments problems. These are expenditure switching
measures and expenditure reducing policies. Expenditure reducing policies refer
to fiscal policy (conducted by changing government expenditure and /or taxes)
and monetary policy which refers to changes in money supply, which in turn
affect interest rate. Expenditure switching policies refers to devaluation
(depreciation) and revaluation (appreciation) of the country’s currency.
The aim of expenditure reducing policies is to reduce domestic
expenditure on consumption and increase expenditure on investment, thus,
releasing goods and services for exports while leaving aggregate output
unchanged. The aim of expenditure switching policies is to switch domestic
demand from imported goods to home made goods. However, the extent to which
expenditure switching policies is achieved depends on elasticity of supply and
demand for tradable goods. If the depreciation of the nominal exchange rate is
matched by increase in wages, absorption and inflation, the real exchange rate
would not depreciate and so the balance of payments would not improve.
However,
expenditure reducing policies have costs in terms of loss of output, investment
and employment. The loss will be minimized if resources can be easily moved to
the tradable goods sector. Alternatively bridging external loans may be
contributed to sustain investment and output.
2.2 THEORY OF BALANCE
OF PAYMENT
2.3 COMPONENTS OF BALANCE OF PAYMENTS
2.3.1 The Current
Account
2.3.2 The Capital
Account
2.3.3 Official Financing Account
2.4 CAUSES OF BOP IMBALANCES
2.5 CAUSES OF BALANCE OF
PAYMENTS DISEQUILIBRIUM
2.6 BALANCE OF PAYMENTS CRISIS
2.6.1 Balancing mechanisms
2.6.2 Rebalancing by changing the exchange rate
2.6.3 Rebalancing by adjusting
internal prices and demand
2.6.4 Rules
based rebalancing mechanisms
2.7 POLICIES TO
CORRECT BALANCE OF PAYMENTS DISEQUILIBRIUM
2.8 EXCHANGE RATE POLICY IN NIGERIA
2.9 THE RELATIONSHIP
BETWEEN EXCHANGE RATES AND
BALANCE OF PAYMENTS
2.10 RELATIONSHIP
BETWEEN FOREIGN INVESTMENT AND BALANCE
OF PAYMENTS
2.11 THEORY OF GOVERNMENT
EXPENDITURE
2.11.1
PUBLIC EXPENDITURE POLICIES IN NIGERIA
2.12 PERFORMANCE AND TRENDS IN NIGERIA’S BALANCE OF PAYMENTS
2.13 A REVIEW OF RELEVANT EMPIRICAL
LITERATURE
2.13.1 Balance of Payment and Exchange Rate
2.13.2 Balance of Payment and Foreign
Investment
2.13.4 Government
Expenditure and the Economy
REFERENCES
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 INTRODUCTION
In this chapter, a considerable amount
of effort will be made to design all the methods and techniques to be used in
collecting the research data. The data gathering techniques to be employed as
well as the analytical tools to be adopted in this research will be dictated by
the nature of this study and the problem under consideration. Thus, the data to
be collected will be those that relate to the variables under consideration,
that is, balance of payments, exchange rates, foreign direct investment,
foreign portfolio investment, government expenditure, private consumption and
all share index of the Nigeria stock exchange for the period of the study.
3.2 RESEARCH DESIGN
In every research
work, there are many designs open to the researcher to choose from in order to
obtain necessary data aimed at the successful realization of the objectives of
the study. However, some research designs are more appropriate and suitable in
the collection and analysis of the research data, in order to achieve the
objectives of studies like this one.
To this end, we will adopt the quasi-experimental
research design for this research. The experimental method attempt to account
for the influence of a factor or multiple factors conditioning a given
situation; it attempts to demonstrate the existence of a causal relationship
between one or more independent variables and one or more dependent variables
(lkeagwu, 1998).
Our choice of this method is motivated by
its inherent ability to critically highlight the caused relationship between
exchange rates and balance of payments performance, analyze the influence of
exchange rates on balance of payments performance, as well as test the
hypothesized relationship. This design has the advantage of establishing
relationships, as well as providing opportunity for studying change over time.
Most importantly, it reduces bias thus ensuring reliability. These characteristics
are critical to the
achievement of the purpose of this study.
3.3 DATA COLLECTION
3.4 DATA ANALYSES TECHNIQUES
3.5.1 MODEL SPECIFICATION
As we stated
earlier, data collected for this study was estimated using a Multiple
Regression Analysis of the Ordinary Least Squares Method. In its general form,
the model is specified as:
y = a + b1x1 + b2x2
+ ...... + bnxn + ie
where y = the dependent or outcome variable
a = constant term
x1, x2…xn =
set of independent variables or predictors
b1,
b2, ….bn =
coefficients of the predictor variables and
ie = the error term.
Thus, given
our variable: (Balance of Payments (BOP), Exchange Rates (EXRATE), Foreign Direct
Investment (FDI), Foreign Portfolio Investment (FPI), Government Expenditure
(GOVT), Private Consumption (PRIVATE) and All Share Index (ASI)), following the
multiple regression model as specified above,
BOP = a + b1EXRATE
+ b2FDI + b3FPI + b4GOVTEX
+ b5PRCONS + b6ASI + ie
Where BOP = Balance of Payments
EXRATE = Exchange Rates
FDI = Foreign Direct Investment
FPI =
Foreign Portfolio Investment
GOVT =
Government Expenditure
PRIVATE =
Private Consumption and
ASI =
All Share Index
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.0 INTRODUCTION
In this chapter, we carry out an
analysis of the data collected from secondary sources from the central bank
Nigeria statistical bulletin. For the purpose of clarity and easy understanding
of the analysis, this chapter has been divided into three sections. The first
section presents an introduction to the chapter, the second presents an
analysis of the data characteristics. Finally, section three deals with the
testing of hypothesis.
Tables and charts will be used for
the presentation of the data and the report is structured around these
exhibits.
4.2 DATA
PRESENTATION
4.3 DATA
ANALYSES AND INTERPRETATION OF RESULTS
4.4 HYPOTHESES
TESTING
HYPOTHESIS ONE
HYPOTHESIS TWO
HYPOTHESIS THREE
HYPOTHESIS FOUR
HYPOTHESIS FIVE
HYPOTHESIS SIX
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION
5.1 SUMMARY AND DISCUSSION OF FINDINGS
This chapter shows
the summary of findings, conclusions drawn and the recommendation made on the
basis of the findings and conclusions of the study. This study undertook to
investigate the Correlates of Balance of Payments in Nigeria.
Among the findings
of the analyses carried are the following:
a)
Balance of Payment is negatively correlated with Exchange Rate, Foreign
Direct Investment, Foreign Portfolio Investment, Government Expenditure,
Private consumption Expenditure and All Share Index of the Nigerian Stock
Exchange.
b)
On the other hand, only two out of six independent variables indicated a
negative relationship with balance of payment. Thus, a naira increase in
government expenditure or private consumption is expected to lead to a
commensurate decrease in balance of payment and vice versa.
c)
A positive relationship is indicated to exist between balance of payment
and exchange rate, foreign direct investment, foreign portfolio investment and
the all share index. This implies that a unit increase in any of the above
named variables will lead to an increase in balance of payment and vice versa.
d)
Finally, none of the independent variables in the hypotheses formulated
for the study were found to be statistically significant, hence the decision to
accept all six null hypotheses.
5.2 CONCLUSIONS
5.3 RECOMMENDATIONS
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