Measuring the Effect of Foreign Exchange Policy on the Export of Crude Oil – Evidence from Nigeria

Abstract

The study assesses the impact of foreign exchange policy on crude oil exports in Nigeria between 2007 and 2016.The paper dwelt on issues of foreign currency positions of successive Nigerian government in a mono-cultural economy. There was also a review of past work done by previous scholars in the area. In the process of developing of the model the first step is to identify the linear regression model requiring the inclusion of the dependent and independent variable and the attendant coefficient weights identified by using statistical method called Ordinary Least Squares (OLS).After analyzing the data using unit root test, granger causality test and the least square NLS ARMA methods the findings indicated that most of the crude oil variable changes could not be explained by the foreign exchange regimes for the period in question as the R2 and adjusted R2 was 28.6% and 19.7%. However this does not suggest that model hasn’t the right goodness of fit when one considers that the AIC (22.89310), or Schwarz criterion (22.95362), shows that the difference between the two as being very negligible, an indicator of a near perfect model convergence near zero. The smaller they are the better the fit of your model is (from a statistical perspective) as they reflect a trade-off between the lack of fit and the number of parameters in the model. The conclusion was that devaluation did nothing increase Nigeria’s exports and foreign exchange earnings in any case. Just recently in 2016, the monetary authorities pegged the official rate at 35% stronger than the black market rate. The policies sparked capital flight and hindered foreign investment flows. As a result of currency pegging and restrictions on foreign exchange market, a lot of speculative and precautionary demand was created as exporters and investors held on to already scarce dollar and naturally would be unwilling to sell at the rate it was officially pegged thereby causing a wider gap between the official rate and the bla