An Analysis of the Effect of Naira Devaluation on Nigerian Balance Of Trade

Abstract

This study investigates the effect of naira devaluation on Nigerian balance of trade using time series data from 1986 to 2021. The study examined the long run and short-run equilibrium relationship between devaluation and trade balance over the study period. The study used unrestricted Vector Auto Regression (VAR), Co-integration and Vector Error Correction Mechanism (VECM) technique in the analysis of data. The variables currency devaluation (CDV), Export rate (EXPT), Import rate (IMPT) and Trade balance are found to be 1(1) variables, while Interest rate (INTR) is found to be 1(0) variables. Based on the VAR Co- integration test result, it indicates long-run equilibrium relationship among the variables. The error correction term was correctly signed and statistically significant. The estimates from the VAR model showed both positive and negative shocks running from naira devaluation to trade balance, export rate, import rate and currency devaluation based on the past and current values. The study concluded that, naira devaluation have positive and significant impact on trade balance of Nigeria. The study recommended that, Government should improve this indigenous innovation to meet up with international standard as a means to reduce dependence on import and encourage production of competitive goods and services, as export becomes cheaper after devaluation, it is expected that Nigeria as a country will immensely improve on its exported goods and increase the output of exportable goods which will leads to favorable balance of trade among others.

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