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The Determinants Of Balance Of Payment In
Nigeria (1983 – 2007)
ABSTRACT
This study
aimed at analyzing through econometric methodology the Determinant of Balance
of payment in Nigeria. In the work, we capture balance of payment as the
dependent variable while trade openness, external debt service and exchange
rate as the explanatory variable. In the second page of the regression
estimated we observed GDP as the dependent variable while balance of payment,
trade openness exchange rate and external debt service being the independent
variable. An ordinary least square was used to capture the relationship between
the variables been the regression plane. From the result estimated, we observed
that all parameters are statistically significant from the t-test statistics.
We also realize from the F-test estimation that the model is statistically
insignificant because the T-cal < T-tab in all the variable. The result went
further in the test of autocorrelation through the Durbin-Watson that there is
absence of autocorrelation among the variable
CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of the Study
Trade in the
primitive era was purely by barter, means exchange of goods. This form of trade
involved discrepancies in exchange value, settlement in credit or money and
this discrepancies constituted the origin of concept of balance of payment
(Growell 1986:1).
The term
balance of payment itself entered the English economic literature during the
mercantilist period. After, 1570 the balance of payments developed slowly in
response to the sets of circumstances; the first was the rise of mercantilisms
and the desire on the part of English businessmen and government officials to
be informed of the quantitative aspect of foreign commerce.
The generic
meaning of the term today is the excess of receipts over payments of any
economic activity, although the concept initially applied, to and received its
greatest elaboration in the theory of international trade. In its original
usage, a “balance of payment” means an “excess of payment over receipts and
under the gold standards, this excess means a gold outflow.
But the term
soon acquired the neutral meaning of the “state of balance of international
economic covers both international financial transactions and international
trade in commodities and services. International trade has money merits. Some
of which include creation of employment opportunities. International trade also
makes room for countries to enjoy higher standard of living.
Every nation
has an international balance of payment problem (Bowdan 1986:662) developed,
developing countries of the world, experience balance of payments problem. But
the difference between the developed and
developing of countries as regards to balance of payments is that due to
deterioration in their term of trade, the developing nations suffer the impacts
of balance payments deficit more than the developed ones.
Due to the
fact that most of the less developed economics of the world have been
experiencing the problem of financing then purchases from the developed
nations, many of these less developed nations removed barriers in order to
increase their sales and services to the developed economics.
Because of
the advantages of international trade discussed above, different nations engage
in international trade. “Each country keeps her own accounts of its
international dealings. Their accounts are called the balance of payment
accounts”. (Chikeleze 1989:1) The balance of payment accounts are divided into
two broad account: - current account and capital account. Current account is
that part of balance of payment which summarizes transactions in currently
produced, goods and services, investment income etc, while capital account on
the other hand, is that part of balance of payments accounts which summarizes
transaction in financial assets including stocks, bonds short-term credits and
indirect purchases of foreign plants or businesses.
Therefore,
capital account covers investments and short-term monetary flows. These
accounts among other thing help each nation to know the sources of its new
foreign money and about the way they foreign money balances are being used up.
Each nation’s international balance of payments shows their nation’s trading
and financial position with the rest of the world. “The structure of a
country’s balance of payments reflects both its stage of economic development and
the pattern of each activity within the country. The accounting balance of
payment records both regular transactions and transactions made to settle any
gap between regular purchases and sales, (Jhingan, 1986:58-60). The problem in
construction of a useful operational definition of the balance, payment is thus
the problem of separating regular transactions from setting” transaction,
distinction best suited to the purposes of the determinants of balance of
payments analysis.
The growth
performance of the Nigerian economy has been determined by both domestic
production and consumption activities as well as foreign transactions in goods
and services. Specifically, it has been acknowledged that foreign trade is an
engine of growth and development. Further, in an economy that is characterized
by macroeconomic stability and favourable investment climate, attractive trade
policies would encourage foreign investment, technological advancement and
exports which will inturn attract massive inflow of foreign exchange.
Prior to the discovery of oil in 1960s,
the Nigerian government was able to execute investment projects through
domestic savings, earnings from agricultural product exports and foreign aids.
However, the capacity of the economy to accumulate domestic savings, earnings
to finance investment was limited. There was therefore, the inability of
government to generate sufficient foreign exchange due to persistent balance of
payment problem arising from the reliance on monoproduct primary export which is
not competitive at the international market.
After the discovery of oil and its
massive exportation in the 1970s, one would expect that more foreign exchange
earning will accrue to the economy, and the economy would be able to undertake
viable investment projects that will lay a basis for sustainable growth and
development.
In an attempt to address the various
macroeconomic problems in the economy, government adopted the demand management
policy in 1982 when the problems were perceived as demand driven. Some measure
where introduced like imposition of tariffs and application of contradictory
fiscal and balance of payment equilibrium. All these have consequences for
imports, savings and investment and growth particularly in developing countries
such as Nigeria which heavily depends on imports for its capital goods and raw
materials. Total Debt – GDP ratio rose from 9.6 percent in 1980 to 24.1 percent
in 1985. With all these constraints on domestic financial resources and the
inability of the private sector to champion the course of growth and
development, the real GDP declined by 3.8 percent between 1980 and 1985.
The persistence of the macro economic
problems in the economy even after the introduction of a number of
stabilization measures made the government to adopt the structural adjustment
programme (SAP) in 1986. This was meant to further strengthening the existing
demand management policies; restructure and diversify the productive base of
the economy and reduce dependence on the oil sector and on imports, and to
achieve fiscal and balance of payments viability, among other underlying
objectives (Philips, 1987)
Further, the SAP policy package includes
trade and payment liberalization which suggests that there was no serious balance
of payments constraint during the period of implementation of SAP compared to
what is obtained before SAP. It should be noted that with the introduction of
SAP in Nigeria, the procedure hitherto used in allocating foreign exchange and
which consequently serve as a mechanism of controlling demand for foreign
exchange was abolished. Thus, the foreign exchange market was deregulated. The
policy aims at making foreign exchange available to whoever could avoid the
prevailing exchange rate.
Between 1986 and 1993, the ratio of
investment to GDP ranged between 11.0 and 18.5 percent, while the ratio of
savings to GDP was between 10.0 and 28.5 percent. The savings-investment gap –
GDP ratio which was negative between 1986 and 1987, became positive in the
subsequent years. This suggests that the SAP period was characterized by
relatively low level absorptive capacity of the economy since some proportion
of savings were not translated into investment (Adewuyi, 2000). Further, the
relatively low level absorptive capacity
of the economy continued in the subsequent period (after SAP) as the
savings-investment gap- GDP ratio was positive, while the external trade
performance indicators did not show significant improvements. The ratio of
fiscal deficit to GDP reached a peak of 11.0 percent in 1994, while the real
GDP growth rate was less than 4.0 percent in the period 1994 to 2000.
All these is used to inform governmental
authorities of the international position of the country, to aid governmental
authorities in reaching decisions on monetary and fiscal policy on the one hard
and trade and payments questions on the other, it is used to measure the
resources flows between one country and another. Information on payments and
receipts in foreign exchange constituting a foreign exchange goods and meeting
payments in foreign currency when they became due and it is used to measure the
influence of foreign transactions on national income.
1.2 STATEMENT OF THE PROBLEMS
In Nigeria,
balance of payments problem has been a matter of concern to almost every
citizen of the country for some decades now. Different households in Nigeria
are encountering various economic problems brought about by the balance of
payments disequilibrium. Our industrialization and technological advancement
have remained very low. There has not been any substantial economic growth in
the nation despites the fact that more than 60 percent of the country’s
populations are engaged in Agriculture, the country still import food items to
supplement those one produced in the economy.
Unemployment
rate in Nigeria economy has become the basic problem in the balance of payments
disequilibrium. Low rate of employment leads to low level of output and hence
high cost of living. However, the central issues therefore are: what roles have
our administrators to play regarding the imbalance in Nigeria’s balance of
payment disequilibrium facing the economy? What impact has the nature of oil
exports goods on the balance of payments problem? What influence has the
activities of smugglers on the balance of payments disequilibrium? Has the low
level of industrialization and technological advancement any effect on the
Nigeria’s balance of payment problem?
1.3 OBJECTIVE OF THE STUDY
The broad
objectives of this study are to discover the factors that influence Nigeria’s
balance of payment (BOP). However, the specific objectives are:
i. To ascertain the determinants of
Nigeria’s balance of payment (BOP).
ii. To determine the impacts of balance
of payment on economic growth in Nigeria.
iii. The study also aims at proffering ways
of achieving a sustainable and tolerable balance of payment equilibrium.
1.4 HYPOTHESIS OF THE STUDY
In order to
achieve the objectives of this study, the following hypothesis are tested:
i. There are no significant
determinants of balance of payment (BOP) in Nigeria.
ii. Balance of payment has no
significant impact on economic growth in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY
The study
will be useful in understanding the distribution and adjustments on
international transactions and thus help the policy makers and implementors.
The study will also be useful in
evaluating the degree of Nigeria’s international solvency. In addition to the
above mentioned points, this study will reveal the influence of national income
on foreign transactions and its importance in the appraisal of Nigeria’s
short-term international economic prospects.
1.6 SCOPE AND LIMITATIONS OF THE STUDY
This
research work on the “a balance of payments determinant in Nigeria is going to
cover all the Nigeria’s international economic transactions from the year 1983
to 2007. The researcher will have to find out how the balance of payment will
affect the Nigeria’s economic growth within the period under study.
But despite the fact that the above
mentioned problems were encountered, the researcher still forged ahead on his
study.
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