Impact of Exchange Rate on Foreign Trade Position in Nigeria

Abstract

The study empirically investigated the impact of exchange rate fluctuations on Nigeria’s international trade position over a period of 30 years (from 1994 to 2024). Using annual time-series data from the Central Bank of Nigeria, the World Bank and International Monetary Fund, the paper employed a multivariate econometric framework to evaluate how exchange rate (EXR), trade openness (TO), inflation rate (CPI), foreign direct investment (FDI), interest rate (RI) and gross capital formation (GCF) have impact on trade balance (TB) of Nigeria, which is the proxy for international trade position of Nigeria used in the study. The descriptive statistics revealed that the Naira depreciated from ₦22/USD in 1994 to ₦1,488/USD in 2024. Johansen co-integration test confirmed that a long-run equilibrium relationship exists among the variables used in the study. The result of the study showed that FDI, TO, GCF and CPI (used as a proxy for inflation) have positive impact on foreign trade position in Nigeria while EXR and RI exert negative impact on foreign trade position in Nigeria. The study further found that Nigeria’s international trade position is predominantly driven by trade openness and FDI and not necessarily exchange rate volatility. The study therefore recommends that Nigerian policymakers should de-emphasize reactive exchange rate interventions and hence create an enabling environment for trade and investment in the country to achieve positive and sustainable foreign trade position in the Nigeria.