Competitiveness and the balance of payments: The role of the real effective exchange rate in Nigeria

Abstract

This research is on competitiveness and the BOP with the REER in focus. The BOP of Nigeria has over the years performed unsatisfactorily due to government’s ineffective REER stabilization policies. This has reduced the level of competitiveness of the country and hindered the level of economic progress. The main objective is thus to assess the impact of the REER on the BOP in Nigeria. The study covered the 1996-2021 period. The cointegration and ECM frameworks were used to analyze the data. The Johansen cointegration test indicated a long run equilibrium relationship among the variables. The parsimonious ECM result indicated that the REER had a positive and significant impact on the BOP. This indicates that a depreciation of the REER improved the position of Nigeria’s BOP. The ERS had positive and significant impact on the BOP. An indication that improvement in the level of external reserves could translate into a favourable BOP. Productivity had a positive on significant impact on the REER. The EXD and OPEN had positive and significant impact on the BOP. It is thus recommended the export and production base of Nigeria should be diversified away from unprocessed and unrefined products to finished products which should be produced with local
raw materials. This will improve the competitiveness of the Nigerian economy which will stabilize the REER and the BOP.