Dollarization, interest and exchange rates dynamics in Nigeria

Abstract

The study provided analysis of the economic implications of dollarization in Nigeria; a focus on interest rate and exchange rate dynamics. The used secondary data covering the period from 1986 to 2024 and were sourced from National Bureau of Statistic and Central Bank of Nigeria Statistical Bulletins. The study estimated and analyzed data using statistical techniques and econometrics. The Augmented Dickey Fuller (ADF) test was used to initially assess the data set for stationarity attributes in order to avoid inaccurate regression estimations. The data's structural breaks were taken into consideration using the Zivot Andrews (ZA) structural breakpoint model, which incorporates the unit root test. The study also employed the Johansen cointegration test to ascertain the variables' long-term correlations. The impact of dollarization on Nigeria's interest rate and exchange rate
throughout the research period was investigated using the Structural Vector Autoregressive (SVAR) approach. The result obtained from Johansen cointegration test suggested that, long run link exist among the variables of the study. Dollarization has a negative impact on interest rates and exchange rates, according to the calculated Structural Vector Autoregressive (SVAR) model. Based on these results, the study suggested, among other things, the Nigerian apex bank should implement currency-differentiated reserve
requirements by raising the reserve requirements for dollar-denominated deposits above those for local currency deposits and adjust prudential regulations for foreign currency credit, such as higher provisions for foreign currency loans, impose higher reserve requirements on foreign currency denominated assets held by banks compared to those held in local currency and control the flow of dollars within the financial system so that only agents involved in legitimate international transactions can access them.