THE EFFECT OF REAL EFFECTIVE EXCHANGE RATE ON IMPORTS AND EXPORTS IN NIGERIA

Abstract

paper explores how the macroeconomic variables affect the trade balance in Nigeria between the year 1991 and 2023. The study incorporates the ex post facto research design and uses the Autoregressive Distributed Lag (ARDL) bounds testing model to analyse both short-term and long-term dynamics based on Secondary data obtained from Central Bank of Nigeria and the World Bank Development Indicators. Empirical evidence suggests that there is the long-run equilibrium relationship between trade balance and the choice of macroeconomic variables. In particular, effective exchange rate has a negative impact on trade balance, which implies that currency appreciation deteriorates the external trade position of Nigeria whereas gross domestic product has a positive and significant effect on trade balance due to the increase in production and export capacity. Money supply, inflation and the interest rate were also noted to be statistically insignificant in the long run. In the short-run, dynamics show that there are weak direct impacts of these variables on the balance of trade. The paper suggests policies to stabilize exchange rates, boost economic growth, and also to help the export-oriented sectors in enhancing trade balance in Nigeria. The macroeconomic management is the key to sustainable performance in the external sectors.