Nigeria’s Fiscal Performance: Exploring the Role of Exchange Rate
Keywords:
Exchange rate, Fiscal deficit, Public debt, Fiscal performance, ARDL, Nigeria.
Abstract
The paper offers empirical justifications for the instrumentality of external sector in influencing the fiscal position of a country through the exchange rate. In the study, ARDL bounds test approach to cointegration analysis is adopted to examine the long run and short run relationship between exchange rate and fiscal performance in Nigeria. The validity of the findings is based on time series data between 1981 and 2017. The emerging evidence reveals that the exchange rate movement has a substantial influence on the fiscal performance, as there exists a significant adverse relationship between exchange rate and fiscal deficit in the long run as well as in the short run, while the association between exchange rate and public debt is found to be significantly positive in both periods. Empirical elucidations posit that an appreciation of the exchange rate could lead to decreasing fiscal deficits. However, the exchange rate appreciation might not induce a reduction in public debt, as it could stimulate demand for loanable funds by the government, although such effect could be mitigated through strategic investment policy and subsidized funding schemes to aid domestic production. Given that fiscal performance is considerably driven or constrained by the exchange rate movement, the study suggests that developing a strategic framework for ensuring a realistic exchange rate and the mitigation of regular fluctuations or correcting inappropriate exchange rate is crucial.
References
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Alam, N. & Taib, F. (2013). An investigation of the relationship of external public debt with budget deficit, current account deficit and exchange rate depreciation in debt trap and non-debt trap countries. European Scientific Journal, 9(22), 144-158.
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Auerbach, A. J. & Gorodnichenko, Y. (2016). Effects of fiscal shocks in a globalized world. IMF Economic Review, 64(1), 177–215.
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Bachman, D.D. (1992). Why is the US current account deficit so large? Evidence from vector autoregressions. Southern Economic Journal, 59(2), 232-40.
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Bahmani-Oskooee, M. & Miteza, I. (2003). Are devaluations expansionary or contractionary? A Survey Article. Economic Issues, 8(2), 1–28.
Barro, R. J., (1990). Government spending in a simple model of endogenous growth. Journal of Political Economy, 98(5), 103-125.
Barro, R.J. (1974). Are government bonds net wealth? Journal of Political Economy, 82(6), 1095-1117.
Calvo, G. A., Izquierdo, A. & Talvi, E. (2003). Sudden stops, the real exchange rate, and fiscal sustainability: Argentina’s lesson. NBER Working Paper No. 9828.
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Darku, C. (2013). The report: Ghana 2013. Oxford Business Group https://books.google.com.ng/books?isbn=190706589X.
David, U. & Ameh, A. (2010). The Effect of exchange rate fluctuations on Nigeria manufacturing sector. African Journal of Business Management, 4(14), 2994-2998.
Engle, R.F. & Granger, C.J. (1987). Cointegration and error-correction-representation, estimation and testing. Econometrica, 55, 251–278.
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Hausmann, R., Pritchett, L. & Rodrik, D. (2005). Growth Accelerations. Journal of Economic Growth, 10(4), 303–29.
Ijeoma, N.B. (2013). An empirical analysis of the impact of debt on the Nigerian economy. International Journal of Arts and Humanities, 2(7), 165-191.
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Johansen, S. & Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration with application to the demand for money. Oxford Bulletin of Economics and Statistics, 52, 169 – 210.
Khalid, A. M. & Teo, G.W. (1999). Causality tests of budget and current account deficits: Cross-country comparisons. Empirical Economics, 24 (3), 389-402.
Kim, S. (2015). Country characteristics and the effects of government consumption shocks on the current account and real exchange rate. Journal of International Economics, 97(2), 436–447.
Kim, S. & Roubini, N. (2008). Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S. Journal of International Economics, 74(2), 362–383.
Lawal A. I., Atunde, I.O., Ahmed, V. & Asaleye, A. (2016). Exchange rate fluctuation and the Nigeria economic growth. EuroEconomica, 35 (2): 124 – 138.
Mitchell, A., & Pentecost, E.J. (2001).The Real Exchange Rate and the Output Response in Four Transition Economies: A Panel Data Study. In Exchange Rate Policies, Prices and Supply-Side Response. Edited by C. Papazoglou and E. J. Pentecost, 68–77. Houndmills: Palgrave Macmillan.
Miteza, I. (2006). Devaluation and output in five transition economies: A panel cointegration approach of Poland, Hungary, Czech Republic, Slovakia and Romania, 1993–2000. Applied Econometrics and International Development, 6, 77–86.
Monacelli, T. & Perotti, R. (2010). Fiscal policy, the real exchange rate and traded goods. Economic Journal, 120 (544), 437–461.
Mundell, R.A. (1961). A theory of optimal currency areas. American Economic Review, 51, 509-517.
Mwega F.M., Mwangi, N. & Olewe-Ochilo, F. (1994). Macroeconomic constraints and medium-term growth in Kenya: A three-gap analysis. African Journal of Economic Policy, 1 (3), 110-115.
Narayan, P. (2005). The saving and investment nexus for China: Evidence from co-integration tests. Applied Economics, 37, 1979-1990.
Neaime, S. & Gaysset, I. (2017). Sustainability of macroeconomic policies in selected MENA countries: Post financial and debt crises. Research in International Business and Finance, 40(C):129-140.
Neaime, S., Gaysset, I. & Badra, N. (2018). The Eurozone debt crisis: A Structural VAR Approach. Research in International Business and Finance, 43, 22-33.
Nwankwo, G. O. (1980). The Nigerian financial system. London: Macmillan; New York: Africana Pub. Co. [distributor], 1980, https://trove.nla.gov.au/version/30475303.
Obansa, S.A., Okoroafor, O.D., Aluko, O.O. & Millicent, E. (2013). Perceived relationship between exchange rate, interest rate and economic growth in Nigeria: 1970-2010. American Journal of Humanities and Social Sciences, 1(3), 116-124.
Patrawimolporn, P. (2007). Effect of exchange rate on debt, debt services and public debt management in Thailand in the 1980s. Asian Economic Journal, 5(3), 339-355.
Pesaran, H. & Shin, Y. (1997). An autoregressive distributed lag modeling approach to co-integration analysis. University of Cambridge, England.
Pesaran, M. H., Shin, Y. & Smith, R.J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16, 289-326.
Piersanti (2000). Impact of the budget deficit on key macroeconomic variables in the major industrial countries. The Florida Atlantic University Libraries.
Premium Times (2018). Nigeria’s fiscal deficit may widen in 2018 – World Bank. Premium Times (November 26, 2018).
Proshare (2018). Driving effective fiscal spending in Nigeria as a part of fiscal consolidation. Proshare Economy (August 17, 2018).
Ravn, M. O., Schmitt-Grohé, S. & Uribe, M. (2012). Consumption, government spending, and the real exchange rate. Journal of Monetary Economics, 59(3), 215–234.
Rodrik, D. (2008). The real exchange rate and economic growth. Brookings papers on economic activity, 39 (2):365-439.
Sek, S. K., Ooi, C.P. & Ismail, M.T. (2012). Investigating the relationship between exchange rate and inflation targeting. Applied Mathematical Sciences, 6(32), 1571–1583.
Thirlwall, A. P. (1979). The balance of payments constraint as an explanation of international growth rate differences. Banca Nazionale del Lavoro Quarterly Review, 32(128), 45–53.
Tornell, A. Y. & Velasco, A. (1994). Fiscal policy and the choice of exchange rate regime. Inter-American Development Bank working paper No.303.
Ubok-Udom, E.U. (1999). Currency depreciation and domestic output growth in Nigeria: 1971-1995. The Nigerian Journal of Economics and Social studies, 41(1), 31-44.
A. E. Akinlo & Odusola, A.F. (2003). Assessing the impact of Nigeria's naira depreciation on output and inflation. Applied Economics, Taylor & Francis Journals, 35(6), 691-703.
Alam, N. & Taib, F. (2013). An investigation of the relationship of external public debt with budget deficit, current account deficit and exchange rate depreciation in debt trap and non-debt trap countries. European Scientific Journal, 9(22), 144-158.
Al-Khedair, S. I. (1996). The impact of the budget deficit on key macroeconomic variables in the major industrial countries. Ph.D. Dissertation, Florida Atlantic University.
Asher O.J. (2012). The impact of exchange rate fluctuation on the Nigeria economic growth (1980 – 2010). Unpublished B.sc Thesis of Caritas University Emene, Enugu State, Nigeria.
Auerbach, A. J. & Gorodnichenko, Y. (2016). Effects of fiscal shocks in a globalized world. IMF Economic Review, 64(1), 177–215.
Azeez, B.A., Kolapo, F.T. & Ajayi, L.B. (2012). Effect of exchange rate volatility on macroeconomic performance in Nigeria. Interdisciplinary Journal of Contemporary Research in Business, 4(1), 149-155.
Bacha E. L. (1990). A three-gap model of foreign transfers and the GDP growth rate in developing countries. Journal of Development Economies, 32(2), 19-35.
Bachman, D.D. (1992). Why is the US current account deficit so large? Evidence from vector autoregressions. Southern Economic Journal, 59(2), 232-40.
Bahmani-Oskooee, M. & Kutan, A.M. (2008). Are devaluations contractionary in emerging economies of Eastern Europe? Economic Change and Restructuring, 41, 61–74.
Bahmani-Oskooee, M. & Miteza, I. (2003). Are devaluations expansionary or contractionary? A Survey Article. Economic Issues, 8(2), 1–28.
Barro, R. J., (1990). Government spending in a simple model of endogenous growth. Journal of Political Economy, 98(5), 103-125.
Barro, R.J. (1974). Are government bonds net wealth? Journal of Political Economy, 82(6), 1095-1117.
Calvo, G. A., Izquierdo, A. & Talvi, E. (2003). Sudden stops, the real exchange rate, and fiscal sustainability: Argentina’s lesson. NBER Working Paper No. 9828.
CEIC (2018). Global economic data, indicators, Charts & Forecasts. CEIC.
Darku, C. (2013). The report: Ghana 2013. Oxford Business Group https://books.google.com.ng/books?isbn=190706589X.
David, U. & Ameh, A. (2010). The Effect of exchange rate fluctuations on Nigeria manufacturing sector. African Journal of Business Management, 4(14), 2994-2998.
Engle, R.F. & Granger, C.J. (1987). Cointegration and error-correction-representation, estimation and testing. Econometrica, 55, 251–278.
Ferreira, A.L., Canuto, O. & Lima, G.T. (2003). Thirlwall ́s law and foreign capital in Brazil. Momento Economico, January–February, 125, 18–29.
Fleming, J.M. (1962). Domestic financial policies under fixed and under floating exchange rates. Staff Papers (International Monetary Fund), 9(3), 369-380.
Gregory, A.W. & Hansen, B.E. (1996). Tests for cointegration in models with regime and trend shifts. Oxford Bulletin of Economics and Statistics, 58, 555–560.
Guyot, A., Lagoarde-Segot, T. & Neaime, S. (2014). Foreign shocks and international cost of equity destabilization: Evidence from the MENA region. Emerging Markets Review, 18, 101-22.
Hausmann, R. & Panizza, U. (2002). The mystery of original sin. Mimeo Kennedy School of Government.
Hausmann, R., Pritchett, L. & Rodrik, D. (2005). Growth Accelerations. Journal of Economic Growth, 10(4), 303–29.
Ijeoma, N.B. (2013). An empirical analysis of the impact of debt on the Nigerian economy. International Journal of Arts and Humanities, 2(7), 165-191.
Islam, M.F. (1998). Brazil’s twin deficits: An empirical examination. Atlantic Economic Journal, 26 (2):121- 128.
Johansen, S. (1991). Estimation and hypothesis testing of co-integration vectors in Gaussian vector autoregressive models. Econometrica, 59, 1551 – 1580.
Johansen, S. & Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration with application to the demand for money. Oxford Bulletin of Economics and Statistics, 52, 169 – 210.
Khalid, A. M. & Teo, G.W. (1999). Causality tests of budget and current account deficits: Cross-country comparisons. Empirical Economics, 24 (3), 389-402.
Kim, S. (2015). Country characteristics and the effects of government consumption shocks on the current account and real exchange rate. Journal of International Economics, 97(2), 436–447.
Kim, S. & Roubini, N. (2008). Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S. Journal of International Economics, 74(2), 362–383.
Lawal A. I., Atunde, I.O., Ahmed, V. & Asaleye, A. (2016). Exchange rate fluctuation and the Nigeria economic growth. EuroEconomica, 35 (2): 124 – 138.
Mitchell, A., & Pentecost, E.J. (2001).The Real Exchange Rate and the Output Response in Four Transition Economies: A Panel Data Study. In Exchange Rate Policies, Prices and Supply-Side Response. Edited by C. Papazoglou and E. J. Pentecost, 68–77. Houndmills: Palgrave Macmillan.
Miteza, I. (2006). Devaluation and output in five transition economies: A panel cointegration approach of Poland, Hungary, Czech Republic, Slovakia and Romania, 1993–2000. Applied Econometrics and International Development, 6, 77–86.
Monacelli, T. & Perotti, R. (2010). Fiscal policy, the real exchange rate and traded goods. Economic Journal, 120 (544), 437–461.
Mundell, R.A. (1961). A theory of optimal currency areas. American Economic Review, 51, 509-517.
Mwega F.M., Mwangi, N. & Olewe-Ochilo, F. (1994). Macroeconomic constraints and medium-term growth in Kenya: A three-gap analysis. African Journal of Economic Policy, 1 (3), 110-115.
Narayan, P. (2005). The saving and investment nexus for China: Evidence from co-integration tests. Applied Economics, 37, 1979-1990.
Neaime, S. & Gaysset, I. (2017). Sustainability of macroeconomic policies in selected MENA countries: Post financial and debt crises. Research in International Business and Finance, 40(C):129-140.
Neaime, S., Gaysset, I. & Badra, N. (2018). The Eurozone debt crisis: A Structural VAR Approach. Research in International Business and Finance, 43, 22-33.
Nwankwo, G. O. (1980). The Nigerian financial system. London: Macmillan; New York: Africana Pub. Co. [distributor], 1980, https://trove.nla.gov.au/version/30475303.
Obansa, S.A., Okoroafor, O.D., Aluko, O.O. & Millicent, E. (2013). Perceived relationship between exchange rate, interest rate and economic growth in Nigeria: 1970-2010. American Journal of Humanities and Social Sciences, 1(3), 116-124.
Patrawimolporn, P. (2007). Effect of exchange rate on debt, debt services and public debt management in Thailand in the 1980s. Asian Economic Journal, 5(3), 339-355.
Pesaran, H. & Shin, Y. (1997). An autoregressive distributed lag modeling approach to co-integration analysis. University of Cambridge, England.
Pesaran, M. H., Shin, Y. & Smith, R.J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16, 289-326.
Piersanti (2000). Impact of the budget deficit on key macroeconomic variables in the major industrial countries. The Florida Atlantic University Libraries.
Premium Times (2018). Nigeria’s fiscal deficit may widen in 2018 – World Bank. Premium Times (November 26, 2018).
Proshare (2018). Driving effective fiscal spending in Nigeria as a part of fiscal consolidation. Proshare Economy (August 17, 2018).
Ravn, M. O., Schmitt-Grohé, S. & Uribe, M. (2012). Consumption, government spending, and the real exchange rate. Journal of Monetary Economics, 59(3), 215–234.
Rodrik, D. (2008). The real exchange rate and economic growth. Brookings papers on economic activity, 39 (2):365-439.
Sek, S. K., Ooi, C.P. & Ismail, M.T. (2012). Investigating the relationship between exchange rate and inflation targeting. Applied Mathematical Sciences, 6(32), 1571–1583.
Thirlwall, A. P. (1979). The balance of payments constraint as an explanation of international growth rate differences. Banca Nazionale del Lavoro Quarterly Review, 32(128), 45–53.
Tornell, A. Y. & Velasco, A. (1994). Fiscal policy and the choice of exchange rate regime. Inter-American Development Bank working paper No.303.
Ubok-Udom, E.U. (1999). Currency depreciation and domestic output growth in Nigeria: 1971-1995. The Nigerian Journal of Economics and Social studies, 41(1), 31-44.
Published
2020-03-11
How to Cite
Fagbemi, F., & Olatunde, O. S. (2020). Nigeria’s Fiscal Performance: Exploring the Role of Exchange Rate. American Finance & Banking Review, 5(1), 17-26. https://doi.org/10.46281/amfbr.v5i1.510
Section
Research Paper/Theoretical Paper/Review Paper/Short Communication Paper
Copyright (c) 2020 Fisayo Fagbemi, Olufemi Solomon Olatunde
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