Effects of Monetary Policy Variables on Nigeria’s Balance of Payments Adjustment: 1981-2024

This study examines the effect of monetary policy on the Nigerian balance of payments adjustment from 1980 to 2023. Objectives are; to examine the effect of monetary policy variables such as Exchange rate, Inflation rate, Balance of trade, Real Gross Domestic Product and Domestic Credit on the Nigerian balance of payments adjustment, investigate the presence of structural change effect of monetary policy and its significant effect on the balance of payments adjustment in Nigeria and evaluate the significant speed of adjustment monetary policy variables such as Exchange rate, Inflation rate, Balance of trade, Real Gross Domestic Product and Domestic Credit on the balance of payments adjustment within the period under study. The study employed the following advanced econometric techniques: the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests, the Chow test, the ECM model, the OLS model, statistical tests and the Co-integration test. Based on the above econometric techniques, it was observed that the group unit root test results show that the variables used in the study became stationary after first differencing at the degree of order one (1). There is Co-integration (long-run relations) among the variables used in the study. Our results indicated rejection of the three null hypotheses of this study and acceptance of the alternative three hypotheses, which stated that Nigerian monetary policy variables, such as the Exchange rate, Inflation rate, Balance of trade, and Domestic Credit, have a significant effect on the Nigerian balance of payments adjustment. There is evidence of a structural change in the effect of monetary policy on the Nigerian balance of payments adjustment, with a breakpoint found around 1998 and 1999. Nigerian monetary policy variables used have significantly adjusted the balance of payments in the Nigerian economy over the three-year period of the study. The researcher recommends that there is a need to manage domestic liquidity wisely in view of the tremendous pressure on the balance of payments due to excess money. A determined effort to mobilize resources through private savings and the implementation of prudent fiscal policy, including the efficient collection of tax revenues and the rationalization of government expenditure towards growth-enhancing and poverty-reduction programs, will also enable the government to pursue its development programs without relying on monetizing its budget deficit. The overall concentration on monetary tools should be reduced, and other policy instruments should be employed to correct the balance of payment fluctuations. The government should also be cautious of budget deficits that are often financed by internal borrowings.