Nigeria’s Current Account Determination under Changes in Government Fiscal Policy and Exchange Rate Volatility (1970-2015)

Abstract

In the face of current account imbalances, exchange rate volatility, fluctuation in lending rate and inflation, development and growth of the economy could be hampered. These calls for better informed and evaluated macroeconomic policies to take care of economic and financial challenges. With this scenario in mind, the long run linkage between current account, fiscal policy and exchange rate volatility was evaluated for a period of forty five years from 1970 to 2015. Secondly, whether fiscal policy and exchange rate volatility determines Nigeria’s current account position was also ascertained. The data were diagnosed for heteroskedasticity, serial correlation, Ramsey Reset and multicollinearity. Johansen co-integration was used in evaluating the long run linkage, short run and long run dynamics by VAR error correction model and determinants of current account by granger impact assessment analysis. The result of the Johansen co-integration revealed that current account, fiscal policy and exchange rate volatility amidst fluctuation in prime lending rate and inflation are connected in the long run. The negative normalised coefficient depicted that rising fiscal deficit and exchange rate volatility will in the long run tremendously affect the current account position of Nigeria. The granger impact assessment analysis disclosed that fiscal policy and exchange rate are not determinant of Nigeria’s current account. The study put forward that Federal Government of Nigeria should stop further budget deficit and ensure stability in the exchange rate. In addition, Central Bank of Nigeria should reduce the minimum rediscount rate which determines the prime lending rate.