An Evaluation of Exchange Rate Volatility on Nigeria’s Trade Balance: Evidence from the Naira Depreciation Period (2016–2020)
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Background of the Study
Exchange rate volatility has a profound effect on international trade by influencing export competitiveness and import costs. In Nigeria, the period between 2016 and 2020 was marked by significant depreciation of the naira, which in turn had complex implications for the country’s trade balance. The depreciating currency affected the cost of imported goods and altered the competitiveness of Nigerian exports in global markets. This period also saw the Nigerian government and central bank implementing various measures to manage the depreciation and stabilize the economy (Chukwu, 2024). Scholars have argued that exchange rate fluctuations can either boost exports by making them cheaper or harm the economy by increasing the cost of essential imports (Ike, 2023).
The dynamics of exchange rate volatility during this period are particularly critical given Nigeria’s heavy reliance on imported inputs for domestic production. The depreciation of the naira resulted in higher production costs for many local industries, thereby impacting overall export performance. Conversely, the lower value of the naira provided a temporary competitive edge in some export sectors, creating a mixed outcome for the trade balance. Recent empirical studies have highlighted that while a depreciated currency might improve the trade balance theoretically, the actual outcomes depend on the elasticity of demand for exports and imports as well as the broader macroeconomic context (Obi, 2025).
Moreover, the policy responses during the naira depreciation period, including foreign exchange controls and interventions by the Central Bank of Nigeria, aimed to mitigate adverse impacts. However, these measures often had unintended consequences, such as the creation of parallel market dynamics and increased uncertainty among international trading partners. This study seeks to evaluate the extent to which exchange rate volatility influenced Nigeria’s trade balance during the naira depreciation period by integrating theoretical frameworks with empirical data analysis. It further investigates the role of policy interventions in shaping these outcomes, providing a critical analysis of their effectiveness in stabilizing the trade environment (Nwankwo, 2023). By exploring both the positive and negative ramifications of currency fluctuations, the study contributes to a deeper understanding of the complex interplay between exchange rates and international trade in a developing economy.
Statement of the Problem
Nigeria’s trade balance has been notably affected by the volatile nature of the naira, particularly during the period of pronounced depreciation from 2016 to 2020. This volatility has led to significant challenges in maintaining stable trade dynamics. One critical problem is that while a depreciated naira can theoretically enhance export competitiveness, the resulting increase in import costs adversely affects the cost structure of local industries, leading to inflationary pressures and reduced economic efficiency (Chukwu, 2024). Additionally, the dual exchange rate system and the emergence of a parallel market have complicated the official policy responses, making it difficult to gauge the true extent of the depreciation’s impact on trade (Ike, 2023).
The inconsistency in policy implementation and the delay in corrective measures have further compounded the issue. Many firms have reported difficulties in planning and pricing due to unpredictable exchange rate movements. This unpredictability creates an uncertain business environment that can discourage both domestic and foreign investments in trade-related sectors. Furthermore, the lack of comprehensive data on exchange rate impacts and the interplay with other macroeconomic variables limits the ability of policymakers to design effective interventions (Obi, 2025).
Consequently, this study aims to dissect the multifaceted effects of exchange rate volatility on Nigeria’s trade balance. It seeks to understand how fluctuations in the naira affect export performance, import costs, and overall trade dynamics. By identifying the key challenges and the shortcomings of the current policy framework, the study will offer insights into potential strategies for mitigating the adverse effects of exchange rate instability. The analysis is crucial in providing a roadmap for enhancing trade performance through more effective currency management and policy coordination (Nwankwo, 2023).
Objectives of the Study
1. To examine the impact of naira depreciation on Nigeria’s trade balance between 2016 and 2020.
2. To analyze the effectiveness of policy interventions in managing exchange rate volatility.
3. To identify the key structural factors that influence the relationship between exchange rate movements and trade performance.
Research Questions
1. How has naira depreciation affected Nigeria’s trade balance during the period under study?
2. What role have policy interventions played in moderating the effects of exchange rate volatility?
3. Which structural factors most significantly influence trade performance in the context of currency fluctuations?
Research Hypotheses
1. Exchange rate volatility significantly influences Nigeria’s trade balance.
2. Policy interventions have a moderating effect on the impact of naira depreciation on trade performance.
3. Structural factors, such as import dependency and export elasticity, significantly affect the relationship between exchange rate movements and trade outcomes.
Scope and Limitations of the Study
This research focuses on the period from 2016 to 2020, using quantitative trade data and policy analysis to assess the effects of exchange rate volatility. Limitations include data availability, the influence of external global market factors, and the complexity of isolating exchange rate effects from other economic variables.
Definitions of Terms
Exchange Rate Volatility: Fluctuations in the value of a country’s currency relative to other currencies over time.
Trade Balance: The difference between the value of a country’s exports and imports.
Naira Depreciation: The reduction in the value of the Nigerian currency relative to foreign currencies.
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