Exchange rate variation and fiscal balance in Nigeria: a time series analysis

Abstract

Exchange rate remains one of the principal determinants of a nation’s external balance and fiscal status of most emerging economies. How better its fluctuation is managed has a long way to go with the performance of major macroeconomic variables in a country. It is behind this backdrop that this paper tries to examine the effects of exchange rate fluctuation on fiscal deficit crisis in Nigeria between 1980 and 2008. The period is so chosen as it covers the range of time that witnessed the greatest fluctuation’s in the external value of the nation’s legal tender (naira). The regression analysis reveals that exchange rate has impacted negatively on fiscal deficit over the period under consideration. The Augmented Dickey-Fuller (ADF) unit root test reveals that all the time series variables employed are non-stationary at levels; both the intercept and deterministic trend. Appropriate policies are therefore recommended on how best to reposition the economy in the face of continuing devaluation of naira