Institutional Quality and Balance of Payments Equilibrium in Nigeria

Abstract

The study analyzed the impact of institutional quality on balance of payments (BOP) position in Nigeria from 1970 to 2016 adopting error correction mechanism. Time series data from the Central Bank of Nigeria (CBN) and World Bank publications were utilized. The result shows a positive relationship between institutional quality proxied by contract intensive money (CIM) and BOP in Nigeria.  The coefficient of CIM was significant at five per cent level with the value of1.25. This implies an improving effect of good institutional quality on Nigeria’s BOP position. The coefficients of exchange rate, price level and interest rate were -0.88, (0.25) and 0.24, respectively. This portends that while exchange rate appreciation and price increase have adverse effect on the BOP, a moderate rise in interest rate exerts a favourable effect on the BOP. Given the result, it is recommended that rules and regulations guiding proper accountability in trade operations should be intensified by the government. By this, the use of anti-graft agencies such as the Economic and Financial Crime Commission (EFCC) and Independent Corrupt Practices Commission (ICPC) is encouraged. Also, the government should encourage a moderately reduced rate of inflation to encourage demand for the nation’s products. By so doing, investment and production will be boosted, hence, export which enhances BOP position. Deposit rate should be kept moderately high while lending rate is kept moderately low to ensure availability of credit to investors, this will enhance the contribution of credit to the balance of payments as local production will increase in export over import. Furthermore, moderate exchange rate depreciation should be encouraged to further reduce the intensity of import dependence which deteriorates balance of payments in Nigeria.