Impact Analysis of Trade Liberalization and the Naira Exchange Rate

The stability or otherwise of the naira exchange rate mirrors as well as predicts economic growth and the overall macroeconomic wellbeing of the Nigerian economy. This objective primarily motivated this investigation, which was to decompose the impact trade liberalization has on the naira exchange rate and what it portends to the Nigerian economy. Secondary time series data on exchange rate of naira to the US Dollar, foreign direct investment, degree of trade openness, rate of inflation and exchange rate were collated from the World Bank country reports, the CBN and NBS, for our estimation and analysis. The result of the Augmented Dickey Fuller unit root test, confirmed that all our variables were integrated of order zero I (0) and I (1). The study also deployed the ARDL bounds tests for the cointegration analysis, which the result confirmed long-run relationships among the variables. Chiefly, our investigation found degree of openness to have a negative and significant effect on naira exchange rate. Thus, degree of openness depreciates the exchange value of the naira. Inflation rate was also found to have negative and significant impact on the naira exchange rate. On the contrary, both FDI and interest rate were positive and significant. Given the peculiar nature of the Nigerian economy as an import based economy, the study concludes that degree of openness or trade liberalization causes exchange instability and is harmful to the economy. Depreciation of the local currency of an import based economy isn�t beneficial as prices of imported goods and services are being determined by the cost of purchasing foreign exchange used for the payment of the imports. This introduces inflation and macroeconomic instability to the economy. The monetary authority is, therefore advice against full deregulation of the exchange market or policies that could depreciate the naira further.