RELEVANCE OF THE BALANCE OF PAYMENTS SECTOR TO THE GROWTH AND DEVELOPMENT OF THE NIGERIAN ECONOMY FROM 1970 TILL 2013

CONTENTS

• Introduction• Importance of the sector• Theoretical Framework• Assessment of the sector via Performance Indicators• Policy and Institutional Environment• Problems affecting the sector• Recommedations • Conclusions• Appendix

INTRODUCTION• “The balance of payments of a country is a statement performance

of the country’s trading transactions with the rest of the world during a given period usually one year”- G.O NKWONKWO

• A typical balance of payments comprises of; the currents account, the capital account and the financial account (also known as the official reserves account or the cash account). Also, net errors and omission is usually included in the BOPs.

• Current accounts include the merchandise and invisible imports and exports. They give rise to national income.

• Capital accounts is made up of short-terms and long-term capital transactions. It is also made up of capital transfers. Capital account is closely linked with the financial account.

• Financial account records the country’s financial transactions with foreign countries. It icludes the short-term and long-term movements of capital.

• Statistical discrepancy is also known as net errors and omissions.

IMPORTANCE OF THE B.O.P SECTORServes as an indicator for changing international

economic position of a country.Measures the payments that flow between Nigeria

and all other countriesSummarises all international economic

transactions for Nigeria during a specific time period usually a year.

Indicates the pressure on Nigeria’s foreign exchange rate.

Helps the government in taking decisions concerning policies to implement and external trade issues.

THEORETICAL FRAMEWORKA. KEYNESIAN (FISCAL APPROACH) Most well known theories under this are the

‘’elasticity theories’’ and “absorption theories”. The elasticity approach provides an analysis of how

devaluations of exchange rate and price level will affect the balance of trade depending on the elasticity of supply and demand for foreign exchange and foreign goods. This leads to the “J-curve”.

The Income- Absorption Approach analyses the effect of devaluation on the trade balance. It is a theory of the balance of trade in goods and services that emphasizes how domestic spending changes relative to domestic production.

THEORETICAL FRAMEWORK (CONT’D) Given the national output (Y) identity, Y=C + I + G + (EX-IM) Where C is consumption, I is investment, G is government spending,EX is exports, and

IM is imports. We define absorption A as : A= C+ I + G.Thus, Y= A+ EX-IM. Simply put, Y-A = EX-IM. If total output exceeds absorption, then the country will export its surplus and the

current account will be in surplus.

B. MONETARY APPROACH The monetary approach to balance of payments postulates that the overall balance

of payments measured by international reserves is influenced by imbalances prevailing in the money market.

The monetary approach, like the absorption approach, stresses the need for reducing domestic expenditure relative to income, in order to eliminate a deficit in the balance of payments.

ASSESSMENT OF THE B.O.P VIA PERFORMANCE INDICATORS

Performance indicators include:Growth rate of the GDPCurrent account as a percentage of GDPCapital and financial account as a percentage of GDPOverall balance as a percentage of GDPGrowth of the balance of paymentsExchange rate Inflation rate Interest rateGrowth of the current account

POLICY AND INSTITUTIONAL ENVIRONMENT

A. POLICIES Monetary Policy (1959-1985) Import Prohibition Trade Policy (1978) Structural Adjustment Programme (1986) Second-Tier Foreign Exchange Market (1986)

B. INSTITUTIONS Central Bank of Nigeria (1958) Federal Ministry of Finance (1958) Federal Ministry of Trade and investment (1958) Office of the Accoutant General of the Federation (1988) Nigerian Investment Promotion Commission (1995)

PROBLEMS BEING FACED BY THE B.O.P

Major problem in balance of payments is the “disequilibrium of balance of payments”.

Causes of the disequilibrium in the balance of payments in Nigeria include:

Flucutations in the world market prices.Increase in disposable incomeHigher rate of inflation. Deficit in the financial account balance (as a result

of low direct investments).

RECOMMENDATIONS

Based on the study, the following measures can be recommended:

Export promotion measures should be adopted. Import substitution measures should be adopted

so as to promote self-reliance.Contractionary monetary policies should be

implemented.Government should invest on capital projects so

as to improve the balance of payments position.

CONCLUSION• From the study, B.O.P deficit from 1980 to 1999 shows that the

economy is in a not-so-good state; while favourable balance of payments from 2000 till 2013 shows that the Nigerian economy has a great potential of achieving sustainable growth and development.

• Though the Nigerian economy has the potential for sustainable growth, it has not been able to achieve a sustainable growth and development.

• This is due to the fact that the current account balance is responsible for the favourable balance of payments position. the capital and financial account balance (which is an indicator for economic growth and development) has been very low.

• Due to this paradox, the B.O.P might give a false impression of the economy’s level of growth and development.

• When the recommendations stated earlier is acted upon, the balance of payments will become a suitable indicator which will give us a clear and true picture of the economy.