Global Journal of Management and Business Research, B: Economics and Commerce, Volume 23 Issue 3

Nigeria’s Balance of Payment Crisis: Causes and Recommendations Victor Kilanko Author: Claremont Graduate University. e-mail: victor.kilanko@cgu.edu Abstract- Nigeria’s balance of payment crisis has been at the heart of its frequent recession and incessant currency devaluation. Hence it is imperative that major economic policies and strategies address this issue. As this paper as showed, if Nigeria could consistently attain overall balance of payment surplus, the naira will be strengthened, and the economy will flourish. Therefore, this paper attempts to demystify Nigeria’s balance of payment deficit while offering recommendations to improve the weak balance of payment. While the structural approach to adjusting balance of payment crisis seems to be the method with lasting economic change, it appears the most difficult to execute. Keywords: balance of payment, currency devaluation, foreign exchange, nigeria, naira. I. I ntroduction alance of payment is a statement of a country’s transactions with the rest of the world over a particular period (Lagoarde-Segot, 2023). It has the current account which shows goods and services transaction and the capital account which shows capital movement. Balance of payment is said to be at deficit if import is more than export and if capital outflow is bigger than capital inflow. While it is at surplus if the reverse is the case. Nigeria has often have daunting balance of payment deficit due to its over-reliance on crude oil (Knoema, 2020). According to the World Bank, Nigeria has a negative $15.4 billion and a negative 16.9 billion in current account balance of payment in 2015 and 2020 respectively (The World Bank, n. d.). While balance of payment deficit shows high consumption and perhaps high quality of life, it tells a different story when it becomes unsustainable. Nigeria has dealt with unsustainable balance of payment deficit for a long time. This is evidenced in the frequent IMF loans, frequent naira devaluation, and frequent contractionary monetary policy (Oladipupo, 2011). In this paper, we shall espouse Nigeria’s balance of payment crisis within the framework of the three balance of payment approaches and recommend how Nigeria can better address its balance of payment deficit. II. A ssessing B alance of P ayment with the M undell- F leming M odel The Mundell-Fleming model also known as the IS/LM/BP model provides economists with a framework to understand and explain the causes of balance of payment problems (Bird, 2014).Let us start with a basic introduction of the model as showed in Figure 1. The IS schedule (real economy) shows the combination of the interest rate and income level where planned investment is equal to planned savings (Bird, 2006). It shows real sector equilibrium. It is downward sloping because when interest rate falls, investment increases based on the elasticity of investment to interest rate (Fan & Fan, 2002). Also, when income rises, savings rise based on marginal propensity to save (MPS). It is quite flat because we are assuming that Nigeria’s MPS is small, and investment is very elastic to interest rate. The LM schedule (monetary economy) represents the values of interest rate and income level where the demand for money equals the supply of B r y LM BP IS 1 Global Journal of Management and Business Research Volume XXIII Issue III Version I Year 2023 ( ) B © 2023 Global Journals Figure 1: A basic Mundell-Fleming Model