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

money. This shows monetary sector equilibrium (Pilbeam, 2013). It is upward sloping because at a certain level of money supply, when income increases, the demand for money as a means of transaction increases and the interest rate also increases as money demand increases (Fan & Fan, 2002). It is steep because we assume that as income rises, the transactional demand for money rises and that there is a steep money supply schedule as money supply is not very elastic to interest rate (at full capacity). Also, we assume Nigeria’s money demand isn’t very sensitive to interest rate. From the above set up, there is a huge transactional demand for money and an insensitive money supply. Money supply doesn’t necessarily increase with increased interest rates. Moreover, the BP schedule (balance of payment) represents the export and import. We assume the export as given because it depends on other nations’ income level which is beyond Nigeria’s control. But import is based on Nigeria’s income level. When income increases, import increases based on Nigeria’s marginal propensity to import (as an import dependent nation)(Riti, Gubak, & DA Madina, 2016). Hence the BP schedule is upward sloping (Fan & Fan, 2002). If we consider the capital account as well, the capital flow will depend on the elasticity of capital flow to interest rate. We assume that capital flow is insensitive to interest rate as political instability and security threats deter investors, so the BP schedule is quite steep. And if there will be a capital surge at all, the interest rate needs to be very high. Let us consider how a shift in these schedules will affect balance of payment. If there’s an expansionary fiscal policy, IS shifts to IS 1 as showed in figure 2. Figure 2: A Mundell-Fleming Model Showing a Shift in IS. The national income increases, and interest rates are pushed up. But as interest rate is still below BP, the economy lacks the required interest rate to bring in enough capital. There will be an overall balance of payment deficit. Also, the steep BP means low capital mobility as many investors do not consider investing in assets in developing economies. However, if Nigeria can fix its capital mobility issues and make the BP schedule to be more flat-like, a surge of capital into the economy will cause balance of payment surplus to compensate for any current account balance of payment deficit (Ezu & Oranefo, 2023). We will discuss how Nigeria can fix its capital mobility issues under the structural approach. If there was a monetary expansion as showed in figure 3 due to an increase in money supply, interest rates will be pushed down below the BP schedule- further than the push of the IS shift. Even though there is higher national income, the economy lacks enough interest rate to attract capital inflow, so there will be an overall balance of payment deficit. Hence, Nigeria really must investigate solving its capital mobility issues. y Figure 3: A Mundell-Fleming Model Showing a Shift in LM r IS BP r BP LM I LM IS y 2 Global Journal of Management and Business Research Volume XXIII Issue III Version I Year 2023 ( ) B © 2023 Global Journals Nigeria’s Balance of Payment Crisis: Causes and Recommendations LM