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

Assuming Nigeria shifts its BP schedule to the right due to increase in political stability or credit worthiness or change in exchange rate as showed in figure 4. The interest rate is above the BP which means that there will be a surge in capital inflow which can compensate for any balance of payment current account deficit and create an overall balance of payment surplus. Figure 4: A Mundell-Fleming Model Showing a Shift in BP III. B alance of P ayment T heories There are three balance of payment theories that examine balance of payment problems. They are the absorption approach, the monetary approach, and the structural approach. a) The Absorption Approach The absorption approach focuses mainly on the current account side of the balance of payment- the real sector (IS)(Pilbeam, 2013). If IS shifts to the right due to improved business outlook or increase in the average propensity to consume, or fiscal expansion, national income will increase. This will lead to an increase in import as the aggregate domestic demand is bigger than the aggregate domestic supply or as higher income induces inflation which makes local goods more expensive than imported ones (Lagoarde-Segot, 2023). This will cause a problem in Nigeria’s balance of payment because the current account weakens and there is a current account balance of payment deficit. To view this in Mathematical Expressions: Y = C + I + G + X – M……………………………………………………………… Where Y = national income C = consumption I = investment G = government spending X = export M = import S = savings C + I + G = domestic demand X – M = Y- (C + I + G)…………………………………………………………………. And Income (Y) = Consumption (C) + Savings (S)……………………..… X – M = (S – I) + (T – G) ……………………………………………………………… From the above equation 4, a balance of payment current account problem can be due to a public sector or a private sector problem. We have seen above how a shift in the private sector (S - I) due to fiscal changes (shift in T-G) can cause a current account problem. However, this approach does not recognize the capital/ financial account(Bird, 2006). The model is silent on the effect of interest rate on BP nor on how change in interest rate can induce capital inflow to attain an overall balance of payment equilibrium. As seen in figure 2, a shift in IS will of course create a ripple effect that the model ignores because it didn’t talk about capital flow or money. Well, the balance of payment account is beyond the current account. Many scholars have attributed this shortcoming to the era the theory was postulated as there was limited capital mobility, pegged exchange rate, and little monetary independence(Bird, 2014). This is often called the trilemma and countries must meet two of the three conditions (pegged exchange rate, capital mobility, and monetary independence) (Popper, Mandilaras, & Bird, 2013). IS y BP I r BP LM 3 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 Equation 1 Equation 2 Equation 3 Equation 4