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

This also explains the reason the theory doesn’t mention exchange rate. Exchange rate differentials will affect import and export. A devaluation of naira will make export cheaper and import more expensive. For a country largely dependent on import, this will lead to current account balance of payment deficit which this theory ignores. The key takeaway is that whenever Nigeria’s aggregate demand is greater than its aggregate supply, it leads to balance of payment current account deficit. To reduce the deficit, the government either dampens demand or raise national aggregate supply. Oftentimes, the government reduces demand which tends to lead to recession. b) The Monetary Approach The monetary approach simply says that any disequilibrium in the balance of payment is due to disequilibrium in the domestic monetary sector (Pilbeam, 2013). Normally in a Domestic Monetary Sector Equilibrium: Money demand (Md) = (Ms) Money supply………………………………... Where Md = kPY…………………………………………………………………………. k = nominal income coefficient P = price level Y = real income And Ms = D + R………………………………………………………………………….. D = net domestic assets of the banking system R = international reserves Let us assume that there is a domestic monetary sector disequilibrium and money supply is higher than money demand. It is also right to assume that there will be higher spending. As this approach integrates both the real sector and monetary sector, we can safely assume that people can spend the excess money in the domestic real sector. When full capacity is reached, price level will go up and our exports will become more expensive. Many people will shift to imported goods because they are cheaper, and this weakens the balance of payment current account and causes a balance of payment deficit problem. This same outcome will result from direct spending in foreign real sector as import quantity goes up than export and the balance of payment current account weakens. If people chose to spend the excess money supply in the domestic financial market, they can buy government bonds and cause the price to rise with increased demand. This will make the interest rate fall. With lower relative interest rate, there will be capital outflow. This weakens the balance of payment capital account. On the other hand, with the fall in interest rate, investment and consumption may increase as business owners and consumers take advantage of lower interest rate to spend more. As aggregate demand rises, inflation sets in when we reach full capacity, and we are back to weak balance of payment current account. Elsewhere, people could have spent their money in the foreign financial market assuming exchange rate doesn’t change, and assuming no default or political risks and there’s perfect competition. They take advantage of interest rate differentials and capital flows out of the Nigerian economy. Hence, we have balance of payment capital account deficit. The above shows diverse ways the Nigerian balance of payment can have problems and the underlying cause is the shift in the LM schedule due to disequilibrium in money supply or money demand as shown in figure 3. R = Md – D……………………………………………………………………............ Change in R = Change in Md – Change in D……………………………… In real life though, these causes are not always clearly delineated. Expansionary fiscal measures may raise income, cause inflation, increase import, cause balance of payment current account deficit. With the attendant interest rate increase may come high capital inflow. Disequilibrium in the capital account is due to disequilibrium in the current account. With Nigeria’s flexible exchange rate, balance of payment deficit leads to exchange rate devaluation and the fall in the value of Naira as the government tries to discourage import consumption and encourage more export and made-in-Nigeria products’ consumption (Ukangwa, Onyenze, & Uke-ejibe, n. d.). Nigeria’s balance of payment deficit problem, hence, touches every fabric of the economy. A balance of payment surplus would however strengthen the naira. But if we had pegged exchange rate, surplus balance of payment adds to our reserves and deficit balance of payment depletes our reserves. And whenever we can’t meet our money demand, we use reserve as shown in equation 9 (Bird, 1981). There are legitimate criticisms of the monetary approach as it has no mention of the exchange rate. Exchange rate plays a huge role in capital flow and this approach despite its reference to money didn’t include the influence of the exchange rate (Iyoboyi & Muftau, 4 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 6 Equation 5 Equation 7 Equation 8 Equation 9