Exchange Rate Volatility and Imports in Nigeria

Abstract

This paper offers empirical evidence on the impact of real exchange rate volatility on Nigeria’s
imports. A review of the literature reveals that exchange rate volatility can have either positive or
negative effects on imports. The empirical analysis began with testing for stationarity of the variables
by applying the Augmented Dickey-Fuller (ADF). This was followed by co-integration test of the
model. Parsimonious ECM model was estimated with the Schwarz criterion and Akaike information
criterion as lag length selection criterion. The result indicates that real exchange rate volatility has no
significant effect on Nigeria’s imports. This is an indication that domestic consumption is skewed
towards imported goods which indicates further, that Nigerian export has a high import content.
Also, the study found that devaluation as a policy instrument to reduce trade imbalance has not
discouraged massive importation. Since exchange rate volatility did not significantly explain imports,
it is thus recommended that more stringent measures like outright ban and quantitative restrictions
be adopted to reduce pressure on the external sector.