The impact of monetary policy on foreign trade in Nigeria was examined for a period of 31 years (1985-2016). The variables used for conducting this empirical analysis were Gross Domestic Products, Foreign Direct investment flow, money supply, exchange rate, interest rate and total trade. The ordinary least square (OLS) methodology was employed for this purpose.  The ADF unit root test was employed to test the stationarity of the variables. The study found out at 5% level of significance that Exchange Rate (EXR) had a negative and significant relationship on the economic growth of Nigeria during the period of study. Foreign Direct Investment Flow (FDIF) had a positive and significant relationship on the economic growth of Nigeria during the period of study. Total Trade (TOTR) had a positive and insignificant relationship with economic growth of Nigeria during the period of study. Interest rate exerted a positive and insignificant relationship with economic growth of Nigeria during the period of study. More so, the study showed that the money supply (MS2) had a positive and significant relationship with economic growth of Nigeria during the period of study. The study recommended that the government should encourage export diversification i.e. Non-oil sector exports should be encouraged and concentration on oil sector export should be minimized.









  • Background of the Study

Monetary policy is one of the key drivers of economic growth through its impact on economic variables. Economic growth is essential in an economy as it reduces poverty as well as improving livelihoods. The growing importance of monetary policy has made its effectiveness in influencing economic growth a priority to most governments. Despite the lack of consensus among economists on how monetary policy actually works and on the magnitude of its effect on the economy, there is a remarkable strong agreement that it has some measure of effects on the economy (Nkoro, 2005)

Monetary policy is a combination of measures designed to regulate the value, supply and cost of money in an economy, in consonance with the expected level of economic activity (Folawewo and Osinubi, 2006). Ajayi (2014) opined that the objectives of monetary policy include price stability, maintenance of balance of payments equilibrium, promotion of employment and output growth, and sustainable development. The pursuit of price stability invariably implies the indirect pursuit of other objectives such as economic growth, which can only take place under conditions of price stability and allocative efficiency of financialmarkets. Monetary policy aims at ensuring that money supply is at a level that is consistent with the growth target of real income, such that non-inflationary growth will be ensured. Monetary policy influences economic growth through aggregate spending. Changes in money supply and interest rate influences consumer spending as well as investment decisions. Consequently, aggregate demand changes in response to monetary policy adjustments.

For most economies, the objectives of monetary policy include price stability, maintenance of balance of payments equilibrium, and promotion of employment, output growth, and sustainable development. These objectives are necessary for the attainment of internal and external balance, and the promotion of long run economic growth. The importance of price stability derives from the harmful effect of price volatility which undermines the objectives. This is indeed a general agreement that domestic price fluctuations undermines the role of monetary values as a store of value, and frustrate investments and growth. (Ajayi, 2014)

Nigeria monetary policy is enhanced to target the reduction in the rate of inflation with the framework of maintaining price stability as a single most important objective of monetary policy. Monetary policy is directed towards the reducing inflation presupposes the existence of a stable and predictable relationship between monetary aggregates and other economic variable in the economy (CBN, 2015).

According to CBN (2012) Monetary Policy refers to the specific actions taken by the Central Bank (Monetary Authority) to regulate the value, supply and cost of money in the economy with a view to achieving predetermine macroeconomic goals.

Generally, monetary policy refers to combination of measures designed to regulate the supply of money in an economy in relation to the level of economic activity. Monetary policy refers to the credit control measure adopted by the central bank of a country (Friedman, 2000).

On the other hand, International trade is simply known as the exchange of goods and services between nations of the world. At least two countries should be involved in the act, the aggregate of activities relating to trading between merchants across borders. Traders engage in economic activities for the purpose of the profit maximization engendered from differentials among international economic environment of nations (Adedeji, 2006).

International trade can be interchangeably referred to as ‘foreign trade’ or ‘global trade’. It encompasses the inflow (import) and outflow (export) of goods and services in a country (Frederick, 2012).

Countries would be limited to goods and services produced within their territories without international trade. International trade is directly related to globalization because increase in trade activities across border is paramount to the globalization process. The globalized nature of an economy enhances its direct participation in the world market consequently leading to market expansion. According to Adam Smith, as quoted in Li, Chen and San (2010) opines that expansion of a country’s market encourages productivity which inevitably leads to economic growth.

The economic growth of Nigeria to large extent depends on her trade with other nations. Nigeria as a developing country has been grappling with realities of developmental process not only politically and socially but also economically. In 1960s, agriculture was the main stay of the economy and the greatest foreign exchange earner, and Nigerian government was able to execute investment projects through domestic savings, earnings from exports of agricultural products and foreign aids (Ezike, 2011).

Nigeria’s over-dependence on crude oil is dangerous because crude oil is a wasting asset with a proven reserve which would eventually become depleted and the vagaries of the oil market has resulted in a significant decline in the earnings because of the exogenously determined price of crude oil. (Abebefe 1995).

The 21st century has witnessed series of monetary policy and trade reforms in Nigeria put in place by government in order to diversify the export base and ensure that foreign trade serves as a driving force for the economic growth process. In view of this, the study aims to provide evidence on the impact of monetary policy on international trade of Nigeria (Emeka and Peter, 2012).

1.2       Statement of Problem

One of the major objectives of monetary policy in Nigeria is price stability. But despite the various monetary regimes that have been adopted by the Central Bank of Nigeria over the years, inflation still remains a major threat to Nigeria’s economic growth (Akinjare et al., 2016).

Nigeria has experienced high volatility in inflation rates. Since the early 1970’s, there have been high inflation episodes in excess of 30 percent. The growth of money supply is correlated with the high inflation episodes because money growth was often in excess of real economic growth. However, preceding the growth in money supply, some factors reflecting the structural characteristics of the economy are observable. Some of these are supply shocks, arising from factors such as famine, currency devaluation and changes in terms of trade. The cause of the inflation may also be adduced to the worsening terms of external trade experienced by the country at that time. It is possible therefore that Nigeria’s inflationary episodes were preceded by structural or real factors followed by monetary expansion (Anowor and Okorie, 2016).

Furthermore, Nigeria is endowed with various kinds of resources needed to place her amongst the top emerging economies of the world. Unfortunately, the nation has not adequately benefitted from the economic prosperity expected of a nation so richly blessed. Ironically, global economic indices from reputable international organization have consistently categorized Nigeria as an economically backward state. For instance, in 1995, the UNDP Human Development Index (HDI) ranked Nigeria as 164th and 141st amongst 197 nations with low per capita income and “low quality of life” respectively (Ezike, 2012).

Through export promotion for instance, Nigeria can manage her resources to create enough wealth and improve the quality of the economy vis-a-visstandard of living and also enhance her global economic rating.

Exporting is not a luxury, but a war of economic survival fought and won through international rules and practices. No doubt, exporting is an old phenomenon in economic setting of Nigeria. The dominant features of Nigerians export trade are the predominance of primary product (cocoa, palm kernel, palm oil, crude oil etc) and relative insignificance of manufactured ones. Before the independence, Nigeria was known for her abundance of natural resources. She was rated the third world’s highest producer of agricultural products and the largest exporter of cocoa worldwide. Exports of these products generated substantial foreign exchange for the country (Okpara, 2005).

As a technologically weak and backward country, the product life cycle theory is to some extent not relevant for Nigeria, even though the country used to be leading exporter of rice in the 60s but now turned to be a major importer of same rice. For example, the year 2008 ended in Nigeria with the massive importation of rice and grains into the country worth N 80 billion (Ikeokwu, 2008).

Nigeria is also unable to achieve sustainable development through international trade due to factors such as poor policy and hostile external environment, lack of good governance, corruption, political instability, poverty, insecurity, poor human capital and infrastructural development amongst others (Tokarick, 2006).

The growth performance of the Nigeria economy has been less satisfactory during the past three decades until recently when statistics shows steady growth in the nation’s economy. Apart from oil, Nigeria export mainly primary products and often rely almost exclusively on a limited number of commodities, such exports are characterized by lower prices than manufactured goods plus highly volatile markets. Thus, Nigeria is often on the wrong end of unbalanced trade environment that favours developed countries. Nigeria with the abundant human and natural resources is paradoxically being regarded as one of the poorest countries in the world.

Finally, the failure of the monetary policy in curbing price instability has caused growth instability as Nigeria’s record of development has been very poor. In marked contrast to most developing countries, its GDP was not significantly higher in the year 2000 that it was 35 years before. As many economic indicators show, Nigeria’s economy has experienced different growth stages. The GDP growth rate recorded negative growth in the early 1980s (-2.7 in 1982, 7.1 in 1983 and -1.1 in 1984). The growth rate increased steadily between 1985 and 1990 but fell sharply in 1986 and 1987 to 2.5% and -0.2%. Except in 1991 when a negative growth rate of -0.8% was recorded, 1990s witnessed an unstable growth. However, the growth rate has been relatively high since 2001 until mid-2014 when it began to fall from 6.54% in 2014Q2 (CBN, 2015) to -0.36% in 2016Q1 (NBS, 2016a), and then to -2.06 in 2016Q2 (NBS, 2016b), and further down to -2.24 in 2016Q3 (NBS, 2016c) due to oil price crash. An examination of the long-term pattern reveals the following secular swings: 1965-1968 Rapid Decline (civil war years), 1969-1971 Revival, 1972-1980 Boom, 1981-1984 Crash, 1985-1991 Renewed Growth, 1992-2013 Wobbling, 2014-2016 Contraction (Anowor and Okorie, 2016). Therefore, there is need to examine the impact of monetary policy on foreign trade in Nigeria.

1.3       Objectives of the Study

The broad objective of the study is to examine the impact of monetary policy on foreign trade in Nigeria. While the specific objectives include;

  1. To examine the effect of monetary policy on economic growth of Nigeria.
  2. To determine the effect of money supply on foreign trade on economic growth of Nigeria
  • To investigate the impact of total trade on economic growth of Nigeria.

1.4       Research Questions

The research questions for this work include:

  1. What is the effect of monetary policy on economic growth of Nigeria?
  2. What is the effect of money supply on foreign trade of Nigeria?
  • What is the impact of total trade on economic growth of Nigeria?

1.5           Research Hypotheses

The following null hypotheses were formulated to guide the study, they include:

Ho1: Total trade has no positive and significant effect on the economic growth of Nigeria.

Ho2money supply has no positive and significant effect on international trade in Nigeria.

Ho3monetary policy has no significant effect on Foreign Direct Investment flow of Nigeria

1.6       Significance of the Study

This study will be an invaluable tool to the following;

  1. Organizations; will benefit from this study because they will have the opportunity to benefit from international trade by means of technical assistance from foreign countries thereby improving on her products, joint ventures and bilateral trade agreement will assist the host country in benefiting from the latest technology and financial assistance from their partners abroad.
  2. The government; this study is also relevant to the government, as it will analyze the shortcoming involved in carrying out international measures and policy reviews can be carried out by the government in order to stimulate international trade thereby increasing her balance of payment surplus.
  • Students; it will bring increased visibility, usage and impact for their work, in studying the economic growth in Nigeria, and as a tool for reference purposes for other researchers in similar areas.
  1. The general public that partake in international trade; it will also go a long way in stimulating exporters to carryout export trade with less hitch. Thus will go a long way in generating employment opportunities for our teaming population, thereby allowing private sector contribution to the economic development of the country in general.
    • Scope of Study

The study is centered only on the export and import on the economic growth of Nigeria.

The scope of the study will span 31 years, that is, (1985 – 2016). Because of the availability of data and the fact that international trade became significantly regulated during this period. The years before 1985 and after 2016 were excluded mainly due to lack of adequate data.