EFFECTS OF MONETARY POLICY AND DETERMINANTS OF BALANCE OF PAYMENT ON ECONOMIC GROWTH IN NIGERIA

Abstract

Nigeria's macroeconomic landscape has been characterised by persistent balance of payments pressures, exchange rate volatility, weak monetary policy transmission, and sluggish economic growth, challenges that have intensified the policy debate on the appropriate role of monetary policy and external sector management in driving sustainable long-run economic growth. Against this backdrop, this study examined the effects of monetary policy and the determinants of balance of payments on economic growth in Nigeria over the period 1986 to 2024, with four specific objectives: to ascertain the key determinants of the balance of payments in Nigeria; to assess the impact of balance of payments determinants on economic growth; to determine the impact of monetary policy on economic growth; and to examine the interaction effect of the monetary policy rate and the real exchange rate on economic growth. The study employed the Autoregressive Distributed Lag (ARDL) Bounds Testing Approach developed by Pesaran, Shin and Smith (2001) across three econometric models. The key findings revealed that oil price is the dominant long-run determinant of Nigeria's balance of payments, with a positive and significant coefficient of 35.829 (p = 0.0006), while broad money supply exerted a significant negative long-run effect on the current account balance with a coefficient of -1.156 (p = 0.0033). Real exchange rate depreciation also worsened the current account balance in the long run with a coefficient of -0.014 (p = 0.0272). With respect to economic growth, trade openness emerged as the strongest positive long-run growth driver with a coefficient of 0.797 (p = 0.0000), while oil price exerted a counterintuitive negative long-run effect on growth with a coefficient of -2.150 (p = 0.0000). The monetary policy rate exerted a significant negative long-run effect on economic growth with a coefficient of -0.031 (p = 0.0019). Most significantly, the interaction term between the monetary policy rate and the real exchange rate (MPR×REXR) returned a negative and highly significant long-run coefficient of - 0.328 (p = 0.0000), establishing that the simultaneous pursuit of monetary tightening and exchange rate depreciation generates compounded contractionary effects on Nigerian economic growth that are substantially more damaging than either force acting independently. The study concludes that Nigeria’s growth is constrained by oil dependence, import intensity, and the compounded contractionary effect of monetary tightening and exchange rate depreciation. The study recommends export diversification, targeted monetary management, and stronger coordination of monetary and exchange rate policies.