Análisis FODA.

As expressed in research documents of the International Monetary Fund (IMF), the balance of payments¹⁴ is a statistical statement that systematically summarizes, for a specific time period, the economic transactions of a country with the rest of the world. It categorizes the value of goods and services a particular country has exported and imported, and its level of borrowing from or lending to the rest of the world and also the level of investments. The net of all these transactions is matched by a change in the country‘s international monetary reserves. Because countries have always been heavily reliant on international trade and capital inflows to fund new investments, the balance of

14 Source: Balance of Payments Manual, IMF. (see Appendix 1 for classifications of BoP)

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payments is, therefore, seen as an important indicator of a country‘s economic strength.

The significance of the BoP position (a deficit or surplus) has changed quite significantly since the advent of the floating exchange rate system following the collapse of the Bretton Woods institution in the 1970s. Thus, exchange rate behaviour has great influence on the BoP position of any economy.

Traditionally, the BoP statistics comprise three components, the current, financial and capital accounts; and there is a considerable body of literature on the relationship between exchange rates and each of these account balances. Some of which have been surveyed in several papers.¹⁵ There is, however, no consensus in the existing literature on the subject of these relationships.

On the theory, Mussa (1976) assessed the fundamental principles of the monetary approach to BoP analysis in a regime of floating exchange rates under a number of assumptions. That exchange rate is the relative price of different national monies, rather than national outputs, and is determined primarily by the demands and supplies of stocks of different national monies. Secondly, exchange rates are strongly influenced by asset holders‘ expectations of future exchange rates and these expectations are influenced by beliefs concerning the future course of monetary policy. Also, real factors as well as monetary factors are important in determining the behaviour of exchange rates. He developed a model with the assumption that exchange rate is fundamentally an asset price that is proximately determined by the relationship between the willingness to hold domestic money and the stock of domestic money available to be held.

In emerging market economies, it is revealed by Jongwanich et al., (2013) that increases (declines) in capital inflows are associated with real exchange rate appreciation (depreciation). But Edwards (1988, 1989) observed that the direction of the influence of exchange rate appreciation on investment flow has also remained vague. An appreciation of the exchange rate may signal the strength of the domestic economy, which further

15 Some include, Mussa (1976), Aghevli and Khan (1977), Ajayi (1975), Edwards (1988, 1989), Cottani et al., (1990) for a group of developing countries, Ghura and Grennes (1993) for a panel of sub-Saharan African economies, Mwega (1993) for Kenya, Elbadawi (1994) for Chile, Ghana and India, Amin and Awung (1997) for selected francophone countries, Aron et al. (1997) for South Africa, Egwaikhide (1999) on Nigeria, and Mungule (2004) for Zambia.

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increases net financial inflows. The ripple effect is a favourable (surplus) current account balance. Again, an appreciation of the domestic tends to decrease the relative value of financial inflows in domestic currency, while increasing the relative worth of financial outflows in foreign currency.

On trade issues, Cooper (1976) considered devaluation of domestic currency might lead to higher exports and lower imports, which in the long run improves the overall balance of payments position. Supporting Cooper (1976) views, Sodersten (1989) hypothesized that devaluation of a country‘s currency makes imports more expensive in terms of the domestic currency and if not matched by a corresponding rise in export prices, the terms of trade would deteriorate. Deterioration in the terms of trade represents a loss of real national income and may further exacerbate the balance of payments problem.

Furthermore, an appreciation of the exchange rate weakens trade balance as exports become expensive in the international market while imports turn out to be relatively cheaper (Kandil, 2009).

In Africa‘s situation, Obadan and Nwobike (1991) pointed out that adopting multiple exchange rate systems as an option to devaluation have helped countries to solve their balance of payments problem. This is, however, viewed as too pricey from a political and societal point of view. Thus, a rationalized and proper administered dual exchange rate system can be very helpful to developing countries for ensuring the contentment of basic needs, ensuring fixed and balance of payments viability and general resource mobilization.

The empirical enquiry of Silumbu (1995), with particular reference to the Malawian economy that employed the Monetary Approach to Balance of Payments (MABP), is very illuminating. The researcher‘s main concern was the effects of the exchange rate, relative prices and domestic credit on the overall BoP within the reserve flow equation (RFE) variant of the MABP. The estimation results, using both quarterly and annual data, showed that the price exerted a significant lagged impact on the overall BoP. The impact of the non-tradeables price on the BoP was stronger from the relative price side than from the money demand side. The results of the Granger-Causality tests for credit and reserves

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were diverse. However, unidirectional causality was established from private sector credit to reserves. The conclusion about the long-run causes of balance of payments fluctuations remained uncertain. Therefore, no policy conclusion could be inferred from the study. By applying cointegration and error correction mechanism econometric method using annual data for the period 1981 to 2002, Nwani (2005) asserted that exchange rate movements and inflation greatly influenced Nigeria‘s balance of payments.