Currency fluctuations have an impact on Nigeria's balance of payments (BOP) because a weaker currency makes imports cheaper for other countries, improving the BOP. Nigeria has tried various exchange rate policies since 1958 but has struggled to achieve a favorable BOP position. While reforms by the Central Bank of Nigeria (CBN) have reduced the impact of currency fluctuations, more consistent actions are needed given Nigeria's volatile economy and all components of the BOP need consideration for policy decisions.

1. Impact of currency fluctuations on BOP of Nigeria
Bop is a statement of all transactions made between entities in one country and the rest of the
world over a defined period of time , currency fluctuations has an impact on the bop because
if the currency gets weak then the imports become cheaper for other countries and it
appreciates the bop of the country, so it can be stated that there is an inverse relationship
between currency fluctuations and bop.
Nigeria has witnessed several exchange rate policies and regimes; however, these
policies had not led to the achievement of a favourable balance of payment position in the
country.
It all started with the formation of central bank of Nigeria in 1958. Nigeria operated under
fixed exchange rate and was pegged to British pound. But after devaluation of British pound
it was changed into naira, naira was overvalued because of the exchange control act which
was enacted in 1968, which resulted in massive importation of finished goods and affected
the balance of payment. (at that time the exchange rate between naira and dollar was 0.71)
1970s was the age of development of oil sector which gave Nigeria opportunity to increase
the foreign exchange earnings and helped to apricate the value of naira to 0.54, but this did
not last long because of the oil surplus of 1980s which increased the demand of the foreign
exchange and broke the fixed rate regime of Nigeria.
In the year 1986 CBN came up with a 2-tire system of exchange rate. In the first-tier prices
were referred as official rate and CBN administratively managed it. As a part of federal
government strategies towards Structural Adjustment Programme (SAP) the second-tier
foreign exchange market was established. Using the market auction system, the exchange rate
was allocated and determined in the second-tier foreign exchange market. The objectives of
this exchange rate policy under SAP included-
1) Preserving the value of domestic currency
2) Enhancing the competitiveness of domestic industries
3) To promote local production
4) To diversify the economy
Bureau de was introduced by CBN in the year 1989 to grip the exchange rate of private sector
(exchange rate declined from 3.32 to 9 per dollar in 1994).

2. Later in 2002 the Dutch auction system was established to reduce the pressure of demand of
foreign exchange and external reserve. Further in 2006 whole sale Dutch auction system
came and prevail till 2008 and in 2009 retail Dutch auction system which was due to the
depleting external reserves.
NER
External
Reserve
Crude
Oil Price
System followed
Years (N/$) US ‘Million
USD/
Barrel
1971-1975 0.63 1238.56 5.53 pegged to Pound
1976-1980 0.63 3014.29 20.32
fixed foreign
exchange regime
1981-1985 2.93 1549.53 30.13 floated
1986-1990 13.74 3863.21 17.01 Bureau de Change
1991-1995 21.89 4472.18 17.16 Bureau de Change
1996-2000 52.09 5571.04 19.29
Structural
Adjustment
Programme (SAP)
2001-2005 125.58 12512.3 32.44 DAS
2006 128.65 37456.09 61 WDAS
2007 125.83 45394.31 69.04 WDAS
2008 118.57 58474.38 94.1 WDAS
2009 148.9 77152.31 60.86 WDAS
2010 150.29 37358.71 77.38 RDAS
2011 153.86 32639.8 107.46 RDAS
2012 157.5 43830 109.45 RDAS
2013 157.31 42850 105.87 RDAS
2014 158.55 37220.33 63.28 RDAS

3. Conclusion–
Although the current account was in surplus mainly through the revenue derived from the
export of crude oil, a large amount of the deficits incurred were from the capital account. The
deficits in the BOP were due to increase importation of food products, textiles, automobiles,
machinery and equipment’s.
The reform in the Nigerian monetary system by CBN has somehow reduced the impact of
currency fluctuations but in long run a more similar efficient actions should be in place
because of the extreme volatile condition of the economy and all the component of the bop
should be considered to take decision on these policies.
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