Abstract

This paper aims to investigate the effect of devaluation/depreciation of the Nigerian naira on the country’s trade balance for the period 1986 to 2008. The paper adopts the elasticity approach to the balance of payments adjustment. The study investigates the effect of exchange rate devaluation as a policy on the Nigerian economy’s Trade for the period 1986 to 2008. The focus is to test for the Marshal-Lerner condition of the power of exchange rate devaluation as a stabilization policy of a particular country. The study adapted the elasticity approach of the Marshall-Lerner condition to the balance of payment adjustment mechanism. The ordinary least square (OLS) method was used to estimate the import and export demand functions. The empirical results shows that devaluation/depreciation does not improve the trade balance;since the sum of demand elasticities for imports and exports is less than unity, the Marshall-Lerner condition do not hold. This paper concluded that devaluation/depreciation cannot improve the trade balance in the Nigerian economy. Devaluation/depreciation can only benefit countries that are originally export based before the devaluation/depreciation of a currency. Economies that are import dependent can hardy benefit from the devaluation/depreciation of its currency. Nigeria is a typical example of a 90% dependent on imported raw materials into the production process. For an economy that is structured like that of Nigeria, devaluation/depreciation will surely complicate the problem on hand, rather than solving it.

Key words: Devaluation, trade balance, Marshall-Lerner condition, co-integration, Nigeria.