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                                            Australian Finance & Banking Review; Vol. 4, No. 1; 2020  
ISSN 2576-1196   E-ISSN 2576-120X 

           Published by Centre for Research on Islamic Banking & Finance and Business, USA 
 

        1 
 

The Effect of Monetary Policy on Foreign Trade in Nigeria 
 

 
Ashamu Sikiru O.  PhD 

Department of Banking and Finance 
Faculty of Management Sciences 

Lagos State University, Ojo, Nigeria 
E-mail: soyerinde2012@gmail.com 

 
 
Abstract 
This research work investigated the impact of monetary policy on foreign trade in Nigeria during the period 1981 to 2017. The 
research made use of secondary data which are collected from the Central Bank of Nigeria, Statistical Bulletin (2017). The 
model obtained from the result represents a Error Correction Model (ECM) which relates the dependent variable (Net Import) 
to several predictor variables Money Supply, Interest Rate, Exchange Rate, Foreign Direct Investment and Trade Openness. 
From the findings of the study, the error correction term (speed of adjustment towards equilibrium) value of -0.53581 is 
significant at 5% and implies that there is a long run causality running from monetary policy   activities measures of foreign 
trade. However, only all the variable was used in the study was significant at 5% level of significance. This implies that monetary 
policy in Nigeria has a positive influence on foreign trade within the period, except for interest rate that has a negative 
coefficient and not significant. In conclusion, these intermediate variables of monetary, the exchange rate arguably have a huge 
impact on the economy because of its effect on the value of local currency, domestic inflation, macroeconomic credibility, capital 
flows and financial stability. Increased exchange rate directly affects the prices of imported commodities and an increase in the 
price of imported goods and services contributes directly to increase in inflation. Based on the analysis, the study concluded that 
there is significance relationship between money supply and net import in Nigeria and also that there is relationship between 
foreign direct investment and net import in Nigeria. The study also shows that there is relationship between trade openness and 
net import in Nigeria. 
 
Keywords: Monetary policy, Money supply, Exchange Rate, Foreign Direct Investment, Error Correction Model and Foreign Trade.  
 
1. Introduction 
Monetary policy refers to the combination of measures designed to regulate the value, supply and cost of money in an economy 
in consonance with the level of economic activities. It can be described as the art of controlling the direction and movement of 
monetary and credit facilities in pursuance of stable price and economic growth in the economy (Ashamu, 2007) 
 Nigeria has over the years been controlling her economy through various macroeconomic policies of which monetary policy is 
among using some monetary policy instruments in efforts to drive along the desired path. 

The unique economic structures of developing countries require active macroeconomic policies to stabilize their 
economies. The monetary policy in this regard is highly important, it not only maintain the internal targets of the economy but 
it also monitors the external balance. Because due to being small economies these countries are considered as price takers in the 
international arena, which leaves them exposed to supply shocks in particular and trade vulnerability in general. Therefore, 
monetary policy performs dual goals of stabilizing interest rate and exchange rate, to firstly maintain output and price level and 
later to maintain competitiveness in international trade. Countries trade with each other to obtain things that are of better 
quality or less expensive or simply different from the goods and services produced at home (Gonnelli, 1993). 

The changes in the exchange rate assist monetary authorities to steer external balance to the desired level. If the country 
experiences the deficit in the trade balance, the devaluation in exchange rates is often followed to mitigate this deficit. Such a 
relationship is explained by the theoretical understandings of Marshall-Lerner (ML) condition, which states that the devaluation 
is needed for the long-term gains in the international trade for developing countries.  

However, the improvement in the trade balance is not readily observable. It requires some adjustments before it shows 
improvement, these adjustments come initially by worsening of trade balance during currency depreciation. It is due to the fact 
that initially there are trade contracts that have been fixed over previous exchange rates, which show the delayed response of 
trade balance towards the improvement and it is known as J-Curve effects. 

Foreign trade as pointed by Frankel & Romer (1999) has been identified as an instrument and driver of economic 
growth. This is so because trade enhances the efficient production of goods and services through allocation of resources to 
countries that have comparative advantage in their production. In addition, its impact on a country’s economy is not limited to 
the quantitative gains, but also structural changes in the economy and facilitates the international capital flow. 



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1.2 Statement of The Problem 
Monetary policy as a technique of economic management is to bring about sustainable economic growth and development 
through foreign trade, has been the pursuit of nations and formal articulation of how money affects economic aggregates, and 
dates back the Adams Smith and water, championed by the monetary economists. Since the expositions of the role of monetary 
policy in influencing macroeconomic objectives like economic growth price stability, equilibrium in balance of payments and 
host of other objectives, monetary authorities are saddled the responsibility of using monetary policy to develop the growth of 
their economy. 

In Nigeria, monetary policy has been used, since central Bank of Nigeria was saddling the responsibility of formulating 
and implementing monetary policy by Central Bank act of 1958. This role has facilitated the emergence of active money market 
where treasury bills, a financial instrument used for open market operations and raising debt for government has grown in 
volume and valued becoming a prominent earning asset for investors and source of balancing liquidity in the market. There have 
been various regimes of monetary in Nigeria sometimes, monetary policy is tight and at other times it is loose mostly use to 
stabilize price. 

The economy has also witnessed times of expansion and contraction but evidently, the reported growth in foreign 
trade has not been a sustainable one as there is evidence of growing poverty among the populaces. The question is, could the 
periods of economic down term be blamed on factors on other than monetary policy ineffective? What measures are to be 
considered if monetary policy would be effective in financing foreign trade and bring about sustainable economic growth and 
development? 
 
1.3 Objectives of The Study 
The main objective of the study is to x-ray the effect of monetary policy on foreign trade. 
In other words, the specific objectives of the study are: 

▪ To examine the effect of money supply on foreign trade in Nigeria. 

▪ To examine the effect of trade openness on foreign trade in Nigeria. 
▪ To examine the effect of foreign direct investment on foreign trade in Nigeria. 

 
2. Literature Review 
2.1 Introduction 
For decades of years now, the geometric acceleration of a long term sustainable economic growth and development especially, 
through increase in export as one of the major macroeconomic objectives has been the desired aim of every economy in the 
world. The realization of this goal, undoubtedly, is not automatic. However, it requires policy guidance which involves 
manipulation of policy instruments (Atuma & Eze, 2017). Such macroeconomic policies that could be used to actualize the 
above aim encompass mutually monetary and fiscal policies. These policies are inextricable, apart from instruments and 
implementing authorities. However, monetary policy appears more effective in correcting short term macroeconomic 
maladjustments due to its frequency in applying and altering policy tools, relative ease of its decision process and sheer nature of 
the sector which propagates its effect to the real economy. Hence, economists see monetary policy as an essential instrument that 
every nation can install for the accurate maintenance of domestic price and exchange rate stability, as a significant condition for 
the attainment of a sustainable economic growth and development (Ulbogu, 1985; Starr, 2005; Balogun, 2007). 

Nigeria being an import dependent economy is faced with stagnated growth, unstable business cycles and economic 
fluctuation. This usually results to unemployment, inflation, unproductivity and balance of payment disequilibrium. Government 
has in one way or the other regulated and controlled the economy to maximize the welfare of the citizens by way of ensuring 
that the resources are efficiently allocated and used.  

Like any other developing country, Nigerian government adopts three types of public policies to carry out the 
objective of income distribution and allocation of resources. These tools of public policy include: monetary policy, fiscal policy 
and income policy tools. In Nigeria, government has always relied on monetary policy as a way of achieving certain economic 
objective in the economy such macroeconomic objectives include; employment, economic growth and development, balance of 
payment equilibrium and relatively stable general price level. The reason for choosing monetary policy is the fact that monetary 
policy has very serious implications for both fiscal and income policy measures. 

There is no consensus among economist as to whether government intervention through the use of monetary policy 
will bring about economic stabilization. This disagreement divided the economy into different schools of thought. They are, the 
classical school, the Keynesian school, and the monetarist school. Each of them has it view on how variation in monetary 
aggregates could affect the economic stabilization.  

The classicists believe that given the equation of exchange and stability in the velocity of money plus the assumption 
that economy operates at full employment, the change in money supply will only affect price without any effect on real demand, 
investment and output. 



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  The Keynesians on the other hand believe that variations in money supply could lead to an increase or decrease in 
interest rate. A decrease in interest rate will affect aggregate investment and enhance aggregate income and output. This is based 
on the belief that interest rate is the key determinant of investment in the market economy. The investment process involves the 
employment of factors such as labor and capital which lead to increase in total employment.  

The monetarists base their views on money supply as the key factor affecting the wellbeing of the economy. They 
believe that an increase in money supply will lead to an increase in nominal demand, and where there is excess capacity, they 
believe that output will be increased. In the long-run, the monetarist position is that the increase in money supply will be 
inflationary without any effect on investment, employment and aggregate demand. 

Government adopts various economic policies, which are implemented in the economy in order to influence economic 
activities. In doing this, the aim of the government is to achieve some target considered desirable for the economy. 

 Conceptually, monetary policy is one of the macro-economic policies which every nation whether developed or not, 
adopts in managing their economies. It implies actions or measures initiated by the monetary authorities so as to sway the 
national economic objectives by controlling the volume and direction of money supply, cost and availability of credits (Asogu, 
1998). It covers variety of measures, intended to power or regulate the volume price as well as direction of money in the 
economy. Particularly, it pervades all the deliberate effort by the monetary authorities to direct supply of money and credits 
conditions for the intention of achieving warrant macroeconomic objectives (Chukwu, 2009). On the other hand, net export 
refers to the value of a country's total exports minus the value of its total imports. It is used to calculate a country's aggregate 
expenditures, or GDP, in an open economy. In other words, net export equals the amount by which foreign spending on a home 
country's goods and services exceeds the home country's spending on foreign goods and services. Another term for net export is 
balance of trade; hence, positive net export means a trade surplus, while negative net export means a trade deficit. In Nigeria, the 
primary goal of this monetary policy is to maintain domestic price and exchange rate stability, since it is critical for the 
attainment of sustainable growth and external sector viability (CBN, 1996). This is mainly achieved by causing savers to avail 
investors of surplus funds for investment through appropriate interest rate structures; stemming wide fluctuations in the 
exchange rate, and as well proper supervision of banks and other related institutions, so as to ensure financial sector soundness, 
maintenance of efficient payments system, applying deliberate policies to expand the scope of the financial system so that 
interior economies which are largely informal, are financially included. Economists have long been interested in factors which 
cause different countries to grow at different rates and achieve different levels of wealth. One of such factors is foreign trade in 
relation to positive net export. Nigeria is basically an open economy with international dealings comprising a considerable 
proportion of her collective output. Hence, Nigeria’s economic development depends on the prospects of her export trade with 
other countries. This is because; foreign trade provides both foreign exchange earnings and market incentives for the geometric 
acceleration of economic expansion (Chimobi & Uche, 2010). However, the economy of Nigeria is faced with high rate of 
unemployment due to low productive investment, inadequate technological advancement and high inflationary pressure. These 
factors are highly conjectured as being able to militate against the growth of the economy by limiting the ability to transform raw 
materials into finished product. Thus, adopting monetary policy instruments in manipulating the fluctuations experienced in the 
economy, the Central Bank of Nigeria (CBN) since its establishment in 1959 has continued to play its traditional role by 
undertaking both contractionary and expansionary measures in tackling the problems that are observed above. Therefore, the 
need to investigate the significant effect of monetary policy instruments on the net export is felt. 
 
3. Model Specification 
The model, which is proposed to be used in this study, will be based on the work of Ariyo & Bakare (2015). In their study, they 
made use of Error Correction Model technique, to estimate the effect of monetary policy on the finance of foreign trade. 
NIit = ƒ (MS, INTR, EXCR, FDI, TO)..................................................(3.1) 

NI = β0 - β1MS - β2 INTR + β3 EXCH + β4FDI + β5 TO + μt……..............(3.2) 
With the variables defined as follows: 
  NI=    Net Import (N’ Billion) 
MS= Money Supply (N’ Billion) 
INTR= Interest Rate 
EXGR= Exchange Rate ($1 to naira) 
FDI= Foreign Direct Investment (N’ Billion) 
TO = Trade Openness 
u    =  Stochastic or disturbance term. 

β0    =  Constant or Intercept. 
 
 
 
 



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4. Result Presentation and Analysis 
4.1 Descriptive Statistics 
It contains the estimation of industrial level common sample statistics such as the mean, median, standard deviation and Jargue-
Bera for the specified variables in the first model. The summary of these statistics is presented in table 1 below. 
 
Table 1. Descriptive Statistics for selected variables 
  

 NI EXGR FDI INTR MS TO 

 Mean  1587.621  82.78625  901.0275  17.77027  4732.998  1.648378 

 Median  382.7500  92.69340  111.3000  17.60000  628.9500  1.610000 

 Maximum  6634.110  305.7900  3924.100  31.70000  23854.68  2.780000 

 Minimum -1266.750  0.610000  0.264000  8.900000  14.47000  0.790000 

 Std. Dev.  2210.523  80.40632  1315.068  4.906790  7121.084  0.492801 

 Skewness  0.920079  0.713607  1.133736  0.205522  1.418402  0.311851 

 Kurtosis  2.355123  2.868116  2.648415  3.635058  3.658612  2.719688 

       

 Jarque-Bera  5.861492  3.167101  8.116933  0.882228  13.07523  0.720852 

 Probability  0.053357  0.205245  0.017275  0.643319  0.001448  0.697379 

       

 Sum  58741.98  3063.091  33338.02  657.5000  175120.9  60.99000 

 Sum Sq. 
Dev. 

 1.76E+08  232746.3  62258524  866.7573  1.83E+09  8.742703 

       

 Observatio
ns 

 37  37  37  37  37  37 

   Source: Author’s computation (2019) 
 

Table 1 reveals that the average Net Import within the period #1,587.621 billion with the maximum Net Import 
value of #6,634.110 which was observed in 2013 while the minimum Net Import value #-1,266.750 was observed in 2015.  
The average Exchange Rate was #82.78, with a maximum Exchange Rate of #305.7 in 2017 and a minimum Exchange Rate of 
#0.610 at the end of 1981.  

Similarly, the average Foreign Direct Investment during the period was #901.0275billion with a maximum Foreign 
Direct Investment of #3,924.100 billion reported in 2013 and a minimum of #0.2640 billion was reported in 1983. 
Similarly, the average Foreign Direct Investment was #7,519 billion, with a maximum value of #34593 reported in 2017 while 
the minimum value of #19,477 billion was reported in 1981.  The Interest Rate of 31.70 percent was observed in 2013 while a 
minimum Interest Rate of 8.90 percent was reported in 1981. 

Similarly, the average money supply was #4732.998 billion, with a maximum value of #23854.68b reported in 2017 
while the minimum value of #14.470billion was reported in 1981.  The Trade Openness of #2,.780000 billion was observed 
in 1990 while a minimum Trade Openness of #0.790 billion was reported in 1982. In the same vein, the Jarque-Bera statistics 
shows that all the selected variables are normally distributed but require further diagnostic test before further analysis 
 
Table 2. Correlation Matrix 
 

 NI EXGR FDI INTR MS TO 

NI  1.000000  0.592405  0.758361 -0.052546  0.507303  0.370988 

EXGR  0.592405  1.000000  0.780684  0.113848  0.869681 -0.005670 

FDI  0.758361  0.780684  1.000000 -0.098604  0.905323 -0.065840 

INTR -0.052546  0.113848 -0.098604  1.000000 -0.080587  0.310477 

MS  0.507303  0.869681  0.905323 -0.080587  1.000000 -0.205509 

TO  0.370988 -0.005670 -0.065840  0.310477 -0.205509  1.000000 

Source: Author’s computation (2019). 
 



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From the correlation matrix presented in table 4.2, it is observed that all the specified variables as moderate positive 
relationship with the Net Import. Except interest rate with negative sign while Exchange Rate, Foreign Direct Investment, 
Money Supply and Trade Openness has 0.592, 0.758, 0.507 and 0.370 respectively. And interest rate has negative sign with 
0.06. The implication of this result is that NI measure does not exhibit any form of multicolllinearity with other data sets in the 
model. 
 
4.2 Unit Root Test 
A test of stationary or non-stationarity in time series data that has become widely popular over the past several years is the unit 
root test. This is to find out if the relationship between economic variables is spurious. This study used the Augmented Dickey-
Fuller (ADF) Techniques to test and verify the unit root property of the series and stationarity of the model, seeing that it is 
very crucial to have a stationary time series. 
 
Table 3. Augmented Dickey-Fuller (ADF) Unit Root Test Results  
 

Variables Level Prob. Critical Values First Difference Prob. Critical 
Values 

NI -1.5657 0.7654 -2.8453 -5.4575 0.0000 -2.9511 

MS -0.3246 0.6442 -2.8442 -4.8765 0.0000 -2.9484 

INTR -2.7324 0.2356 -2.8655 -3.0945 0.0267 -2.9763 

EXCR 2.3446 0.4786 -2.8775 -5.8986 0.0000 -2.9484 

FDI 1.3432 0.4465 -2.87742 -4.7887 0.0017 -2.9484 

TO 2.5436 0.2371 -2.87742 -5.7843 0.0216 -2.9484 

Source: Author’s computation (2019) 
 
Table 3 shows that all the specified variables ADF statistic at level are less than the corresponding critical values. This is 
confirmed by the corresponding P-values which are greater than 5% and compelled the need for the test at first difference which 
yield stationary values at 5% and 1% significant level. This implies that all the specified series are of I (I) or stationary at first 
difference. 
 
Table 4. Unrestricted Co-integration Trace Test 
 

Hypothesized No. 
of CE(s) 

 
Eigen value 

 
Trace Statistic 

 
0.05 Critical Value 

 
Prob.** 

None* 

At most 1* 

At most 2* 

At most 3* 

At most 4 

At most 5 

0.763452 

0.789655 

0.654642 

0.523378 

0.394554 

0.188886 

153.6574 

103.7864 

76.25572 

47.95684 

24.21368 

7.152837 

101.3457 

93.34575 

63.81889 

32.85613 

29.79707 

15.49471 

0.0000 

0.0000 

0.0172 

0.0036 

0.1916 

0.5600 

 
Trace test indicates 4 cointegrating eqn(s) at the 0.05 level  
* denotes rejection of the hypothesis at the 0.05 level  
**MacKinnon-Haug-Michelis (1999) p-values 
 

The results from the trace test and it rejects the null hypothesis if the trace statistics exceeds the critical value generated 
by the statistical packages. The table shows that the trace statistics value of 153.6 exceeds the critical value of 101.3 at 95 
percent confidence level. This implies that the null hypothesis of no co-integrating relationships is rejected. Instead, there are 
four possible cointegrating equations among the variables as indicated by the trace statistics at 5% level of significance. Below 
showed the result of the Maximum Eigen value co-integration test: 
 



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Table 5. Unrestricted Co-integration Rank Test (Maximum Eigen value) 
 

Hypothesized No. 
of CE(s) 

 
Eigen value 

 
Max-Eigen Statistic 

 
0.05 Critical Value 

 
Prob.** 

None* 
At most 1* 
At most 2 
At most 3 
At most 4 
At most 5 

0.763452 
0.789655 
0.654642 
0.523378 
0.394554 
0.188886 

145.7567 
67.09702 
32.29888 
18.74316 
17.06084 
7.117802 
 

67.23142 
40.07757 
33.87687 
27.58434 
21.13162 
14.26460 
 

0.0000 
0.0002 
0.0762 
0.4346 
0.1691 
0.4753 
 

 
Max-eigen value test indicates 2 co-integrating eqn(s) at the 0.05 level  
* denotes rejection of the hypothesis at the 0.05 level  
**MacKinnon-Haug-Michelis (1999) p-values 
 

The results from this test as the Eigen Value test statistics value of 145.75 exceeds the critical value 67.23 at 95 
percent coincidence level. This suggests that the null hypothesis be rejected. Instead, there are two possible co-integration 
equations among the variables as indicated by the Max-Eigen value at 5% level of significance. Also, the results confirmed the 
presence of a long-run relationship between and explanatory variables. 

Based on the trace Unit root test and co-integration test results, the study proceed to the adoption of the Error 
Correction as specified for the study and the result is presented in table 4.6. 
 
Table 6. Error-Correction Model Results  
 
Dependent Variable: NI 
Sample (adjusted): 1981 – 2016   
     

     Variable Coefficient    Std. Error t-Statistic Prob.   

C 22.96523 134210-0 -1.12563     0.0079 

MS 1.45213 5.63392 -0.21389     0.0362 

INTR -0.90467 0.01220 0.69071     0.0647 

EXGR -1.76999 0.82028 -0.30361     0.0317 

FDI -0.45356 1.03246 -0.20127     0.0002 

T0 -1.56091 0.17684 -0.22674     0.0317 

ECM-1 -0.53581 0.13421 -0.21021     0.0037 
      R-squared 0.751150     Mean dependent var 36321.67 

Adjusted R-squared 0.719995     S.D. dependent var 53184.39 

S.E. of regression 4519.968     Akaike info criterion 34.05634 

Sum squared resid 1.96E+09     Schwarz criterion 28.08585 

Log likelihood -536.9291     Hannan-Quinn criter. 30.09570 

F-statistic 20.57736     Durbin-Watson stat 1.951878 

Prob(F-statistic) 0.000000    

          
Source: Researcher’s Compilation from Eviews 9 
 
5. Interpretation 
The error correction term (speed of adjustment towards equilibrium) value of -0.53581 is significant at 5% and implies that 
there is a long run causality running from monetary policy   activities measures and finance of foreign trade. However, only all 
the variable was used in the study was significant at 5% level of significance. This implies that monetary policy in Nigeria has a 
positive influence on finance of foreign trade within the period, except for interest rate that has a negative coefficient and not 
significant. 

The coefficient of determination (R2) value of 0.75 implies that all the specified independent variables account for 
about 75% of the total variation in the net import within the period under review while the remaining 25% of the variations are 



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due changes in the behavioural patterns of other variables outside the scope of this study. This connotes that there are few other 
factors that influence the NI in Nigeria aside the specified independent variables. 

This aspect of study comprises summary of findings, conclusion and recommendations. The findings are drawn from 
the data analyzed. Based on the findings, conclusion and appropriate recommendations are provided to all concerned parties. 
 
6. Summary of Findings 
This study investigated the impact of monetary policy on foreign trade in Nigeria during the period 1981 to 2017. The model 
obtained from the result represents a ECM model which relates the dependent variable (Net Import) to several predictor 
variables Money Supply, Interest Rate, Exchange Rate, Foreign Direct Investment and Trade Openness. From the findings of 
the study, the error correction term (speed of adjustment towards equilibrium) value of -0.53581 is significant at 5% and 
implies that there is a long run causality running from monetary policy   activities measures and finance of foreign trade. 
However, only all the variable was used in the study was significant at 5% level of significance. This implies that monetary 
policy in Nigeria has a positive influence on finance of foreign trade within the period, except for interest rate that has a negative 
coefficient and not significant. 

The coefficient of determination (R2) value of 0.75 implies that all the specified independent variables account for 
about 75% of the total variation in the net import within the period under review while the remaining 25% of the variations are 
due changes in the behavioral patterns of other variables outside the scope of this study. This connotes that there are few other 
factors that influence the NI in Nigeria aside the specified independent variables. 
 
7. Conclusions  
Monetary policy has is an important tool for the attainment of macroeconomic stability, usually seen as a step to achieving 
economic growth and economic sustainability. Thus, in the pursuit of macroeconomic stability, the managers of monetary policy 
have often set targets on intermediate variables which include the short-term interest rate, growth of money supply and exchange 
rate. Based on the analysis, the study concluded that there is significance relationship between money supply and net import in 
Nigeria and also that there is relationship between foreign direct investment and net import in Nigeria. The study also shows 
that there is relationship between trade openness and net import in Nigeria. 
 
8. Recommendations  
Based on the findings of this study, the following recommendations are essential.  

▪ There should be effective monetary policy management to achieve the objective of price stability by government.  

▪ The Nigerian authorities should carry out reforms that would enhance the role of interest rate in order to mobilize 
funds for trade purpose. This may be done by a complete regulation of the interest rate. This is for a long-term 
economic performance. 

▪ Adopt tight trade openness by keeping trade openness rate below or at ceiling level in order to ensure economic 
growth.  

▪ Government should ensure political and macroeconomic stability so as encourage investment, both local and foreign 
and guarantee business survival.  

 
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