POVERTY REDUCTION AND BALANCE OF PAYMENT DYNAMICS HYPOTHESIS IN NIGERIA: AN OVER-PARAMETERIZED AND PARSIMONIOUS ERROR CORRECTION MODELING (1986 -2022)

Abstract

This research investigated quantitatively, the impact of macro-economic condition of Balance of Payments on Poverty Reduction in Nigeria for the period (1986-2022); An over-Parameterized and Parsimonious modeling. The main objective was to evaluate the impact of balance of payment on poverty reduction in Nigeria, through balance of payment equilibrium. For the achievement of these aims, we put forward and specified models with variables such as Gross Domestic Product per capita, Foreign Direct investment (FDIs), Exchange Rate (EXRE) and External Reserve (EXR). These variables were extracted from CBN Statistical bulletin and from the NBS bulletin. The econometric method of cointegration and error correction model (ECM) with particular emphasis on over-parameterized and parsimonious error correction models was adopted. Given the empirical results, it was established that the a’priori expectation was consistent in the estimation. At the long run, the result shows that the impact of balance of payments on poverty reduction in Nigeria adjusts rapidly fairly well to changes in the explanatory variables, indicating the existence of long-run relationships between them. The over-parameterized and parsimonious error correction in model 2 result shows that, the error correction coefficient is low, rightly signed and significant at 1%. This shows that poverty reduction proxy by Gross Domestic product per Capita (GDPPC) in Nigeria for the period under review does adjust fairly to Balance of Payments, this is referred to as Balance of Payments dynamics hypothesis. Conclusively, based on our results, appropriate policy recommendations were made which include, the desirability to adopt policies that would accelerate the inflows of foreign direct investments and reduce the external debt stock, which would in turn promote sustained growth and full employment. Also, the need for the government to have a paradigm shift from consumption to production.