Project Abstract

Abstract
This research project focuses on conducting an empirical study of the foreign exchange rate premium in Nigeria from 1970 to 2007. The foreign exchange rate premium is a crucial indicator of the economic health of a country, especially in the context of Nigeria's reliance on oil exports and its exposure to global market fluctuations. The study aims to analyze the factors influencing the foreign exchange rate premium in Nigeria over the specified period and to assess the impact of these factors on the country's economy. The research utilizes a combination of quantitative data analysis and econometric modeling techniques to investigate the determinants of the foreign exchange rate premium in Nigeria. By examining variables such as inflation rates, exchange rate regimes, oil prices, government policies, and external shocks, the study seeks to provide a comprehensive understanding of the dynamics driving the foreign exchange rate premium in the country. The period under study, from 1970 to 2007, encompasses significant economic and political events in Nigeria, including changes in government, fluctuations in global oil prices, and shifts in economic policies. By analyzing this period, the research aims to capture the long-term trends and patterns in the foreign exchange rate premium and to identify any structural changes that may have occurred over time. The findings of this study are expected to contribute to the existing literature on exchange rate dynamics in developing countries, particularly in the context of oil-dependent economies like Nigeria. By shedding light on the factors influencing the foreign exchange rate premium in Nigeria, the research aims to provide valuable insights for policymakers, economists, and investors seeking to understand and navigate the complexities of the country's exchange rate system. Overall, this research project aims to deepen our understanding of the foreign exchange rate premium in Nigeria by conducting a comprehensive empirical analysis spanning nearly four decades. Through a rigorous examination of the determinants of the exchange rate premium and their impact on the Nigerian economy, this study seeks to provide valuable insights that can inform future research and policy decisions in the country.

Project Overview

This work evaluates the trends in the parallel market exchange rate premium, its determination and impact on the foreign exchange market in Nigeria. It examines the impact of existing demand and supply gaps in the overall foreign exchange market on the determination of the parallel market premium. It further examines the impact of the parallel market exchange rate premium on the determination of the official exchange rate and the parallel market rates. The study uses the stock-flow model of Kiguel and O’connel (1994) to examine the impact of the parallel market exchange rate premium on the determination of the official exchange rate and the parallel market exchange rate. The estimation results reveal that the parallel market exchange rate premium has a significant negative effect on parallel market exchange rate in Nigeria. Thus, an increase in the foreign exchange rate premium tends to reduce the next round of parallel market exchange rate. On the other hand, the parallel market exchange rate premium affects the official exchange rate positively. This is because a high premium on the parallel market exchrange rate tends to increase the demand for foreign exchange at the official rate. The examination of the impact of the demand and supply gaps in the foreign exchange market shows that the coefficient of exchange rate imbalance can be negative or positive depending on whether there is excess demand or supply condition in the market.