The Effects Of Remittance Inflows On Exchange Rates In Nigeria

The positive impact of remittances on development indicators of recipient countries is well documented in literature. Remittances have been a major source of economic support for dependents of migrant workers in their home countries. Nigeria receives the largest amount of remittances in Africa and the third among developing economies; receiving 21 Billion US Dollars in 2015. Large remittance inflows could however hurt the recipient economy when the flows are significant relative to the size of the recipient economy. With increasing remittance inflows relative to other capital inflows into Nigeria, remittances could have undesired outcomes, with the possibility of the exchange rates appreciation and a loss of competitiveness in the tradable sector. Using the Dynamic Ordinary Least Squares (DOLS) and data covering 1981 to 2014, this paper explores the empirical evidence regarding the impact of remittances on the real exchange rate in Nigeria. DOLS improves on OLS by coping with small sample and dynamic sources of bias to determine the long-run effect/coefficients of remittances and other variables on economic development. The DOLS also deals with the potential endogeneity problem of explanatory variables. Specifically, studying the nature of the variables, there is a possibility of reverse -causality running between the exchange rate and remittance, foreign direct investment. This situation therefore can raise the possibility of endogeneity. The potential of simultaneity bias, small sample bias and endogeneity among the regressors is dealt with by the inclusion of lagged and lead value of first differences of the regressors. In this design, the dynamic OLS estimator performed well relative to other asymptotically efficient estimators Our findings suggest that remittance inflows have been associated with a rise in the real exchange rate in Nigeria. The coefficient on remittances (REMI) is positive and statistically significant. Thus, high remittance inflows have been associated with a rise in the real exchange rate in Nigeria. This implies that high remittance inflows have exerted depreciating pressure on the country's currency. Thus, contrary to the Dutch disease proposition, high remittance inflows into Nigeria have not resulted in an overvalued exchange rate but a low-valued exchange rate.