Computation of Nigeria’s Real Effective Exchange Rate Indices

Abstract

The exchange rate is a useful macroeconomic indicator which aid policy makers to take informed actions to stimulate or sustain the economy on a long run growth path. Thus, several exchange rate indices (bilateral nominal/real exchange rate, nominal effective exchange rate, real effective exchange rate, purchasing power parity, etc) are computed for different policy information. This paper computed Nigeria’s real and nominal effective exchange rate (REER and NEER) indices using a pool of high frequency monthly data for the period 1996-2007. The paper observed that the REER index appreciated most of the period due to inflationary pressures in Nigeria, implying a loss in Nigeria’s competitiveness relative to its major trading partners. The conclusion was that the naira was overvalued in real terms. The NEER also appreciated during the review period against the currency indices of the major trading partners, indicating a stronger naira. The paper advocated a basket approach to naira nominal exchange rate determination in which the relative macroeconomic developments in major trading partner economies are factored into the market exchange rate of the naira. A major shortcoming of the present study is that subregional effects of Nigeria’s trade with its neighbors were not factored into the computations due to dearth of data. Current data indicate low level trade between Nigeria and its neighbors and other African countries