Exchange Rate Misalignment, Current Account Dynamics, and Economic Adjustment in Nigeria

Exchange rate misalignment, defined as the sustained deviation of the actual exchange rate from its fundamentals-determined equilibrium level, distorts trade competitiveness, current account balances, and the allocation of resources across traded and non-traded sectors. This study estimates the degree of exchange rate misalignment in Nigeria between 2010 and 2023 and investigates its implications for current account dynamics and macroeconomic adjustment. The behavioural equilibrium exchange rate model and the purchasing power parity approach are employed to estimate the naira's equilibrium real effective exchange rate using macroeconomic fundamentals including terms of trade, net foreign assets, government consumption, and productivity differentials. Misalignment estimates are constructed as deviations from the estimated equilibrium path. Vector error correction modelling is then used to analyse the current account adjustment dynamics triggered by misalignment episodes. Monthly data from the Central Bank of Nigeria, the International Monetary Fund's International Financial Statistics database, and the World Bank are utilised. The theoretical framework draws on new open economy macroeconomic models, the elasticities approach to the current account, and the intertemporal approach to balance of payments. The study critically evaluates the foreign exchange policy regimes of 2015 to 2016 and 2023, both characterised by significant managed exchange rate adjustments, as natural experiments in misalignment correction. Existing literature confirms substantial and persistent misalignment in the naira, yet high-frequency estimates covering recent policy episodes are absent from the literature. This study fills that gap with implications for the Central Bank of Nigeria's exchange rate management and the Federal Ministry of Finance's international finance strategy. Keywords: exchange rate misalignment, current account, Nigeria, BEER model, macroeconomic adjustment