Trade Imbalances and Currency Substitution in Nigeria’s Informal Economy: Evidence from Northern Border Markets

This study examines the relationship between Nigeria's trade imbalances with neighbouring countries and the prevalence of currency substitution and dollarisation practices in informal border market economies in the North West and North East geopolitical zones. Persistent trade deficits with Niger, Chad, and Cameroon, combined with naira volatility, have created conditions in which CFA franc and US dollar transactions dominate informal commercial activity in border communities, effectively marginalising the naira as a medium of exchange in frontier economic zones. The study employs a mixed-methods design combining a survey of 110 informal traders and market operators in Maigatari, Illela, and Gamboru Ngala border markets with ethnographic observation and qualitative interviews with currency dealers, customs officials, and community traders. Descriptive statistics quantify currency substitution prevalence and thematic analysis illuminates the motivational structure underlying currency substitution behaviour. The theoretical framework draws on the currency substitution literature, Gresham's law, and the informal economy theory of border markets. The study examines how trade balance asymmetries generate persistent demand for foreign currencies in border exchange, how naira exchange rate volatility reinforces substitution tendencies, and the fiscal and monetary policy implications of sustained currency substitution in frontier zones. Findings are expected to reveal that currency substitution in northern border markets is structural rather than transitional, with implications for the effectiveness of monetary policy transmission in these regions. Recommendations include targeted trade balance improvement strategies for northern border corridors, mobile banking integration to promote naira-denominated transactions, and cross-border payment system development with ECOWAS partners. Keywords: currency substitution, trade imbalance, border markets, informal economy, Nigeria