The Effect of Fdi and Trade Openness on Balance of Payment Deficit in Nigeria

This research sought to determine the role of FDI and openness to trade on balance of payment
deficit in Nigeria in the time frame spanning 1984 and 2023. The research uses the ration of
balance of payments to gross domestic product to capture deficit dynamics, while FDI and trade
openness were represented by FDI inflows measured in terms of GDP and trade openness ratio
based on GDP respectively. Furthermore, the control variables used in this model were fiscal
balances in GDP terms and real effective exchange rates The utilized data in the execution of this
study was obtained from World Bank data repositories and Central Bank of Nigeria’s economic
publications. This research implemented an ex-post facto research design and time series
regression analysis, executing pre-estimation tests to ascertain stationarity. Upon empirical
findings, this study determined that an increase in FDI and trade openness adjusted for oil export
dependency will worsen BOP deficits in Nigeria. However, trade openness shows no statistically
meaningful long term relationship with the balance of payment deficits. The study recommends the
implementation of policies with favorable tax incentives towards FDI inflows into sectors with
high production and export potential. Furthermore, there is a need to encourage export
diversification in critical sectors as well as promoting import substitution on the precondition that
it improves productivity. These results are critical for guiding policy decisions to mitigate the
negative effects of the structural factors which drive BOP deficits in Nigeria and engender a
macroeconomic environment suitable for long term growth and development