Exchange Rate Volatility and Trade Balance Dynamics in Nigeria: Evidence from a Nonlinear ARDL Approach

This study examines the impact of exchange rate volatility on Nigeria’s trade balance using quarterly data from Q1 1990 to Q4 2025. The study employs Autoregressive Distributed Lag (ARDL) and Nonlinear ARDL (NARDL) models to capture both symmetric and asymmetric effects of exchange rate movements. Unit root tests reveal mixed orders of integration among the variables, while the Johansen cointegration test confirms the existence of a long-run relationship among trade balance, exchange rate, inflation, economic growth, and trade openness. The ARDL error correction model indicates that approximately 25% of short-run disequilibrium is corrected each period. Long-run results show that trade openness significantly improves trade balance, whereas exchange rate, inflation, and economic growth have insignificant effects. The NARDL results reveal asymmetric exchange rate effects: appreciation significantly worsens trade balance while depreciation has insignificant effects. Diagnostic tests confirm model stability and absence of serial correlation. The study concludes that exchange rate depreciation alone may not improve Nigeria’s trade balance due to structural import dependence. The study recommends exchange rate stability, export diversification, and industrial development to strengthen Nigeria’s external sector performance.