Effect of Variation between Nigeria Naira and The CFA Franc on Cross-Border Trade in Nigeria

Abstract

This paper analyses the effect of variation between Nigeria Naira and the CFA Franc on cross-border trade in Nigeria. The analysis becomes necessary because the value of the Nigeria Naira has been fluctuating continually while the official currency (CFA Franc) of the country’s largest cross-border trading partner (Benin Republic) does not experience similar dynamics Result from the Impulse Response Function (IRF) and Variance Decomposition (VD) based on Vector Autoregressive (VAR) model show that response of cross-border trade to exchange rate innovation exhibits negative trend in the short-run as well as long-run suggesting that frequent exchange rate movements would discourage cross-border trade. Results further suggest that whenever exchange rate witnesses a distortion, either by monetary authority or the invisible hand of market forces, factors within the exchange rate system are responsible for its long-run adjustment. This study, not minding the incessant Naira depreciation, recommends that cross- border trading exercise between Nigeria and Benin Republic follows a smooth transition and therefore should be encouraged and allowed to strive at its own pace.