Sectoral productivity and real exchange rate effects of remittances: evidence from Nigeria

This study examines the impact of remittances on Nigeria’s real exchange rate and the productivity of its tradable and non-tradable sectors. Drawing on the Dutch Disease Model and the Balassa–Samuelson Effect, the research investigates how remittance inflows influence economic dynamics in a developing, oil-dependent economy. Using annual data from 1980 to 2022 obtained from the World Development Indicators and the Central Bank of Nigeria, the study employs the Autoregressive Distributed Lag (ARDL) approach to analyse both short- and long-term effects. The results reveal a complex relationship that challenges traditional expectations. In the short term, remittances decrease productivity in the tradable sector while improving productivity in the non-tradable sector. However, over time, the tradable sector recovers and experiences sustained gains, whereas the non-tradable sector experiences declines in productivity. Contrary to the Dutch Disease hypothesis, remittances do not exert a long-term impact on the real exchange rate. Other factors, including trade openness, inflation, and terms of trade, also significantly influence the real exchange rate and tradable sector. The findings suggest that Nigeria should avoid over-reliance on remittances as a tool for exchange rate stabilisation. Instead, efforts should prioritise strengthening the capital market, curbing capital flight, and promoting export growth. By shedding new light on the intricate effects of remittances, this study provides valuable insights for policymakers in Nigeria and other developing economies.