Investigating a paradigm shift in the revenue - exchange rate nexus

Literature on the nexus between exchange rates and public revenue treats revenue as a function of exchange rates. This article is an attempt at ascertaining what the Nigeria Central Bank’s Monetary Policy Committee observes during it’s September, 2024 meeting. The committee postulates strong correlation between the monthly Federal Account Allocation Committee (FAAC) releases and liquidity levels in the banking system and its impact on the exchange rates. This implies a paradigm shift in the direction of the relationship between the variables under consideration. The study employs monthly data on FAAC releases and Naira/US Dollar end of the months exchange rates from August 2019 to September 2024, apply Unit root test with breakpoints and Least Squares with breaks and Paire-Wise Granger Causality test in analyzing the data. The results identify five breaks’ dates; 2020M05, 2021M05, 2022M07, 2023M04, 2024M01 and six regimes. Further, the results reveal that revenue was insignificant in explaining exchange rates between the first and the fourth regimes. However, revenue emerges as positive and significant determinant of exchange rate during the fifth regime (2023M04 to 2023m12) and the sixth regime (2024M01 to 2024M09). In addition, the results of the causality tests reveal unidirectional causality from exchange rates to revenue for lags 1 and 2 and bidirectional causality for lags 3, 4 and 5. The paper recommends that the exchange rates-revenue nexus is requiring re-assessment and re-evaluations of how fiscal revenue relates to currency value using revise economic models and theories.