Price Stability and Trade Balance between Nigeria and Her African Trade Partners

This paper explores the relationships between price stability and trade balance for Nigeria and its key African trading partners between 1990 and 2024. The empirical evidence on the relationship between inflation and trade balance in African countries is inconclusive, with little consideration of the dynamics of exchange rate and trade openness in an integrated, multi-country multi-variates framework that allows for cross-country dependence and heterogeneity. To fill this gap, the study uses a balanced panel data of 385 country-year observations, covering eleven African countries, and Panel Fully Modified Ordinary Least Squares (PFMOLS), Pooled Mean Group (PMG) and Panel Vector Error Correction Model (PVECM) methods after testing for unit roots and cointegration. The findings reveal that inflation has a long-run negative impact on trade balance, but a short-run insignificant effect, confirming the J-curve theory. The depreciation of exchange rate has a negative effect on trade balance in both the short- and long-run, implying export supply inelasticity. By contrast, trade openness is found to be the most significant positive influence on trade balance. The speed of adjustment to the long-run equilibrium is moderate (based on the error correction term), and there is considerable variation across partners (based on country results). The research concludes that while price stability is vital for long-run trade performance, structural drivers, especially trade openness and export diversification, are more crucial for enhancing trade performance. It suggests the need for continued coordination of monetary policy, exchange rate stability and policies to promote export diversification and trade integration. This study adds to the existing literature by offering a comprehensive panel analysis that incorporates key macroeconomic determinants and addresses long- and short-run dynamics in the African trade environment