Foreign Exchange Management Regime and Value of Shares Traded Ratio in Nigeria

To stabilize the foreign exchange market, the Nigerian government implemented policies prioritizing essential forex demands, reducing volatility, and conserving reserves. Measures included restricting forex access for certain items, capping international ATM withdrawals, and limiting naira card usage abroad. Forex was allocated mainly for critical imports and travel allowances. Despite these steps, reserves continued to fall, leading to a shift to a flexible exchange rate regime in June 2016. This introduced new trading platforms, expanded forward contracts, and aimed to enhance exchange rate stability. By then, the naira had significantly devalued across both interbank and BDC markets. Therefore, this study examined the effect of foreign exchange management regimes on the value of shares traded ratio in Nigeria overthirtysix-year period, from 1986 to 2022. The study adopt an ex-post factor research design, an autoregressive distributed lag model was the estimation techniques with an inference of 5% level of significance. The findings reveal contrasting impacts of floating and fixed exchange rate regimes on stock market activity. Under the floating regime, exchange rate and balance of payments have insignificant negative effects, while external reserves and inflation significantly reduce the value of shares traded. Conversely, foreign direct investment (FDI) positively influences share trading, and foreign portfolio investment (FPI) shows a positive but insignificant effect. In the fixed exchange regime, all key variables exchange rate, balance of payments, external reserves, and inflation exert strong negative effects on share trading, suggesting that currency rigidity, external imbalances, and inflationary pressures suppress market liquidity. FDI has a limited positive effect, while FPI shows a significant negative impact, indicating that the fixed regime may deter foreign investment. The results emphasize the need for a more flexible exchange rate approach and policy strategies that attract foreign investment while controlling inflation. Recommendations include encouraging FDI and FPI under a floating regime, improving inflation control, and enhancing transparency in foreign exchange policies to boost market efficiency and investor confidence.