Climate risks, balance-of-payments constraints and central banking in emerging economies – Insights from Nigeria

Abstract

This paper explores the question in how far physical and transition effects of climate change impact central banking transmitted through the balance-of-payments in emerging economies. We conduct a country case study of Nigeria by triangulating primary qualitative data generated from ten semi-structured interviews with secondary quantitative data used to construct two structural vector autoregressive models. We find that climate risks impact Nigeria's balance-of-payments both through the financial and current account channel to the detriment of the central bank's objectives. Long-term physical effects of climate change and the strong connection between crude oil and Nigeria's domestic economy, its financial system and its trade balance are key explanatory variables. They effectuate an aggravated pressure on the exchange rate, in particular when global instability rises, reduce foreign exchange income and increase the need thereof – further putting pressure on the exchange rate and undermining the acceptance of Nigerian financial assets. As a result, the central bank is forced to keep interest rates high. These effects have recessionary implications for the domestic economy and impede economic diversification as well as green transition in Nigeria. We empirically show how climate risks are exponents of challenges to central banking in emerging economies which perpetuates global inequality.