An Analysis of Foreign Exchange Reserve Holdings and Macroeconomic Stability in Nigeria

Description

– An Analysis of Foreign Exchange Reserve Holdings and Macroeconomic Stability in Nigeria –

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Abstract

This study stems the depletion of Nigeria’s Reserves in recent times and the possible implications of this fluctuation of the Foreign Exchange Reserves on the macroeconomic stability of Nigeria in tandem with factors like holding of Reserves in excess and the  desirability or otherwise of holding Reserves as embedded in the  nation’s  Reserve Management Strategy.

The study used quarterly data ranging  from  the first  quarter  of 1981 to the first quarter of 2015.

A Reserve demand function was developed using a simultaneous equation model to provide a theoretic cover of the interdependence between Real GDP and Foreign Exchange Reserves while VAR Models were used to estimate the implications of Reserves on some macroeconomic indicators which included Inflation Rate, Exchange Rate  and Investment.

Cointegration tests reveal that there was no  long-run  relationship amongst  the variables in their respective models. It was found that the opportunity cost of holding Reserves though negatively affecting Reserve holdings was  not  significant,  while  other factors like the Capital and Current Account Vulnerability.

Introduction

Nigeria, like many other countries hold Foreign Exchange Reserve at  what  is  perceived a favourable level, the reason for this is not farfetched. Foreign Exchange Reserve plays a critical role in the stability of any given economy on the whole and this is a major reason why its dynamics creates worrisome riddles to policy makers.

Foreign Exchange  Reserve otherwise called External Reserve, as defined by the International Monetary Fund (IMF, 1993),

Central Bank of Nigeria (CBN, 2007a), “consists of official  public  sector  foreign assets that are readily available to, and controlled by the  monetary  authorities  for direct financing of payment imbalances, through intervention in the  exchange  markets  to affect the currency exchange rate and or for other purposes”.

This definition as implied by the IMF explains that the quantum of Foreign Exchange Reserve held in any given economy depends to an extent on the monetary policy implementation of the said  economy.

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