FOREIGN RESERVES ACCUMULATION AND MACROECONOMIC ENVIRONMENT: THE NIGERIAN EXPERIENCE (2004-2014)

Abstract

This study examines the impact of Nigeria’s foreign reserves accumulation on macroeconomic environment. Seven macroeconomic variables were selected to represent macroeconomic environment (GDP, inflation, exchange rate and unemployment, investment, external debt and total trade). Data were sourced from the Central Bank of Nigeria’s Statistical Bulletin between 2004 and 2014. The ordinary least square (OLS) econometric model was employed in the analysis of the data. The study conducted the unit root test using both the Augmented DickerFuller and Philip Perron with and without trend and the result showed that all variables were stationary at first difference except inflation. The cointegration result obtained from the analysis showed the existence of a long run relationship between foreign reserves and the explanatory variables. The paper concludes that foreign reserve is a necessary tool in the macroeconomic stability of the country. It recommended that government should adopt proper and well articulated strategies of managing the nation’s reserve in order to achieve the desired objectives.

Keywords

• Foreign Reserves, Gross Domestic Product, External Debt, Macroeconomic Environment.

References

1. Aizenman, J; Lee, J. (2005), “International Reserves: Precautionary vs.
2. Mercantilist Views, Theory and Evidence”. IMF Working Paper /05/198 Archer, D. and Halliday J. (1998), “Rationale for Holding Foreign Currency
3. Reserves”. Reserves Bank of New Zealand Bulletin, Vol. 61, No.4 pp.347-51. Cruz, M. and Walters, B, (2008), “Is the Accumulation of International Reserve good for Development?” Cambridge Journal of Economics, Vol.32, No.5, pp. 681.
4. Engle, R.F., Granger, C.W.J. (1987),”Cointegration and Error-Correction:
5. Representation, Estimation and Testing”, Econometrica, 55(2), pp.257-276. Fukuda and Kon (2008), “Macroeconomic Impact of Foreign Exchange Reserve
6. Accumulation: Theory and International Evidence”, ADBI Working Paper Series, No. 197 Gujarati, D.N. (2003), Basic Econometrics, McGraw-Hills Inc.New York.
7. Humphness, N. (1990), External Reserves and Management of Risk Reserves, Bank of New Zealand Bulletin, vol. 53, No.3.
8. Heller, H.R. (1996), “Optimal International Reserves” Econs. J. No: 76 pp.296

9. CBN (2007),Reserves Consumptions and Future Savings: What Option?
10. Islam, M.S. (2009), “An Economic Analysis of Bangladesh’s Foreign Exchange
11. Reserves”. Institute of South Asian Studies (ISAS) Working Paper, No. 85 IMF (2004), Guidelines for Foreign Reserves Management, IMF, Washgton DC.
12. International Monetary Fund (1993), Balance of Payment Manual, International
13. Monetary fund; Washington. Iyola, M.A, (1976),”Demand for International Reserves in Less Developed countries: A Distributed
14. Lag Specification” The Review of Economics and Statistics, Vol. 58, No.3 Jeanne, Oliver and Roman Raciere (2006), “The Optional Level of International Reserves for
15. Emerging Market Countries: Formulas, and Applications”; Working Paper Wp/06/229, International Monetary Fund, Washington. Jeane, O. (2007), “International Reserves in Emerging Market Countries; Too
16. Much of a Good Thus”, Brooking Papers on Economic Activity Vol. 28, PP 1-80. Lin, Meic Yin and Wang, J.S. (Not stated), “Foreign Reserves and Inflation: empirical study of five East Asian Economies” Available at: https://nccur.lib.nccu.edu.tw/bitstream/140.119/21803/1/foreign%20exchange.pdf
17. Magnus, O.A. (2007), “Foreign Exchange Reserves Accumulation: Implications for the Nigerian Economy”, Central Bank of Nigeria Working Paper, pp.31-43.
18. Meshak, I. (2014), “External Reserve Composition and Economic Growth in Nigeria:
19. A time Series Analysis”: Canadian Open Economic Journal, Vol.1,No.1pp 1-13. Migap, J.P. (2010), “The Decline of the Dollar: Implication for Nigeria’s Foreign
20. Reserves”, International Journal of Economic Development Research and Investment, Vol. 1 Nos. 2 & 3.pp 150-167. Nda, A. M. (2006),”Effective Reserves Management in Nigeria: Issues, Challenges and Prospect”, Central Bank of Nigeria Bulletin, 30(3).
21. Nugee, J. (2000), “Foreign Exchange Reserves Management, Bank of England Centre for Central Banking Studies”, Handbooks in Central Banking, No. 19, November.
22. Osabuohien, E.S.C., and Egwakhe, A.J. (2008), “External Reserve and the Nigerian Economy. The dual Folded Debate”; AJBER, Vol.3, No.2,3
23. Pesaran, M. H; Y.Shin and R.J. Smith (2000), “Structural analysis of Vector Error
24. Correction Models with Exogenous 1(1) Variable”. Journal of Econometrics, Vol. , pp. 293-343. Polteronich, V. and Popov, v. (2002), “Accumulation of Foreign Exchange Reserves and the Framework on the New Economic School Research Programme”, Russia. pp 161-195.
25. Soludo, C.C. (2005), “The Challenges of Foreign Reserves Management in Nigeria” A
26. Keynote Address delivered at the UBS Eleventh Annual Reserves Management Seminar, Wolfs, 2 10 June. Soludo, C.C. (2006),”Can Nigeria be the China of Africa?” Lecture Delivered at the founders’ Day of the University of Benin, Nigeria, 23 November.
27. Usman Abdullatee, Ibrahim Waheed (2010), “External Reserve Holding in Nigeria:
28. Implications for Investment, Inflation and Exchange Rate”. Journal of Economics and International Finance, 2(9) pp 183-189. UUCTAD (2007), Activities Undertaken by UNCTA in Favour of Africa, Trade and Development Board, 42nd Executive session, Geneva.
29. Williams, D. (2003), “The need for Reserves, in Pridghe” ( R. and N. Carver Eds.),
30. How Continues Manage Reserves Assets, Central Banking Publications, London, pp. 33-44. Umeora, C.E. (2013), “Foreign Exchange Reserves (FER) Accumulations and Macroeconomic Stability: The Nigerian Experience”, International Journal of
31. Business and Management Invention, Vol. 2, pp 150-157. Voltisek, p. (2002), The Measurement of External Debt and External Reserves:
32. The Case of the Czech Republic, Statistics Department, Czech National Bank.