Effect Of Selected Macro-Economic Variables On Nigeria’s Foreign Reserve: 1986-2016

Authors: Nanwul Diyemang Felix; Bolaji Eunice Kehinde
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Nigeria has over the past three decades implemented numerous policy initiatives and measures in the management of its externalreserves. Although very little was achieved because the structure in place could not support sustainable external reserves management. The study thus examines the effect of selected macro-economic variables on Nigeria’s foreign reserve between 1986 and 2016. The study adopted ARDL method of analysis in carrying out the empirical analysis. Unit root test was carried out on each of the variables to avoid spurious regression results; while the bound test showed that long-run equilibrium relationship exists between macro-economic variables and Nigeria’s foreign reserve. Findings from the study revealed that deprecation of exchange rates had a negative effect on Nigeria’s foreign reserve. It showed that one percent depreciation of the exchange rates (holding other factors constant) has on the overage reduced foreign exchange reserve by 0.73 percent between 1986 and 2016. However, it was found that GDP had a positive and significant relationship with foreign reserve. It showed that a percentage change in GDP has on the average (holding other variables constant) increased the foreign reserve by 0.63 percent between 1986 and 2016. Lastly, it was discovered that inflation rate has had a positive effect on the Nigeria’s foreign reserve within the period under review. The study thus recommends that in achieving the optimal level of external reserves, the monetary authority should balance the macroeconomic adjustment costs incurred if reserves are exhausted with the opportunity cost of holding the external reserves. Managers of Nigeria’s foreign reserves should encourage the monitoring of the use of scarce foreign exchange resources to ensure that foreign exchange disbursements and utilization are in line with economic priorities and within the annual foreign exchange budget. This will help to ensure availability of a regular and comfortable balance of payments position as well as the stability of the Naira and hence, go a long way in equilibrating foreign reserves.