Modeling the Determinants of Foreign Reserves in Nigeria

Abstract

This study evaluated the determinants of foreign reserves in Nigeria. Literature relevant to the subject matter were rigorously reviewed. The model of the study hypothesized that foreign reserve (RESV) in Nigeria is a function of some macroeconomic variables. The Johansen cointegration tests established evidence of a long run relationship among the variables. The results of the estimated short run coefficients based on parsimonious Error Correction Model (ECM) indicated that RGDP, oil exports (OILEXP) are positive and significant determinants of RESV. This significant deterministic value of OILEXPT remained up to the first period lag. Expectedly, EXCH was found to be significant but negative determinant of RESV. FDI inflows positively and significantly determine RESV only in its first period lag while lending rate (LR) was discovered to be a negative and insignificant determinant. Similarly, the coefficient of inflation rate (INFL) was negative and significant. However, the coefficient of non-oil exports (NOILEXP), though positive, was not significant determinant of RESV. The probability of the diagnostic tests conducted reinforced the robustness of the model. On the basis of the empirical findings we recommend that the government incentivise NOILEXP as a means of positively affecting RESV.

Keywords: Foreign Reserves, Exchange Rate.

JEL Classification: F41, C5, C22.