Foreign Reserve Management and Economic Growth in Nigeria, 1990-2018

Abstract

The management, administration and utilization of Foreign External Reserves- foreign currency deposits of the apex bank (Central Banks) or other monetary or financial institutions has been a major macroeconomic challenge especially for developing economies like Nigeria. Over the past three decades, Nigeria has witnessed fluctuations in its reserve accumulation and taken numerous policy measures in the management of its external reserves. This study investigated the impact of foreign reserve accumulation and the country’s reserve management policies on its economic growth for the period 1990 to 2018. Secondary data from the United Nations Center for Trade and Development (UNCTAD), World Bank, IMF and Index Mundi Statistical Bulletin were used in the study. The data were subjected to unit root test, cointegration test and Granger Causality tests, The tests revealed that all the variables were integrated at I(1) and are cointegrated. The ECM result showed a long run relationship among the variables in our model. The OLS regression result shows an inverse and insignificant relationship between reserve accumulation and the country’s economic growth. The Reserve to GDP ratio of the country is found to be so low and significantly inversely related to the GDP per capita. Other variables in our model- MPR, BOP, FDI and Foreign Remittances were all found to have positive relationship with the MPR and Exchange rate found to be insignificant. The Granger Causality test shows that exchange rate ad foreign remittances are the dominant variables in our model. The study recommends a holistic reappraisal of the country’s exchange reserve policy, a judicious and sustainable use of foreign reserve and need to strengthen the domestic capital market.

Keywords: Balance of Payment, Foreign Reserve Management, Foreign Remittances, Granger Causality.

DOI: 10.7176/JESD/10-18-16

Publication date:September 30^th 2019