Determinants of foreign exchange reserves in sub-saharan Africa

Abstract

Driven by the lack of literature on the nature of the association between foreign exchange reserves and institutions for Sub-Saharan Africa, this study examines the determinants of foreign exchange reserves in 19 Sub-Saharan African countries over the period 2000–2019. The study applies the panel autoregressive distributed lag methodology. The empirical discussion considers the role of the institution and its effect on the flow of foreign exchange reserves across the selected countries. Results from the empirical analysis indicate that the main determinants of foreign exchange reserves in Sub-Saharan Africa are trade openness, broad money to GDP, CPI, and exchange rate. Strikingly, we find that of institution, political stability and absence of terrorism, government effectiveness, control of corruption and voice and accountability significantly affect reserves in the long run, while control of corruption and regulatory quality negatively affect reserves in the short run. The implication of these findings is that policymakers must have a keen awareness of both institutional factors and other macroeconomic phenomena.