Determinants of International Reserves in Nigeria

Abstract

Over the past decades, nations have accumulated international reserves to leverage foreign counterparts or protect themselves against external shocks resulting from integration. The factors identified by researchers as contributing to international reserve accumulation, however, have primarily been market factors. This study sets out to identify some distinct factors of the Nigerian economy. This is accomplished using annual data from 1970 to 2016. Several econometric methods, including the unit root test and Granger causality, were applied to test two hypotheses. The results showed substantial long-run correlations between the variables examined. Thus, the Error Correction Methodology (ECM) was used to investigate short-term and long-term relationships. Findings reveal that the accumulation of foreign reserves was significantly influenced in the long run only by aggregate exports EXPT and trade openness OPN since both variables were statistically significant at 5 percent. At the specified beak-point, there was an important structural change. Finally, Nigeria’s level of international reserves was significantly impacted by the quality of its institutions. Thus, the study recommends that policymakers maintain the current exchange rate regime in order to ensure world competitiveness. The research also suggested that the government take steps to improve and build strong institutions in order to promote transparency and accountability.