External Reserves and Economic Growth in Nigeria: An Empirical Investigation

Abstract

The paper examines the nexus between Nigeria’s foreign reserves and economic growth. Analysis of the data from 2000:Q1 - 2013:Q2, using the modified Wald statistic of Toda and Yamamoto (1995) confirms a unidirectional causality running from external reserves to economic growth. The Gregory and Hansen co-integration test also confirms the existence of a long run relationship between the variables, but with a structural break in 2009:Q4. We find that external reserves drive economic growth in Nigeria, both in the short and long term horizons. Results also show that a one per cent increase in external reserves leads to 0.15 per cent increase in economic growth. Since general macroeconomic stability has growth enhancing effects, the paper endorses the CBN routine interventions in the foreign exchange market aimed at ensuring stability of the exchange rate.