ABSTRACT
This study examined the impact of external reserves accumulation on the Nigerian economy. Secondary data on real gross domestic product, special drawing rights, foreign exchange reserves, international monetary fund (IMF) reserves position and foreign currency deposit, covering the period from 1986 to 2019 were sourced from the statistical bulletin of the Central Bank of Nigeria. Special drawing rights, foreign exchange reserves, international monetary fund (IMF) reserves position and foreign currency deposit were used as explanatory variables and proxy for external reserves accumulation while real gross domestic product (RGDP) was used to proxy the economy. Data collected were analysed using econometric technique of autoregressive distributed lag (ARDL) model. The study found that special drawing rights (t = 3.51622, p < 0.05) and international monetary fund (IMF) reserves position (t = 4.8945, p < 0.05) had positive and significant impact on economic growth in Nigeria while foreign currency deposit (t = -2.6542, p < 0.05) and foreign exchange (t = -2.2642, p < 0.05) both had negative and statistically significant impact on economic growth in Nigeria. The study concluded that external reserves accumulation does promote economic growth in Nigeria. The study recommend that Government and private institutions should invest more domestically especially in the infant industries, SME’s, agricultural sector so as to boost the level of domestic outputs for exportation which will equally generate more foreign exchange, Monetary authorities should endeavor to make policies that will keep the monetary policy rate at a competitive level in order to stimulate economic growth through the activities of the local investors, government should implement good policies which will enhance the relationship of the country with foreign investors so as to encourage them to invest more in the Nigerian economy.
TABLE
OF CONTENTS
Title page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
List of Tables vi
List of Figures vii
Abstract viii
CHAPTER 1: INTRODUCTION
1.1 Background
of the Study 1
1.2 Statement of the Problem 4
1.3 Objectives of the Study 4
1.4 Questions 5
1.5 Hypotheses 5
1.6
Significance of the Study 5
1.7 Scope of
the Study 6
1.8 Limitations of the Study 6
CHAPTER
2: REVIEW OF RELATED LITERATURE
2.1
Conceptual Review 8
2.1.1
Overview of Nigeria’s foreign reserves accumulation 12
2.1.2 Crude oil and external reserves in Nigeria 13
2.1.3 Trend analysis on Nigeria’s external reserves
and exchange
rates (Jan 2014-Jul 2015) 15
2.1.4 Importance
of reserves and its management 18
2.2
Theoretical Framework 21
2.2.1 Self-insurance
theory 21
2.2.2 Mercantilist
theoretical model 22
2.2.3 Macroeconomic
stabilization theory 22
2.3 Empirical
Review 23
2.4 Summary
of Literature 37
2.5 Gap
in Literature 44
CHAPTER 3: METHODOLOGY
3.1 Research
Design 45
3.2
Area of Study 46
3.3
Sources of Data 46
3.4 Model Specification 47
3.5 Description
of Model Variable 49
3.5.1 Dependent variable 49
3.5.2 Independent variables 49
3.6 Technique for Data Estimation 50
CHAPTER 4: DATA PRESENTATION,
ANALYSIS AND DISCUSSION
4.1 Data Presentation 52
4.2 Unit Root Test 56
4.3 Hypotheses
Testing 64
4.3.1 Test of
hypothesis 1: (H01:) There is no significant impact of special
drawing
rights on GDP in Nigeria within the reference period. 64
4.3.2 Test of
hypothesis 2: (H02) IMF reserve position do not have
significant impact on Nigerian
economy. 65
4.3.3 Test of
hypothesis 3: (H03:) foreign exchange do not have significant
impact on the Nigerian economy 65
4.3.4 Test of
hypothesis 4: (H04:) Foreign currency deposits do not have
significant impact on the Nigerian
economy. 65
4.4
Discussion of Results 66
CHAPTER 5: SUMMARY, CONCLUSION AND
RECOMMENDATIONS
5.1 Summary of Findings 68
5.2
Conclusion 69
5.3
Recommendations 69
5.4
Contributions to Existing Knowledge 70
References 71
Appendices 77
LIST
OF TABLES
4.1: Data presentation 53
4.2: Descriptive statistics 55
4.3:
Unit root test 56
4.4:
ARDL Cointegration 58
4.5:
ARDL bound test 59
4.6:
ARDL regression result 62
LIST OF FIGURES
2.1:
Monthly inter-bank exchange rate 16
2.2:
Monthly position of reserves, demand and supply of Forex 17
4.1:
Model stability test 60
CHAPTER
1
INTRODUCTION
1.1
BACKGROUND
OF THE STUDY
The
recent rise in the demand for external reserves have stimulated a resurgence of
literature on external reserves accumulation. This growth in external reserves
is a reflection of the huge concern countries attach to holding sufficient
volume of international exchange reserves (Oputa and Ogunleye 2010). The
opinion on the rationale behind maintaining foreign reserves varies from one
scholar to the other. For instance, Mendoza (2004) suggests that reserves are
held for both transaction and precautionary motives. Dooley, Folkerts‑Landau
and Garber (2004) argued that reserves accumulation agenda in Asian central
banks was to prevent their currencies from appreciating against the U.S. dollar
in order to promote their export-led growth strategy. In principle, countries
hold reserves in order to meet unexpected and temporary fluctuations in international
payments. In this context, the optimal size of reserves depends on the balance
between the macroeconomic adjustment costs that result if reserves are
exhausted and the opportunity cost of holding reserves (Heller, 2006).
However, some of the reasons for keeping external
reserves include: to protect the value of the local currency, settle
international payments responsibilities, especially, financing foreign trade
needs, accumulation of wealth, exchange rate management, improving the credit
worthiness of an economy, and to provide a safety net for future external
shocks among others (David and Baba 2012). External reserves accumulation in
emerging economies is directly related to the rise in the current account
deficit in countries whose currency is used for accumulation, especially in the
United States. Consequently, adjustments in the United States dollar have
serious costs implications for other countries of the world, mostly in
countries which external reserves’ accumulation is in dollars (Gokhale, and Raju 2013).
The emerging economies experience show the importance of the accumulation of
external reserves in order to solve precautionary problems, capital flows
instability and other developments that may negatively affect expectations
(Kruskovic and Tina 2014). For over thirty years now, numerous policy
initiatives and strategies in the administration of its external reserves have
been taken by the Nigerian government. However, very marginal outcome was
realized due to the fact that structures put in place then could not provide
enough support for efficient foreign reserves management (IMF 2013).
According to the International Monetary Fund IMF,
(2013) foreign reserves is maintained for financing balance of payments
disequilibrium and maintaining competitive exchange rate level capable of
achieving macro-economic objectives. In addition, external reserves acts: as a
monetary policy instrument; as a liquidity buffer in case of an international
financial market crash; as an instrument of easing the vulnerability to
external factors and boosting the stability and confidence in financial markets
during periods of financial crisis (Ibrahim, 2011). Despite the positive influence of
external reserves on the economy, reserves build-ups is not without its costs:
The costs associated with reserves build-ups are in several forms: First, the
return on external reserves is generally much lower than return on domestic
assets for the developing and emerging economies
(Guillermo, 2012) For example,
in many developing countries the return on external reserves is less than 1.0%.
This is partly because foreign reserves of Central Banks must be highly liquid
to be qualified as reserves. This liquidity consideration essentially means the
foreign reserves need to be invested in US treasury bills, and in Euro or
Japanese Yen denominated government assets (Nwosa, 2017). In all such cases, the rate of return on
foreign reserves is extremely low and the differential between the return on
domestic assets and the lower return of foreign assets constitute a significant
income loss for the central bank. This is particularly large in the current low
interest rate environment in the industrial countries (Abdu, 2013).
The
Central Bank of Nigeria (CBN) Act 1991 vests the custody and management of the
country’s external reserves in the CBN. The Act provides that the CBN shall at
all times maintain a reserves of external assets consisting of gold, balance at
any bank outside Nigeria where the currency is freely convertible; treasury bills;
securities of or guarantees by a government of any country outside Nigeria,
securities of or guarantees by international financial institutions of which
Nigeria is a member; Nigeria’s gold tranche at the international monetary fund
and allocation of special drawing rights made to Nigeria by the International
Monetary Fund (Omolade and Ngalawa, 2016).
Though
the management of external reserves of a country is the exclusive
responsibility of the central bank, the quantum of reserves to be held at any
point in time depends on several exogenous factors, depending on its
development objective and the prevailing policy directives. The pertinent
question is whether these factors in relation to policy directions have helped
Nigeria to achieve stability and growth. A stylized fact presentation of the
association between external reserves and key macroeconomic variable parameters
will help shed light on the direction, degree and dimension of relationship
between the variables. In 1986 for instance, while external reserves stood at
$1576.8 million US dollars, exchange rate was 3.3166N/$ and real GDP was 2.51%; ten years letter, (in 1995), the
parameter increased to $2695.4 million.
Finally,
in 2018, it was estimated at $34597.7 million while exchange rate was 349.32N/$ respectively. This clearly shows that
there is the need to study the direction between external reserves
accumulations as metrics for measuring the Nigerian economy.
1.2
STATEMENT OF THE PROBLEM
Since
the collapse of the Bretton Wood system in 1974, many nations; especially low
income and developing nations appears to have increased external reserves
significantly. In Nigeria for instance, foreign reserves increased from $1576.8
million in 1986 to $34597.7 million in 2018. In order to intervene in the foreign
exchange markets and reduce foreign exchange volatility and achieve price
stability; accumulation of external reserves continues to be vital. These
accumulations are made regardless of whatever effects they have on economy of
Nigeria, exchange rates, price stability and balance of payments. Foreign
reserves accumulation and the economic growth of nations have been a subject of
academic discuss among researchers. Meanwhile, few studies on external reserves
and Nigeria economy are Abiola and Adebayo, 2013; Alasan and sahib, 2011; whose
studies are distinct from the presented study. While Abiola and Adebayo (2013)
only focused on the channeling of external reserves in Nigeria into alternative
investment outlets, Alasan and Shaib (2011) focused on external reserves
management and economic development in Nigeria. As noted above there exists gap
in literature on the relationship between foreign reserves accumulation and
economy of Nigeria in Nigeria. Thus, this study seeks to fill this gap in
knowledge by examining the impact of external reserves accumulation on economy
of Nigeria in Nigeria from 1986 to 2019, a period characterized with unstable
economic conditions.
1.3
OBJECTIVES OF THE STUDY
The broad objective of the study is to determine the
impact of external reserves accumulation on the economy of Nigeria from (1986 –
2019). The specific objectives are to:
1.
Determine
the impact of special drawing rights on the Nigerian economy.
2.
Examine
the impact of IMF reserve on the economy of Nigeria.
3.
Evaluate
the impact of foreign exchange on the economy of Nigeria.
4.
Assess
the extent to which foreign currency deposit impact on the Nigerian economy.
1.4 RESEARCH QUESTIONS
The following research questions guided the study.
1.
To
what extent does special drawing rights impact on the Nigerian economy?
2.
What
is the impact of IMF reserve position on the economy of Nigeria?
3.
What
is the impact of foreign exchange on the economy of Nigeria?
4.
How
does foreign currency deposit impact on the Nigerian economy?
1.5
RESEARCH HYPOTHESES
This study was guided by the following hypotheses
H01: There is no significant impact of special drawing
rights on GDP in Nigeria within the reference period.
H02:
IMF reserve
position do not have significant impact on Nigerian economy.
H03:
foreign exchange
do not have significant impact on the Nigerian economy.
H04:
Foreign currency
deposits do not have significant impact on the Nigerian economy.
1.6 SIGNIFICANCE OF THE STUDY
The
study of foreign reserves accumulation on the economy of Nigeria has posed a
fundamental concern and questions in the minds of researchers in recent times.
For this purpose, the present study is of great benefit to the following
institutions:
1. Monetary
Authorities: the findings and recommendations of this study is of use to the
monetary authorities in formulating lasting monetary policies that will stand
the test of time and remedy balance of payment imbalances.
2. This
research is of immense help to policy makers and balance of payment operators,
and government especially as regards to the transaction of the exchange rate
and balance of payments in Nigeria.
3.
The outcome of this work
will be relevant to the government, especially as regards to the transaction of
exchange rate on balance of payments in Nigeria.
4.
It will equally serve as
a future reference material for students and researchers.
1.7 SCOPE OF THE STUDY
The study of the impact of external reserves
accumulation on Nigerian economy covered the period of 33 years (1986 – 2019).
Since this study utilizes annual time series data, this scope will contribute
for improvement in the stationerity of the data set. Also, data availability
led to the choice of the scope as well as the quest to review literature
exhaustively.
1.8
LIMITATIONS OF THE STUDY
The researcher
encountered various limitations in the course of this study. Such limitations
include:
Time constraints:
the researcher was faced with very limited time within which to complete the
study. In order to meet up with this limited time, the researcher devoted more
time to make sure that this study was completed.
Data availability:
The data used were time-series data, which collection posed series of
challenges in terms of sources and accessibility. However, the researcher had
to limit the period of study to 2019 so as to make use of the available data.
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