NIGERIA FOREIGN EXCHANGE RATES AND ITS EXTERNAL RESERVES POSITION: A REASSESSMENT

Abstract

This study examines the effect of exchange rate on the external reserves position of Nigeria from 1994 to 2019 using secondary data from Central Bank of Nigeria Statistical Bulletin. There is absence of unit roots among the variables and the co-integration tests revealed a long term equilibrium relationship among the variables. The result of the error correction model discloses that exchange rate has negative and significant effect on external reserves. Furthermore, an increase in the external reserves in the previous year leads to 34% increase in the reserves in the current year. Also, gross domestic product is positively and significantly related with external reserves while inflation and external reserves are negatively and insignificantly related. It is thus concluded that exchange rate has negative relationship but insignificant effect on foreign exchange reserves of the country resulting from the outflow of foreign reserves to control undue depreciation of the exchange rate. The study, however, recommends that exchange rate should be adequately managed in order to control excessive depreciation in the nation’s currency against other currencies of the world. This will lead to increase in export and subsequently boost foreign exchange reserves.